COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets and amending Directive (EU) 2019/1937
Date: 2020-09-24
Institutions: Directorate-General for Financial Stability, Financial Services and Capital Markets Union, European Commission
Subjects: blockchain, consumer protection, electronic money, financial legislation, issuing of currency, market supervision, provision of services, virtual currency

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 24.9.2020  SWD(2020) 380 final  COMMISSION STAFF WORKING DOCUMENT  IMPACT ASSESSMENT  Accompanying the document Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets and amending Directive (EU) 2019/1937    {COM(2020) 593 final} - {SEC(2020) 306 final} - {SWD(2020) 381 final}  
 
 
Table of contents 

1. 

INTRODUCTION: POLITICAL AND LEGAL CONTEXT ................................... 2 

1.1.  Political context ........................................................................................................ 2 
1.2.  Market and legal context ......................................................................................... 3 
1.2.1. Distributed ledger technology (DLT) and the different types of crypto-assets ...... 3 

1.2.2. The crypto-asset ecosystem ...................................................................................... 7 

1.3.  Opportunities and challenges .................................................................................. 8 

2. 

PROBLEM DEFINITION ....................................................................................... 10 

2.1.  What are the problem drivers? ............................................................................. 10 
2.1.1. Lack of certainty as to whether and how existing EU rules apply (for crypto-

assets that could be covered by EU rules) ............................................................. 10 

2.1.2. Absence of rules at EU level and diverging national rules for crypto-assets that 

would not be covered by EU rules ......................................................................... 12 

2.2.  What are the problems? ........................................................................................ 12 
2.2.1. Regulatory obstacles to and gaps in the use of security tokens and DLT in the EU 
financial services legislation .................................................................................. 12 

2.2.2. Consumer or investor protection risks and risks of fraud  ................................... 14 

2.2.3. Market integrity risks (for unregulated crypto-assets) ......................................... 16 

2.2.4. Market fragmentation and risks to the level playing field .................................... 17 

2.2.5. Financial stability and monetary policy risks raised by stablecoins and global 

stablecoins .............................................................................................................. 18 

2.3.  Consequences .......................................................................................................... 19 
2.3.1. Missed efficiency gains in the trading and post-trading areas ............................. 19 

2.3.2. Missed financing opportunities for small businesses and companies due to a low 
level of initial coin offerings and security token offerings ................................... 22 

2.3.3. Missed opportunities in terms of financial inclusion and cheap, fast, efficient 

payments ................................................................................................................. 24 

2.4.  How will the problem evolve? ............................................................................... 26 

3.  WHY SHOULD THE EU ACT? ............................................................................. 28 

3.1.  Legal basis ............................................................................................................... 28 
3.2.  Subsidiarity: Necessity of EU action .................................................................... 29 
3.3.  Subsidiarity: Added value of EU action ............................................................... 29 

4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? .................................................... 30 

4.1.  General objectives .................................................................................................. 30 
4.2.  Specific objectives .................................................................................................. 30 

 
 
 
5.  WHAT ARE THE AVAILABLE POLICY OPTIONS? ......................................... 31 

5.1.  What is the baseline from which options are assessed? ...................................... 32 
5.2.  Description of the policy options........................................................................... 32 
5.2.1. Policy options for crypto-asset that are not currently covered by the EU financial 
framework for financial services ........................................................................... 32 

5.2.2. Policy Options for crypto-assets that may qualify as financial instruments under 

MiFID II                                                                                                                  35 

5.2.3. Policy options for stablecoins and global stablecoins ........................................... 35 

6.  WHAT ARE THE IMPACTS OF THE POLICY OPTIONS?................................ 37 

6.1.  Policy options for crypto-asset that are not currently covered by the EU   

financial framework for financial services ......................................................... 37 

6.2.  Impact of policy options for crypto-assets that could qualify as financial 

instruments under MiFID II ................................................................................ 42 

6.3.  Impacts of policy options for stablecoins and global stablecoins...................... 48 

7. 

