Rapid advancement of the blockchain sector combined with extreme crypto asset volatility has left regulators scratching their heads. Knowing how to control innovative financial services developments such as ICOs fuelled by digital assets is not easy. There has been much debate. ESMA’s ICO and digital assets – what marketers need to know from the Contentworks Agency team, should help you out.
ESMA Worries and Concerns
What’s keeping ESMA awake at night? Well, multiple issues actually. The document published is long and detailed but to keep things simple, the EU financial regulatory agency is concerned about crypto asset risks. These include: investor safety, market integrity and security risks such as fraud, cyber-attacks, money laundering and marketing manipulation.
Heavy stuff! And they’re right to be worried due to the number of hacks, scams and other malpractices that have plagued the industry. Indeed, 80% of ICOs conducted in 2017 were believed to be scams. That said, over $20.1 billion continued to be invested into ICOs throughout 2018, a key indication of investor interest.
ESMA ICO Acknowledgements
ICOs have been a particular headache for regulators. But it’s not all doom and gloom. ESMA is quick to highlight the potential benefits of ICOs which help to give start-ups additional revenue when they need it the most. Similarly, tokenisation is praised. The representation of traditional assets via distributed ledger technology could lead to cool stuff like greater flexibility. Enhanced liquidity of some assets such as unlisted shares could make transferring ownership of these assets easier providing more and more opportunities for investors.
Notable Regulation Challenges
First and foremost, there is currently no legal qualification of crypto assets under EU financial securities law. That’s why the waters are so murky. ESMA confronts the legal status of crypto assets concluding that a one-size-fits-all approach to regulation isn’t possible.
This is because the range of crypto assets is diverse including the investment type, utility type, payment type, hybrid type and so on. The approach to regulation will also be different depending on if assets qualify as financial instruments under MiFID II rules, or not! In reality, only a fraction of crypto assets are likely to be considered as MiFID financial instruments. This means they are likely to fall outside existing EU financial services rules.
One of the main concerns is investor safety and whether investors can tell the difference between regulated financial instruments and non-regulated financial instruments.
ESMA gave the following two foreseeable options for EU policymakers:
- Implement a bespoke regime for particular types of crypto assets tailoring rules to specific risks involved.
- Do nothing. And accept many digital asset and ICO activities fall outside of EU law. However this does not address investor protection and market integrity laws.
The concern is also that while some EU Member states are making their own rules; a level-playing field needs to be established in order to ensure consistency. This seems particularly relevant considering the cross-border nature of trading digital assets.
So where do we go from here?
Regulatory Implications When an Asset Qualifies as a Financial Instrument
ESMA’s document lays out legal provisions potentially applicable to crypto assets when they do qualify as financial instruments. But again, due to the assortment of approaches to digital asset activities, this is in no way set in stone.
The Prospectus Directive
In some cases, the publication of a prospectus may be required before securities are offered to the public or are traded within a regulated EU market. This must include relevant information for an investor. In the case of crypto assets, this would probably include detailed information on the issuer’s venture. Also, the features and rights connected to the crypto asset being issued, the terms and conditions and expected timetable of the offer and the use of the proceeds of the offer as well as any risks associated with the underlying technology.
Tip – Understand if a prospectus is relevant to your business venture. Write all documents in an easily analysable and comprehensive form. That means fully understanding the ins and outs of your product offering.
The Transparency Directive
The essence of this is to disclose accurate, comprehensive and timely information about issuers whose securities are admitted to trading on a regular market within an EU Member state. Disclosure of information includes on-going and periodic information about the issuer including annual financial reports, half-yearly reports, interim management statements, acquisition or disposal of major holdings, and any changes to the rights of security holders. This applies to instruments classified as transferable securities.
Tip – Be truthful, upfront and honest with all content marketing as this should fall in line with any information provided for regulatory reasons. Clue up on what’s required and streamline your business making sure PR, marketing and compliance teams are all aligned nicely.
MiFID II’s Framework
If assets provided qualify as financial instruments under MiFID II rules, they must comply with MiFID II requirements. Where crypto assets qualify as financial instruments, for example, both transparency and reporting requirements laid out in the updated regulatory framework apply.
Marketers must then:
- Provide or be sure that there’s sufficient publically accessible information to allow consumers to make intelligent investment decisions.
- Be clear, fair and not misleading in any way. Act honestly, professionally and fairly in order to meet the interests of the clients.
- Provide balanced trading examples which do not inflate positive outcomes.
- No information should be withheld and investment firms must maintain records for 5 years of the orders.
Top marketing tips:
- Craft content specifically tailored to the above rules. Pass everything through compliance.
- Do not let your guard down on social media. All MiFID rules apply to your social accounts.
Specific rules and regulations regarding ICOs and digital assets are yet to be clarified with a universal EU approach being suggested but not implemented to-date. One of the best ways to ensure you on the right side of the law is to keep in-the-know. Follow updates from all EU states and keep an eye on regulatory framework across the globe.
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