ESMA: Crypto platforms should trade under MiFID II rules

Platforms trading crypto-assets that qualify as financial instruments should be subject to the rules, but ESMA has advised a bespoke regime be implemented for firms trading crypto-assets outside of the MiFID scope.

The EU financial regulator has said that certain crypto platforms should trade under MiFID II rules in cases where the crypto-assets being traded qualify as financial instruments under the regulation.

Advice to the European Commission, Council and Parliament, authored and published by the European Securities and Markets Authority (ESMA), stated that certain platforms ought to be subject to the regulation, according to three broad categories.

Those platforms trading crypto-assets that have a central order book and/or match orders under other trading models are likely to qualify as multilateral systems and therefore should operate under MiFID II regulation, ESMA said.

Similarly, platforms that are dealing on own account and executing client orders against proprietary capital would qualify as broker dealers, rather than as a multilateral trading venue, and so should also comply with the requirements.

ESMA outlined that the key MiFID requirements that crypto platforms could be subject to include pre- and post-trade transparency rules, and transaction and trade reporting. However, the authority stressed that there are areas of the legislation that may need to be reconsidered to allow for an effective application of the rules for crypto-assets.

“Some crypto-assets may qualify as MiFID financial instruments, in which case the full set of EU financial rules would apply,” Steven Maijoor, chair of ESMA, commented. “However, because the existing rules were not designed with these instruments in mind, National Competent Authorities (NCAs) face challenges in interpreting the existing requirements and certain requirements are not adapted to the specific characteristics of crypto-assets.”

For crypto-assets that do not qualify as MiFID financial instruments, ESMA added that at a minimum, Anti-Money Laundering (AML) rules should apply alongside risk disclosure, to ensure consumers are aware of potential risks before investing in crypto-assets funds.

“A number of crypto-assets fall outside the current financial regulatory framework,” Maijoor added. “This poses substantial risks to investors who have limited or no protection when investing in those crypto-assets. In order to have a level playing field and to ensure adequate investor protection across the EU, we consider that the gaps and issues identified would best be addressed at the European level.”

ESMA suggested that for crypto-assets outside of the MiFID scope, EU policymakers could consider establishing a bespoke regime to allow for tailoring of the rules to address the risks and issues associated with crypto-assets.

The regulator’s second and final scenario for EU policymakers looking at crypto-assets outside of the MiFID scope is to ‘do nothing’. This would see authorities consider that these crypto-assets fall outside of their remit and no further action should be taken.

However, ESMA warned that this option does not address the known threats to investor protection and market integrity, and so urged that a bespoke regime is the most appropriate course of action.