PREFERRED OPTIONS ......................................................................................... 55 

7.1.  Overall impact of preferred options ..................................................................... 55 

7.2.  Specific impact: small and medium-sized enterprises ........................................ 60 

7.3.  Specific impact: Environmental impact ............................................................... 60 

8.  HOW  WILL  ACTUAL 

IMPACTS  BE  MONITORED  AND 

EVALUATED? ........................................................................................................ 65 

Annex 1: Procedural information .................................................................................. 67 

Annex 2: Stakeholder consultation ................................................................................ 70 

Annex 3: Who is affected and how? ............................................................................... 78 

Annex 4: Problem definition ........................................................................................... 85 

Annex 5: Discarded options ............................................................................................ 91 

Annex 6: Option 1 for stablecoins and global stablecoins ........................................... 96 

1 

 
 
 
 
 
 
 
 
 
1.  INTRODUCTION: POLITICAL AND LEGAL CONTEXT 

1.1. Political context  

As President von der Leyen stated in her Political Guidelines for the new Commission1, 
it is crucial that Europe can reap all the benefits of the digital age and that it strengthens 
its  industry  and  innovation  capacity  in  a  safe  and  ethical  way.  Digitalisation  and  new 
technologies  are  transforming  the  European  financial  system  and  the  way  it  provides 
financial services to Europe’s businesses and citizens. Two  years after the Commission 
adopted  the  FinTech  Action  Plan2,  the  actions  set  out  have  largely  been  implemented. 
The  socio-economic  impacts  of  the  COVID-19  crisis  have  also  highlighted  the 
importance  of  digital  finance  and  the  need  to  allow  business  to  be  conducted  remotely 
and through innovative digital technologies, wherever possible. 

As part of the Commission’s overarching agenda of making Europe ready for the digital 
age, the Commission is undertaking considerable work in the area of digital finance in an 
effort  to  both  enable  the  financing  of  the  digital  transformation  and  ensuring  that  the 
financial  sector  can  make  the  most  of  the  opportunities  the  digital  age  presents  and 
become  competitive  globally.  The  digital  finance  strategy  will  set  out  the  direction  of 
travel  for  digital  finance  in  the  EU,  focussing  for  example  on  access  to  data,  artificial 
intelligence and digital identities. Additionally, as part of the digital finance strategy, the 
Commission will publish underpinning proposals on crypto-assets, as part of the work on 
ensuring the EU framework allows for innovation while mitigating the risks, and digital 
operational  resilience,  as  increased  digitalisation  means  increased  cyber  threats.  As 
regards  blockchain  and  distributed  ledger  technology  (DLT),  the  Commission  has  a 
stated  and  confirmed  policy  interest  in  developing  and  promoting  the  uptake  of  this 
transformative technology across sectors, including the financial sector3.  

Crypto-assets  are  one  of  the  major  blockchain  applications  for  finance.  Since  the 
publication  of  the  FinTech  Action  Plan,  the  Commission  has  been  examining  the 
opportunities  and  challenges  raised  by  crypto-assets.  In  that  Action  Plan,  the 
Commission  mandated  the  European  Banking  Authority  (EBA)  and  the  European 
Securities  and  Markets  Authority  (ESMA)  to  assess  the  applicability  and  suitability  of 
the existing financial services regulatory framework to crypto-assets. The advice4 issued 
in  January  2019  clearly  pointed  out  that  while  some  crypto-assets  could  fall  within  the 
scope  of  EU  legislation,  effectively  applying  it  to  these  assets  is  not  always 
straightforward.  Moreover,  the  advice  noted  that  provisions  in  existing  EU  legislation 
that  may  inhibit  the  use  of  DLT.  At  the  same  time,  EBA  and  ESMA  underlined  that  – 
beyond EU legislation aimed at  combating money  laundering and terrorism  financing  - 

1 Ursula von der Leyen, Political Guidelines for the next European Commission, 2019-2024. 
2 Commission Communication: ‘FinTech Action Plan: For a more competitive and innovative European 
financial sector (March 2018). 
3  For  instance,  the  recent  Communication  on  a  new  SME  strategy  for  a  sustainable  and  digital  Europe 
(COM  2020/103/Final)  emphasizes  that  Fintech  innovation  can  enable  SMEs  to  issue  crypto  assets  and 
digital tokens and includes an action for the Commission to launch a blockchain-based initiative enabling 
the issuance and trading of SME bonds across Europe. 
4 ESMA, Advice on ‘Initial Coin Offerings and Crypto-Assets’, 2019; EBA report with advice on crypto-
assets, 2019. 

