Le cripto-attività rappresentano un’importante innovazione per il mercato unico digitale dell’Unione Europea (UE), perché promuovono l’inclusione finanziaria e riducono i costi e la velocità delle transazioni. Allo stesso tempo, possono trarre in inganno investitori inesperti e facilitare l’evasione fiscale e il riciclaggio di denaro. Il presente scritto considera che il bilanciamento tra vantaggi e svantaggi di tali innovazioni tecnologiche vada calibrato attentamente dal legislatore, alla luce delle caratteristiche specifiche di ogni ordinamento, ma che debba necessariamente condividere alcuni elementi. Dopo aver analizzato dunque i rischi delle cripto-attività e gli elementi comuni ad una possibile risposta regolamentare, questo contributo analizza l’atteggiamento del legislatore nei confronti delle cripto attività nell’UE ed in alcune giurisdizioni chiave nel resto del mondo. L’analisi rivela dunque che l’approccio alle cripto-attività è plurifocale e che, mentre si stanno consolidando tre approcci regolatori (UE, USA e Cina) profondamente diversi, la UE, anticipando i tempi, può rappresentare un importante punto di riferimento.

*The views expressed in this paper are those of the author and do not necessarily represent the views of ESMA, its Board of Supervisors, or any of its staff members. This paper is the result of a common reflection. However, Sections II, III and IV are to be attributed to Eugenia Siracusa, and Sections V, VI, and VII to Giovanni Zaccaroni. This paper was completed on 28 February 2022: all websites were last accessed on that date.

SOMMARIO:

I. Introduction - II. The Risks of Crypto Assets Related to Their Features: A. Difficult understanding and categorization. B. Cross-border dimension. C. Cross-sectoral dimension. D. Anonymity. E. Often not backed by tangible assets or securities. F. Illiquidity and high volatility. G. Cyber attacks - III. The Regulatory Approach - IV. The European Union’s Response: A. The scope of application of MiCAR. B. The MiCAR categorization of crypto assets and their regulation. C. The MiCAR regulation of crypto-asset services and crypto-asset service providers. D. Other aspects and conclusive remarks on the EU response - V. The Response in the Rest of the World: A. States with a Neutral Approach to Crypto Assets. B. States with a Negative Approach to Crypto Assets. C. States with a Positive Approach to Crypto Assets - VI. A Pluri-focal Regulatory Approach. A. United States. B. EU. C. China - VII. Conclusions: Enhancing and Coordinating the Regulatory Response: A. The adoption of a similar regulatory terminology. B. The adoption of a common categorization of crypto assets. C. An approach that is flexible, neutral, and favors international cooperation - NOTE

I. Introduction

In the last 10 years, the European Union institutions showed an unprecedented interest in the digital society, trying to keep pace with technological developments. [1] The global financial sector has been equally characterized by a steady increase in the use of technology, due to some large technology companies entering financial services. [2] Crypto assets and the technology on which are based – distributed ledger technology (DLT) – represent an indisputable example of this technology revolution. [3] In particular, crypto assets have been making the headlines because of their extremely high volatility [4] as well as their popularity among large companies [5] and, more recently, among retail investors often driven by social media. [6] Such a technological development is an opportunity for the financial sector, which brings about important benefits. The main ones are the promotion of financial inclusion of the population at large, the reduction of the costs of financial and payment transactions, and the increase of their speed, related to the economies of scale and advanced technology. For example, global stablecoins, like Libra (now Diem) [7], which are essentially used as a means of payment, have the potential to make cross-border payment transactions easier, cheaper, and quicker. [8] Crypto assets that function as utility tokens giving access to a company’s product or service could enable clients to benefit in a faster manner from what a company has to offer, compare different offers on the market, and boost competition. [9] Crypto assets that instead qualify as security could be used particularly by small firms to raise capital and reach the largest number of investors globally through online transactions. [10] However, those benefits do not come without risks. In particular, the risks related to crypto assets are exacerbated compared to more traditional forms of investments, because of the various features of those assets, which are analyzed in the first part of this paper. [11] Hence, to ensure that the risks do not outweigh the benefits, it is important to understand and address them in a way that, on the one hand, effectively protects investors and the stability and orderly functioning of financial markets, and, on the other, does not stifle innovation. [12] This paper argues that the right way to achieve this difficult balance is a calibrated regulatory response, [continua ..]

