The European Securities and Markets Authority (ESMA) has published on the 9th of January 2019 its advice on Initial Coin Offerings (“ICO”) and Crypto-Assets. This advice highlights a number of issues and gaps in the existing EU regulatory framework and provides insight to the EU policymakers when considering how the regulatory framework can be developed to deal with the use of crypto-assets and investor protection. Authors: Darko Stefanoski, Orkan Sahin

What is the key impact of MiFID II/MiFIR on crypto-assets?

A firm that provides investment services/activities in relation to financial instruments as defined by MiFID II needs to be authorized as an investment firm and comply with MiFID II requirements. Where crypto-assets qualify as financial instruments, a number of crypto-assets related activities are likely to qualify as investment services/activities such as placing, dealing on own account, operating an MTF or OTF or providing investment advice. The organizational requirements, the conduct of business rules and the transparency and reporting requirements laid down in MiFID II would then apply, depending in some cases on the type of services offered and the type of financial instruments involved.

ESMA’s preliminary view is that where crypto-assets qualify as financial instruments, platforms trading crypto-assets with a central order book and/or matching orders under other trading models are likely to qualify as multilateral systems and should therefore either operate as Regulated Markets (RMs) or as Multilateral Trading Facilities (MTFs) or Organised Trading Facilities (OTFs). RMs are operated or managed by a market operator. MTFs and OTFs are operated by a market operator or an investment firm.

Where the operators of those platforms are dealing on own account and executing client orders against their proprietary capital, they would not qualify as multilateral trading venues, respectively RMs, MTFs and OTFs, but rather as broker/dealers providing the MiFID II services of dealing on own account and/or the execution of client orders and should therefore comply with the requirements set out in Title II of MiFID II.

Which requirements are likely to apply? 

  • Capital requirements: In particular, investment firms operating an MTF or an OTF or dealing on own account need to have an initial capital of EUR 730,000 minimum. RMs need to have available at the time of authorization and on an ongoing basis, sufficient financial resources to facilitate its orderly functioning, having regard to the transactions concluded on the market and the risks to which it is exposed. 
  • Organizational requirements: Adequate policies and procedures to ensure compliance with the obligations under MiFID II have to be established, including in relation to the prevention of conflicts of interest, the approval and distribution of financial instruments to clients, business continuity, integrity and security of data, recordkeeping, internal controls and risk management. 
  • Obligation to report transactions/supply financial instrument reference data: Investment firms which execute transactions in financial instruments are required to report complete and accurate details of such transactions to the competent authority as quickly as possible, and no later than the close of the following working day. With regard to financial instruments admitted to trading on RMs or traded on MTFs or OTFs, trading venues shall provide competent authorities with identifying reference data for the purposes of transaction reporting.
  • Obligations to maintain records: Investment firms have to keep at the disposal of the competent authority, for five years, the relevant data relating to all orders and all transactions in financial instruments which they have carried out, whether on own account or on behalf of a client. In the case of transactions carried out on behalf of clients, the records must contain all the information and details of the identity of the client. The operators of RMs, MTFs or OTFs have to keep at the disposal of the competent authority, for at least five years, the relevant data relating to all orders in financial instruments which are advertised through their systems. The records must contain the relevant data that constitute the characteristics of the order, including those that link an order with the executed transaction(s) that stems from that order and the details of which shall be reported.
  • Access to MTFs, OTFs and RMs: MTFs and OTFs need to have in place transparent and non-discriminatory rules for access to their facilities. Similar provisions apply to RMs.
  • Pre and post-trade transparency: MiFIR sets out transparency requirements for trading venues in relation to both equity and non-equity instruments.

How can EY help

EY has extensive experience in helping organizations navigate through regulatory initiatives. Our global regulatory team is a dedicated cross-functional team with extensive experience of regulatory change and deep understanding of crypto-assets. Through our global knowledge in these areas we are able to help organizations understand the implications from strategic and operational to legal, regulatory and tax perspectives as well as provide multidisciplinary teams at all stages of implementation projects to become compliant.