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most  crypto-assets  fall  outside  the  scope  of  EU  financial  services  legislation  and 
therefore are not  subject to  provisions on consumer and investor protection  and market 
integrity, among others. In addition, a number of Member States have recently legislated 
on issues related to crypto-assets leading to market fragmentation. 

The  inherent  cross-border  nature  of  internet-based  products  and  applications  and  in 
particular  those  leveraging  distributed  networks,  such  as  crypto-assets,  require  strong 
international  cooperation  in  order  to  be  regulated  properly.  The  Commission  has 
consistently  participated  actively  in  all  relevant  fora  working  on  crypto-assets  over  the 
past years to promote cooperation and a common approach. The Commission continues 
to follow and participate in the relevant work, done in particular by the FSB and FATF 
on ‘stablecoins’. The  current  development  of high-level  principles by  FSB, will form  a 
solid basis for jurisdictions to build potential regulation on and will be taken into account 
in the EU framework. 

A relatively new subset of crypto-assets – the so-called “stablecoins” - has emerged and 
attracted  the  attention  of  both  the  public  and  regulators  around  the  world.  While  the 
crypto-asset  market  remains  modest  in  size  and  does  not  currently  pose  a  threat  to 
financial stability5, this may change with the advent of “stablecoins”, as they seek wider 
adoption  by  incorporating  features  aimed  at  stabilising  their  value  and  by  exploiting 
network effects6.  

Given  the  developments  in  the  crypto-asset  market  in  2019,  President  Ursula  von  der 
Leyen  has  stressed  the  need  for  “a  common  approach  with  Member  States  on 
cryptocurrencies to ensure we understand how to make the most of the opportunities they 
create  and  address  the  new  risks  they  may  pose”7.  Executive  Vice-President  Valdis 
Dombrovskis  has  also  indicated  his  intention  to  propose  new  legislation  for  a  common 
EU  approach  on  crypto-assets,  including  “stablecoins”.  While  acknowledging  the  risks 
they  may  present,  the  Commission  and  the  Council  also  jointly  declared  in  December 
2019  that  they  “are  committed  to  put  in  place  the  framework  that  will  harness  the 
potential opportunities that some crypto-assets may offer”8.  

The  purpose  of  this  document  is  to  assess  the  case  for  action,  the  objectives,  and  the 
impact of different policy options for a European framework for markets in crypto assets, 
as envisaged by the 2020 Commission work programme9.  

1.2. Market and legal context 

1.2.1.  Distributed  ledger  technology  (DLT)  and  the  different  types  of  crypto-

assets 

Crypto-assets are a type of assets that depend primarily on cryptography and DLT. 
DLT  is  essentially  records,  or  ledgers,  of  electronic  transactions,  very  similar  to 

5 FSB Chair’s letter to G20 Finance Ministers and Central Bank Governors, 2018.  
6 G7 Working Group on Stablecoins, Report on ‘Investigating the impact of global stablecoins’, 2019. 
7 Mission letter of President-elect Von der Leyen to Vice-President Dombrovskis, 10 September 2019. 
8 Joint Statement of the European Commission and Council on ‘stablecoins’, 5 December 2019. 
9 https://ec.europa.eu/info/publications/2020-commission-work-programme-key-documents_en.  

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accounting ledgers. Their uniqueness lies in the fact that they are maintained by a shared 
or  ‘distributed’  network  of  participants  (‘nodes’)  and  not  by  a  centralised  entity.  It 
therefore avoids the downside faced by central storage systems of representing a single 
point  of  potential  failure.  The  key  aspect  of  DLT  systems  is  that  they  allow  for  the 
decentralised  processing,  validation  or  authentication  of  transactions  or  other  types  of 
data exchange. Typically, records are stored on the ledger only once the participants have 
reached consensus10.  