II. The Risks of Crypto Assets Related to Their Features: A. Difficult understanding and categorization. B. Cross-border dimension. C. Cross-sectoral dimension. D. Anonymity. E. Often not backed by tangible assets or securities. F. Illiquidity and high volatility. G. Cyber attacks

The most relevant risks of crypto assets derive from the combination of the features underlying this technology. Not all those features are unique to crypto assets. Some of them are also present in traditional forms of investments or financial products. However, their combination in crypto assets exacerbates the risks that those products pose to investors (especially retail investors) as well as to the stability and orderly functioning of global financial markets. It is important to note that the analysis set out in this Section is by no means conclusive. This Section discusses the main features and related risks of crypto assets identified so far. However, the evolving nature of this technology will require a continuous assessment of possible new emerging features and changing risk outlook. A. Crypto assets constitute a very complex technology.[13] Very effectively, the American comedian, John Olivier, once described Bitcoin as «everything you don’t understand about money, combined with everything you don’t understand about computers».[14] A definition of crypto assets, which is commonly used at international level, is contained in the Fintech Report of the International Organization of Securities Commission (IOSCO) and states that crypto assets are a «type of private assets that depend primarily on cryptography and distributed ledger technology (DLT) as part of their perceived or inherent value». [15] This definition is broadly used because it is high-level enough to encompass the various types of crypto assets, which differ significantly in their nature and objectives. [16] The most common classification of the various types of crypto assets was inspired by the approach followed by the Swiss Financial Market Supervisory Authority (FINMA) [17] and distinguishes between (i) securities tokens, namely those crypto assets that fall within a jurisdiction’s definition of security;  [18] (ii) payment tokens, which, as the name suggests, are crypto assets intended to be used as a means of payment; and (iii) utility tokens, that is crypto assets intended to provide digital access to a product, an application or a service. Clearly, to determine in which category a certain crypto asset would fall, reference must be made to its substance (how it is used or can be used in practice), regardless of the name attributed to it. This exercise is far from easy, considering that many crypto assets are hybrid [continua ..]

III. The Regulatory Approach

As it emerges from the Section above, the risks related to crypto assets are many and of a different nature. It is therefore crucial that those risks are comprehensively considered so that they can be effectively addressed to ensure that investors in crypto assets are protected and that global financial stability and the orderly functioning of global financial markets are preserved. In this respect, various responses have been taken by public regulators across the world. [27] Despite those responses have to a certain extent a positive effect, in the opinion of the authors, only a tailored regulatory response can be effective in striking the right balance between tackling the risks of crypto assets and taking advantage of the benefits of this new technology can offer. Sections IV and V of this paper will show how various jurisdictions across the world have taken or are preparing to take the regulatory path. Certainly, a regulatory response has to be tailored to the specificities and the market conditions of each jurisdiction. However, it cannot disregard the different risks related to crypto assets that we have analyzed. To be effective, a regulatory response needs to follow a holistic approach, stemming from a comprehensive consideration and assessment of the risks of a different nature posed by crypto assets. [28] Some of those risks are relatively new to public regulators, such as the risk of cyber-attacks. That is why it is particularly important for regulators to understand the extent and implications of the various risks involved, to ensure that the regulatory response can focus on the right priorities. For example, about the cyber-attack risk, key priorities which would need to be considered from a regulatory perspective are custodianship and the type of storage of the crypto assets held in custody, but also security of the private keys to access wallets. Furthermore, while it is important for an effective regulatory response to ensure legal certainty, it is equally important that, given the fast evolution of crypto assets, such response would be sufficiently flexible to allow for a fast-changing technological environment and risk outlook. In addition, it is also very important that a regulatory response would remain technology neutral, namely it would not favor (including in an indirect manner) a particular type of technology over another. Given the cross-border and cross-sectoral nature of crypto assets, key to an effective regulatory [continua ..]

