Europe Proposes a Crypto Single Market

“The first objective is legal certainty, which is needed both for crypto-assets that are not covered by existing EU financial services legislation and for the application of DLT [Distributed Ledger Technology, aka blockchain] in financial services and the tokenisation of traditional financial instruments.

The second objective is to support innovation. To promote the uptake of DLT and development of crypto-assets and crypto-assets services, it is vital to put in place a sound and proportionate framework to support responsible innovation and fair competition.

The third objective is to ensure appropriate levels of consumer and investor protection and market integrity. The fourth objective is to ensure financial stability.”

The draft law is expected in the third quarter according to the European Commission, but they have sent to Member States what they call a non-paper, which they say is for “facilitating discussions.”

We managed to get our hands on this non-paper, and there they present a nuanced approach towards cryptos. They say:

“The regulation of a crypto-asset should follow its economic function. Securities tokens, i.e. crypto assets which have all the characteristics of a financial instrument, should be regulated and supervised under MiFID II (Directive 2014/65/EU).

In order to clarify this and ensure full harmonisation on this approach, a modification of the notion of financial instruments (Article 4(15)) could be considered to make it sure that such financial instruments can be issued on a digital ledger.”

That translates to if SpaceX wants to go public in an IPO style ICO, they need to comply with current rules in regards to IPO-ing but those rules need to be modified to make it clear it can be what Germany calls a crypto e-stock.

We’ll have to wait for the full draft law to clarify how new regulations will adapt to digitization, but a second category mentioned here is hybrid tokens.

They don’t specify what are these hybrid token, but the stated principle is that new regulations would cover aspects that current regulations do not cover.

So a hybrid token is probably something like Trustnodes gives you a TN token for free if you subscribe or it could be the defi tokens that are given for free to incentivize liquidity provisions.

Thus that would presumably cover anything that is not clearly a security which would fall under “a bespoke regime for markets in crypto-assets (MiCA).” They say:

“The main requirement of MiCA on issuers would be to mandate the publication of a harmonised whitepaper/information document accompanying an issuance of crypto-assets in the EU with mandatory disclosures (detailed description of the issuer, the project and planned used of funds, conditions of the offer, rights and obligations attached to the crypto-assets and risks).

Certain exemptions to this whitepaper would also be implemented for small offerings of crypto-assets (value under €1 million within a twelve-month period) and for offerings aimed at qualified investors as defined in the Prospectus Regulation.”

What is interesting about this whitepaper requirement is that it does not require authorization by a National Competent Authority (NCA), but they need to be notified of it and if it doesn’t comply they can take steps as can the Single European Market Authority (SEMA).

This qualified investors exemption does raise the question of whether our SpaceX example is correct or otherwise with it to be seen just how they fully define all these matters, with the European Commission stating:

“For the purposes of the Regulation, MiCA would also define among others, the following notions: ‘crypto-asset’, ‘utility token’, ‘asset-backed crypto-asset’, ‘significant asset-backed crypto-asset’, and the different services related to crypto-assets, such as the service of custody (i.e. wallet providers) and of exchange, the operation of a trading platform.”

They lay out some requirements for crypto custody and service providers, trading platforms and exchanges, which seem to be common sense things.

Also in regards to asset backed cryptos and/or stablecoins they lay out rules in regards to conflict of interest, capital requirements, and generally what you’d expect.

In addition, “a pilot regime on DLT market infrastructures that would be similar to a sandbox approach would be envisaged.

This would enable both market participants and regulators to gain experience on the use DLT, the benefits of that technology and the novel form of risks it creates.”

Sandboxes have been shown to be a pretty effective tool, but the hardest task here is how do they treat exactly these shares that are tokens, these e-stocks, and how the fundraising framework will be adapted to the new capabilities of a token itself being ownership. They say:

“The bespoke regime, MiCA, is presently being considered in the form of a Regulation to establish harmonised requirements at EU level for issuers that seek to offer their crypto-assets across the Union and crypto-asset service providers wishing to apply for an authorisation to provide their services in the single market.

This initiative would replace existing national frameworks applicable to crypto-assets not covered by existing EU financial services legislation.”

So this is continental level legislation, and the setting up of a jurisdiction that can amount to the biggest in the world.

In addition, e-stocks could be a way to get a continental stock exchange with the European stock market currently fragmented between Dax and FTSE Milan and other national exchanges that on their own can’t compete with NYSE which has protectionist measures in regards to foreign listed stocks.

So naturally everyone wants to go to NYSE because it is bigger, but if there was a continental equivalent in Europe, then people would be forced to choose between NYSE’s protectionism and the European market which in combination is huge where the single market union is concerned, something that is a lot bigger than the European Union.

And if they get right this e-stocks thing, then that could well be a big leap into digitization which could be a big boost to market operations, and thus to the economy of all of Europe.