DLT  can  be  divided  into  two  categories:  permission-based  and  permissionless. 
Permission-based  DLTs  are  closed  systems  where  only  identified  participants  can 
propose and validate ledger updates.  In permissionless  DLTs, any  entity  can access  the 
database  and,  depending  on  the  specific  validation  method  used,  may  be  able  to 
contribute to  updating the ledger. The bitcoin’s innovation  was to  build a decentralised 
network that has no central, trusted authority and is open to anyone. In contrast, most of 
the DLT platforms being developed for use in the financial sector are permission-based.   

Another important feature of distributed ledgers and crypto-assets is the extensive 
use  of  cryptography, 
techniques  such  as 
i.e.  computer-based  encryption 
public/private keys and hash functions11, to store assets and validate transactions. In 
this context, the public key (and the public address, which is a shorter form of the public 
key12)  is  publicly  known  and  is  essential  for  identification.  They  are  similar  to  a  user 
account  number.  The  public  address  is  a  balance  and  can  be  used  for  depositing  and 
receiving  crypto-assets.  The  private  key13  (akin  to  a  password  needed  to  unlock  a  user 
account) is used for authentication and encryption. It grants a user the right to dispose of 
the  crypto-assets  at  a  given  address  and  is  needed  to  authorise  a  movement  of  crypto-
assets.  Losing  the  private  key  is  equivalent  to  losing  the  right  to  move  assets  around, 
hence the need to save it in a secure location.  

Files that are written onto the ledger are given a unique cryptographic signature and will 
usually  be  timestamped.  This  allows  participants  to  view  the  records  in  question, 
providing a verifiable and auditable history of the information stored. 

DLT  networks  and  crypto-asset  activities  are  supported  by  ‘smart  contracts’.  A 
smart contract is a piece of software that runs directly on DLT and can replicate a given 
contract’s terms. It effectively implements the terms of an agreement (e.g. payment terms 
and  conditions)  into  computational  material  to  automate  the  execution  of  contractual 
obligations.  For  instance,  in  the  case  of  an  offer  of  crypto-assets,  a  smart  contract  can 

10 There are various consensus mechanism types that depend on the DLT set-up (see section 7). However, 
all  of  them  aim  to  tackle  any  tampering  with  the  information  stored  on  the  ledger  and  to  avoid  any 
manipulation by a single entity.      
11 A hash function is an algorithm that transforms large random size data to small fixed size data. The data 
output of the algorithm is called the hash value. Hash functions operate in a one-way manner, which means 
that it is impossible to compute the input from a particular output. For instance, it is impossible to infer the 
public key from the address or to infer the private key from the public key. Meanwhile, the entire network 
can derive the public key from the private key and therefore authenticate a given transaction.  
12  The  address 
1EHNa6Q4Jz2uvNExL497mE43ikXhwF6kZm8 
13 Example of a private key: 5Kb8kLf9zgWQnogidDA76MzPL6TsZZY36hWXMssSzNydYXYB9KF 

the  public  key.  Example  of  a  public  address:  

is  a  cryptographic  hash  of 

4 

 
 
                                                           
guarantee  that  the  funds  will  be  returned  to  investors  if  the  offer  does  not  reach  the 
minimum subscription target14.      

Thousands  of  crypto-assets  have  been  issued  since  bitcoin  was  launched  in  2009.  In 
February  2020,  there  were  more  than  5,000  crypto-assets  worldwide15.  There  is  also  a 
wide variety of crypto-assets. There is no official categorisation of crypto-assets in use in 
the EU or at international level. However, a commonly used classification comprises four 
main categories of crypto-assets16:  

  Payment/exchange/currency tokens (often referred as virtual currencies or crypto-
currencies). These tokens are used as means of exchange (e.g. to enable the buying or 
selling of goods/services by someone other than the token issuer). They can also held 
for investment purposes, even it is not their intended function. Examples of payment 
tokens  include  Bitcoin  or  Litecoin.  The  “stablecoins”  are  a  relatively  new  form  of 
payment tokens with particular features aimed at stabilising their value. “Stablecoins” 
are  typically  backed  by  real  assets  or  funds  (such  as  short-term  government  bonds, 
fiat  currencies…)  or  by  other  crypto-assets.  They  can  also  take  the  form  of 
algorithmic “stablecoins” (with algorithm being used as a way to stabilise volatility in 
the value of the coin). 