IV. The European Union’s Response: A. The scope of application of MiCAR. B. The MiCAR categorization of crypto assets and their regulation. C. The MiCAR regulation of crypto-asset services and crypto-asset service providers. D. Other aspects and conclusive remarks on the EU response

In September 2020, the European Commission presented its digital finance package, [29] which, alongside a digital finance strategy, sets out a number of legislative proposals. The most relevant to the scope of this work is the Proposal for a Regulation on markets in crypto assets (MiCAR). [30] Alongside MiCAR, the package also includes a Proposal for a Regulation on a pilot regime for markets infrastructures based on distributed ledger technology, [31] a Proposal for a Regulation on digital operational resilience for the financial sector [32] and a Proposal for a Directive amending Directives 2006/43/EC, 2009/65/EC, 2009/138/EU, 2011/61/EU, EU/2013/36, 2014/65/EU, (EU) 2015/2366 and EU/2016/2341 (Amending Directive). [33] A. The MICAR proposal aims to lay down a harmonized regulatory framework for crypto-asset issuers and service providers across the European Union (EU). The approach followed by the European Commission is that of a full harmonization: MiCAR sets out a mandatory regime which would apply to all entities falling within its scope of application[34] and which would replace any existing bespoke national regime.[35] MiCAR would capture all issuers of and service providers dealing with crypto assets, which are not covered elsewhere in financial legislation, and e-money tokens. Crypto assets are defined as «a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology». [36] The crypto assets which would be excluded from the scope of application of MiCAR are those that fall within the definitions of (i) ‘financial instruments’pursuant to point (15) of Article 4(1) of Directive 2014/65/EU [37] (‘MiFID II’), (ii) ‘structured deposits’pursuant to point (43) of Article 4(1) of MiFID II, (iii) ‘deposits’pursuant to point (3) of Article 2(1) of Directive 2014/49/EU, [38] and (iv) ‘securitizations’pursuant to point (1) of Article 2 of Regulation (EU) 2017/2402. [39] In respect of point (i), it is important to note that the aforesaid proposal for an Amending Directive would modify the definition of ‘financial instrument’set out in point (15) of Article 4(1) of MiFID II to expressly refer to distributed ledger technology – the new definition of ‘financial instrument’in MiFID II would therefore read: [continua ..]

V. The Response in the Rest of the World: A. States with a Neutral Approach to Crypto Assets. B. States with a Negative Approach to Crypto Assets. C. States with a Positive Approach to Crypto Assets

Crypto assets are experiencing a phase of regulatory uncertainty at a global level. While a large part of legal systems is neutral towards crypto assets, there are States which are favorably inclined towards crypto assets, and that introduced rules that allow payment tokens to be used as legal currencies. Other States instead decided to introduce legal provisions to make it more difficult or rather radically ban crypto assets. The analysis of the regulatory approaches outside the EU will consider a set of specific legal systems that are relevant both for the policy choices made as well as for the importance of their crypto assets market. [66] A. Many States in the world have a neutral approach to crypto assets. These countries accept payment tokens, although not always as legal tender, and do not pose obstacles to their exchange and commercialization. The US has a primary role among these countries, with both the federal as well as the State levels having a predominantly neutral outlook towards the issue of crypto currencies. [67] It is, however, presently unclear to which extent the phenomenon falls under the scope of the competencies of the federal powers and agencies or of the local ones. The Internal Revenue Service (IRS) has, similarly to other jurisdictions, declared that the income from virtual currency transactions should be reported on income tax returns. [68] The Chairman of the Securities and Exchange Commission (SEC) has issued a statement, [69] followed by several warnings, [70] also confirmed by the action taken against XRP [71] and LBRY [72], maintaining that certain payment tokens might be considered as securities and as a consequence are subjected to the applicable regulation on securities. Another federal agency, the Commodities Futures Trading Commission (CFTC), found that for the Commodities and Exchanges Act (CEA) payment tokens are to be considered as commodities. [73] Although a comprehensive federal approach has not been yet achieved, a recently introduced bill streamlines plans for a fully-fledged regulation of crypto assets at the federal level, attempting to clarify the different CFTC and SEC competences [74]. In particular, the bill cites that «Not later than 90 days after the date of the enactment of this section, the Securities and Exchange Commission and the Commodity Futures Trading Commission shall jointly establish a working group (to be known as the ‘‘SEC [continua ..]

