ESMA has recently initiated a consultation paper on the conditions and criteria for the qualification of crypto-assets as financial instruments. The paper suggests general conditions and criteria for deciding whether a crypto-asset qualifies as a transferable security, a money market instrument, a unit in a collective investment undertaking, a derivative or an emission allowance.
The paper also follows a substance over form approach and a case-by-case analysis and aims to provide more clarity about the distinction between the respective material scopes of Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets, and amending Regulations (EU) No 1093/2010 and (EU) No 1095/2010 and Directives 2013/36/EU and (EU) 2019/1937 (the “MiCA Regulation”) and the Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (the “MiFID II”).
First of all, it should be noted that Article 2 of MiCA Regulation defines the scope of MiCA Regulation and paragraph 4 lists in particular the type of crypto-assets that are excluded from the said Regulation. It states notably that MiCA Regulation “does not apply to crypto-assets that qualify as […] financial instruments as defined in Article 4(1), point (15), of Directive 2014/65/EU”.
On one hand, the concept of crypto-asset is widely defined in Article 3(5) of MiCA Regulation, as “a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology”. Crypto-assets, depending on the rights they embody, may pose specific challenges for regulators and market participants, as there may be a lack of clarity as to their exact nature and, therefore, which regulatory frameworks apply to such instruments.
On the other hand, the financial instruments are defined in MiFID II mainly by listing the instruments that should be regarded as financial instruments. These instruments include: (i) transferable securities, (ii) money-market instruments, (iii) units of collective investment undertakings, (iv) various derivative contracts and (v) emission allowances.
Going further, here are some key takeaways in relation to the classification of crypto-assets as financial instruments:
- The classification of crypto-assets as financial instruments depends on the specific characteristics and nature of such crypto-assets. To determine whether a crypto-asset qualifies as a transferable security, or another type of MiFID II financial instrument, the specific features, design and rights attached to this crypto-asset should be taken into consideration;
- If a crypto-asset meets the criteria of a financial instrument, it should follow the same regulatory rules as other financial instruments, no matter what technology is used to create or manage it. The type or purpose of the technology does not affect the application of the financial markets law.
- A crypto-asset can be considered as a transferable security if it gives the holder similar rights as other securities, such as shares, bonds or derivatives. MiFID II’s Article 4(1)(44) states that a crypto-asset must fulfill three conditions to be classified as a transferable security: (i) it must belong to a “class of securities”, (ii) it must be tradable on the capital market and (iii) it must not be a payment instrument. In this context, note should be made that negotiability is an essential condition. Even though European Union law does not have a clear definition of negotiability, it means that crypto-assets can be moved or exchanged on the markets, despite some possible limitations (e.g. legal, market or technical limitations). The idea of negotiability should include crypto-assets that can be transferred or traded on capital markets and should be understood in a wide sense. Negotiability on capital market also requires fungibility, which depends on the ability of the crypto-asset to have the same value per unit.
- MiFID II does not explicitly define the concept of “capital market”, but it should generally cover places where securities are traded as well as over-the-counter markets. Moreover, the “capital” part of the term should also be considered (i.e. the fact that traditional markets in transferable securities are used to fund the operation of businesses).
- Transferable securities in MiFID II do not include instruments of payment. The concept of instrument of payment under MiFID II19 is not the same as the “payment instrument” defined in PSD2. The former is more similar to the idea of funds in PSD2, while the latter means devices (physical or digital) that are used to make payment transactions. Therefore, the concept should be interpreted in a wide way (i.e. including both cash and non-cash payment methods).