  Investment  tokens  may  provide  rights  related  to  companies  (e.g.  in  the  form  of 

ownership rights and/or entitlements similar to dividends). 

  Utility  tokens  have  two  main  functions.  Some  of  them  enable  access  to  a  specific 
current  or  prospective  service  or  good  (similar  to  a  voucher).  Some  are  issued  to 
reward operators for maintaining the DLT, for validating and recording transactions. 
Like payment and investment tokens, some utility tokens can be traded on secondary 
markets17. One example of utility token is Filecoin18. 

  Hybrid  tokens  have  features  at  issuance  that  enable  their  use  for  more  than  one 

purpose.   

Some  crypto-assets  could  already  be  covered  by  EU  financial  services  legislation, 
but  the  majority  of  them  would  not  be19.  When  considering  whether  EU  financial 
regulation  applies to  crypto-assets, an important  question is  whether the crypto-asset in 
question constitutes a ‘financial instrument’ or ‘electronic money’. 

14 For instance, as of 26 December 2017, there were 970,898 smart contracts running on the Ethereum. 
blockchain alone. See: Wolfgang Ahrendt, Gordon J. Pace, Gerardo Schneider, Smart Contracts – A Killer 
Application for Deductive Source Code Verification, 2018. 
15 Trade website Coinmarketcap. 
16 See, for instance, the EBA report with advice on crypto-assets, 2019. 
17 This, however, presupposes that the  utility token is technically enabled for trading at issuance and that 
there  is  also  enough  demand  (liquidity)  for  utility  tokens  to  be  traded.  This  may  not  be  the  case  where 
utility tokens are conceived to function within in a single data ecosystem, only. 
18 Filecoin is a decentralised storage network that turns cloud storage into an algorithmic market. Filecoins 
can be spent to get access to unused storage capacity on computers worldwide. Providers of the unused 
storage capacity in turn earn filecoins, which can then be sold for cryptocurrencies or fiat currency.  
19 ESMA, Advice on ‘Initial Coin Offerings and crypto-assets’, 2019; EBA report with advice on crypto-
assets, 2019. 

5 

 
 
                                                           
instruments”  under  the  Markets 

Some  crypto-assets,  especially  some  “investment  tokens”  or  some  “stablecoins”, 
in  Financial 
could  qualify  as  “financial 
Instruments Directive (MiFID II)20. Under MiFID II21, “financial instruments” are inter 
alia  ‘transferable  securities’  (such  as  shares,  bonds  and  any  other  securities  giving  the 
right  to  acquire  or  sell  any  such  transferable  securities),  ‘money  market  instruments’, 
‘units in collective investment undertakings’ and various derivative contracts. In so far as 
a  crypto-asset  qualifies  as  a  financial  instrument  under  MIFID  II,  a  full  set  of  EU 
financial  rules  (including  the  Prospectus  Regulation,  the  Transparency  Directive  (TD), 
the  Market  Abuse  Regulation  (MAR),  the  Short  Selling  Regulation  (SSR),  the  Central 
Securities Depositories Regulation (CSDR) and the Settlement Finality Directive (SFD)) 
are likely to apply to their issuer and/or firms conducting activities related to them.  

Other  crypto-assets,  especially  some  other  types  of  stablecoin,  could  qualify  as 
electronic money under the Electronic Money Directive II (EMD2) if they satisfy all 
elements of the definition, notably by giving users a direct claim on the reserve backing 
the ‘stablecoin’22.  