VI. A Pluri-focal Regulatory Approach. A. United States. B. EU. C. China

One of the main challenges posed by crypto assets is represented by their cross-border and cross-sectorial dimension. [117] Regulating crypto assets requires by nature a blend of different expertise (e.g., I.T., engineering, law, economics, politics) across different jurisdictions. This analysis shows that while the EU is an important regulatory player in the crypto assets market, it is not the only one. [118] Several other regulatory players are emerging and are gaining strength as their crypto-asset markets are an alternative to traditional finance. We can recognize at least three different regulatory focal points, jurisdictions that are able to influence other countries with their example, either because they are members of a supranational organization or because of the specific authoritativeness of that country. A. Crypto assets regulation in the US is extremely fragmented and divided between the competencies of various government agencies. However, things are moving fast and, considering the need to protect the interests of investors and stability of financial markets, the US seems about to provide a more comprehensive regulatory framework. With their regulatory power, the US can influence crypto assets regulation in many other countries around the world, and in Latin American countries. B. The EU itself includes States which are amongst the most developed economies in the world. The proposal for a regulation of crypto assets showed in Section III of this work, despite that it can be improved in certain areas, reveals an approach that benefits from the introduction of a unique terminology and a flexible and proportionate framework for crypto asset issuers and service providers, which can effectively ensure the safe use and adoption of crypto assets. C. China chose to strongly disincentivize the use of crypto assets as utility or security, concentrating its regulatory forces in providing a framework for a state-owned centralized digital currency. This, although being a different use of crypto assets than the traditional one, can influence the many jurisdictions in the world that are attracted by the technology behind crypto assets but fear their unlimited adoption and decentralization.

VII. Conclusions: Enhancing and Coordinating the Regulatory Response: A. The adoption of a similar regulatory terminology. B. The adoption of a common categorization of crypto assets. C. An approach that is flexible, neutral, and favors international cooperation

The impact that crypto assets have on the traditional financial sector is unprecedented. [119] However, the ability of this technology to drive innovation is limited if it remains outside the current legal framework. The need exists to build an appropriate regulatory environment that displays its full potential while protecting users and financial markets from the risks discussed in Section II of this paper. [120] To reach this objective, we suggest the following: A. The variety of the terminology adopted in the regulatory approaches across the world, as shown in Sections IV and V of this work, can easily lead to misunderstanding and confusion. Although a complete equivalence in terminology is very difficult to be achieved, we think the EU model should be followed. The terminology proposed by the EU in the recent MiCAR proposal can represent, in the view of the authors, an important source of inspiration, as it is comprehensive but also flexible enough to incorporate changes brought about by a fast-evolving technology, particularly if further clarification will be provided during the legislative process on the distinction between a crypto asset and a MiFID financial instrument. B. The different categories of crypto assets are another blurry area. Sometimes crypto assets are divided among payment tokens and other security and utility tokens[121]; instead, they are sometimes described according to their technical characteristics, as the underpinning technology or the consensus-validation mechanism.[122] It is extremely difficult to imagine a consistent and comprehensive approach without at least tentative common categorization. Also, in this case, it seems to us that the categorization of crypto assets set out in the MiCAR proposal and inspired by FINMA’s approach [123] can represent a comprehensive starting point, which encompasses the various categories of crypto assets developed so far. In addition, as explained in Section IV.B, the MiCAR proposal sets out additional tailored requirements for those crypto assets posing higher risks (significant ARTs or EMTs) or susceptible to becoming more popular (ARTs). This approach, which is fully in line with the principle of proportionality, can certainly be an example for other jurisdictions. C. As exposed in Section III, an effective regulatory approach to crypto assets is holistic, embraces innovation, is technology neutral, and ensures cooperation between different legal orders. The [continua ..]

NOTE