EU Focus on Blockchain Regulation Gaining Momentum

Developments concerning blockchain have been a high priority item for many EU member states; however, to date a coordinated effort from Brussels to establish a harmonized approach across the European Union has been muted. Nonetheless, developments over the past weeks may indicate that a pan-European regulatory regime for blockchain and digital assets could be on the horizon. 

First, the Securities and Markets Stakeholder Group (“SMSG”) recently provided important advice to the European Securities and Markets Authority (“ESMA”) concerning Initial Coin Offerings (“ICOs”). On 19 October 2018 the SMSG published its “Own Initiative Report on Initial Coin Offerings and Crypto-Assets.”¹ The Report advised ESMA to provide level 3 guidelines² to national supervisory authorities across the EU or to market participants on the treatment of utility and asset tokens with regard to: 

• interpreting the MiFID II³ definition of “transferable securities” and “commodities;” 
• reconsidering the concept of multilateral trading facilities (“MTFs”) and organized trading facilities (“OTF”) in connection with the organization of secondary markets in utility and asset tokens; 
• applying Market Abuse Regulation⁴ to such MTFs and OTFs respectively; and 
• regulating the activities of persons giving advice on asset and utility tokens, or executing orders in such tokens (together, the “MiFID II implications”). 

In a broader context, the SMSG effort is a public initiative for further exploration of distributive ledger technologies in the FinTech space. 

Second, on 3 October 2018 the European Parliament adopted a resolution on “Distributed ledger technologies and blockchains: Building trust with disintermediation (2017/2772) (RSP))” (the “DLT Resolution”)5 that urges the European Commission, the European supervisory authorities and other EU institutions to take action.

The DLT Resolution recognizes the great potential of distributed ledger technology (“DLT”), including its ability: 

• to give citizens the opportunity to control their own data and to decide which data to share in the ledger; and to choose to whom such data should be exposed (including pseudonymisation of users, but not their anonymisation);6 
• to improve transaction cost efficiency by removing intermediaries and intermediation costs; 
• to “democratize” data, together with building trust and increasing transparency while providing a secure and efficient route for the execution of transactions; and 
• to significantly improve key sectors of the economy (e.g., effective green energy production, distribution and storage) as well as the quality of infrastructure and public services (e.g., transport, healthcare, supply chains utilization, education etc.). 

Emphasizing the volatility and uncertainty associated with cryptocurrencies, the DLT Resolution acknowledges that the feasibility of alternative methods of payment and transfer of value using cryptocurrencies should be examined further. Moreover, the European Parliament calls on the European Commission and the European Central Bank to provide feedback on the sources of volatility, to identify threats to the public and to explore potentially incorporating cryptocurrencies into the European payment system. 

The European Parliament further encourages the European Commission to explore and undertake an in-depth assessment of the potential utility and legal implications of the use of smart contracts, and to eventually promote the development of technical standards with the relevant international organizations. 

Recognizing the strategic importance of DLT, the European Parliament calls on the European Commission to closely monitor technological developments, assess technological risks, support resilience to a cyberattack or a system breakdown, and promote data protection projects that ensure the sustainability of DLT platforms. The European Parliament encourages the competent authorities and the European Commission to develop stress testing for DLT applications, as well as to monitor the potential of DLT for improving “social good” and assess the social impact of the technology. 

The European Parliament also calls on the European Investment Bank (“EIB”) and the European Investment Fund (“EIF”) to synchronize action under the EFSI 2.0 regulations7 to create funding opportunities that support DLT-based entrepreneurial endeavors to accelerate innovation and technology development. The European Parliament also requested the European Commission to partner with the Member States to ensure certainty and harmonization of the legal framework within the European Union, including the introduction of a European passport of DLT-based projects. 

The European Parliament recognizes the potential of ICOs as an alternative source of funding for small and medium sized enterprises (“SME”) and innovative start-ups. It calls on the European Commission to explore the legal requirements that will allow this asset class to be blended with other financial vehicles. The European Parliament appeals to the European Commission to identify criteria that enhance investor protection, and articulate disclosure requirements and obligations for the initiators of ICOs, including the use of crowdfunding schemes.8 

These recent industry and political initiatives are efforts to secure a place for blockchain and DLT in the crowded EU agenda, in order to ensure that the European Union remains a globally attractive and competitive innovations hub. This would be achieved through the establishment of a harmonized legislative environment, creation of attractive funding opportunities and support for the construction of the necessary infrastructure. 

Footnotes 

_{1) SMSG Advice to ESMA – “Own Initiative Report on Initial Coin Offerings and Crypto-Assets”
2) Pursuant to the Regulation (EU) 1095/2010, establishing ESMA, in areas not covered by regulatory or implementing technical standards, the authority has the power to issue guidelines and recommendations on the application of Union law to the national supervisory authorities and to the market participants, thus ensuring consistent, efficient and effective supervisory practices within the European System of Financial Supervision (an integrated network of national and European Union supervisory authorities).
3) Directive 2014/65/EU of the European Parliament and the Council of 15 May 2014, on markets in financial instruments (“MiFID II”)
4) Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC
5) The Resolution of the European Parliament on “Distributed ledger technologies and blockchains: Building trust with disintermediation (2017/2772) (RSP))” (the “DLT Resolution”)
6) In accordance with Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation) – (the “GDPR”), the principles of data protection should apply to any information concerning an identified or identifiable natural person including personal data which have undergone pseudonymisation, as defined by GDPR.
7) Regulation (EU) 2017/2396 – EFSI 2.0 – extending the duration of the European Fund for Strategic Investments (“EFSI”). The EFSI has been implemented and co-sponsored by the EIB and in cooperation with the EIF.
8) The DLT Resolution and the Draft Report on the proposal for a regulation of the European Parliament and of the Council on European Crowdfunding Service Providers (ECSP) for Business (COM(2018)0113 – C8-0103/2018 – 2018/0048(COD))}