The current EU legal framework on anti-money laundering and countering the financing 
of terrorism (AML/CFT) also applies to some providers of services (wallet providers and 
crypto-to-fiat exchanges) related to ‘virtual currencies’23. The EU AML/CFT framework 
provides  for  the  registration  and  supervision  of  these  two  types  of  service  providers 
without regulating them as such. The EBA’s report and advice on crypto assets published 
in  2019  recommended  to  have  regard  to  the  latest  recommendations,  standards  and 
guidance issued by the Financial Action Task Force (FATF) as part of a holistic review 
of the need, if any, for action at the EU level to address issues relating to crypto-assets24. 
The  new  standards  adopted  by  the  FATF  in  October  2018  introduced  a  definition  of 
virtual asset25 (which is broader than ‘virtual currency’) and cover services not currently 
within  the  scope  of  the  AMLD  (notably  crypto-to-crypto  exchanges  and  financial 
services related to an issuer’s offer and/or sale of a virtual asset).  

20 Market in Financial Instruments Directive (2014/65/EU). 
21 Article 4(1)(15) and Annex I C. 
22Electronic  money  is  defined  as  ‘electronically,  including  magnetically,  stored  monetary  value  as 
represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment 
transactions as defined in point 5 of Article 4 of [the Payment Services Directive 2], and which is accepted 
by a natural or legal person other than the electronic money issuer’.      
23  Under  the  Anti-Money  Laundering  Directive  (Directive  2015/849/EU)  as  amended  by  AMLD5 
(Directive  2018/843/EU,  a  ‘custodian  wallet  provider’  is  defined  as  an  entity  that    services  to  safeguard 
private cryptographic keys on behalf of its customers in order to hold, store and transfer virtual currencies. 
Fiat-to-crypto exchanges are ‘providers engaged in exchange  services between virtual currencies and fiat 
currencies’. The notion of ‘virtual currency’ is defined as ‘digital representation of value that is not issued 
or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established 
currency  and  does  not  possess  a  legal  status  of  currency  or  money,  but  is  accepted  by  natural  or  legal 
persons as a means of exchange and which can be transferred, stored and traded electronically’.  
24 In their Advice on ‘Initial Coin Offerings and Crypto-Assets’, ESMA referred and agreed with the 
EBA’s recommendation in their Report with advice for the European Commission on crypto-assets, to 
review the scope of AMLD based on the updated FATF recommendations. 
25 The FATF defines ‘virtual assets’ as: ‘a digital representation of value that can be digitally traded or 
transferred,  and  can  be  used  for  payment  or  investment  purposes,  and  that  does  not  include  digital 
representations of fiat currencies, securities and other financial assets that are already covered elsewhere 
in the FATF Recommendations’. 

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Figure 1: Interactions between EU financial services legislation and the different types of tokens 

1.2.2.  The crypto-asset ecosystem 

The  crypto-asset  market  encompasses  a  range  of  activities  and  different  market  actors 
that provide trading and/or intermediation services. Many of these activities and service 
providers  are  currently  not  subject  to  any  regulatory  framework  on  financial  services, 
either at EU level (except for AML/CFT purposes) or national level.  

The crypto-asset issuer or sponsor is the organisation that has typically developed the 
technical  specifications  of  a  crypto-asset  and  defined  its  features.  In  some  cases,  their 
identity  is  known,  while  in  others,  they  are  unidentified.  Some  are  still  involved  in 
maintaining  and  improving  the  crypto-asset’s  code  and  underlying  algorithm,  while 
others are not26.  

Crypto-asset trading platforms act as a marketplace bringing together different crypto-
asset users that are either looking to buy or sell crypto-assets. Trading platforms match 
buyers and sellers directly or through an intermediary. The business model, the range of 
services  offered  and  the  number  and  type  (e.g.  crypto-to-fiat  or  crypto-to-crypto)  of 
trading pairs vary across platforms. Most of the trading platforms currently operating are 
‘centralised  platforms’  controlled  by  a  central  operator.  ‘Decentralised  platforms’  are  a 
recent  phenomenon.  They  have  no  central  entity  and  operate  through  the  use  of  smart 
contracts.  Centralised  platforms  hold  crypto-assets  on  behalf  of  their  clients,  while 
decentralised  platforms  do  not.  Another  important  distinction  is  that  trade  settlement 
typically occurs on the books of the platform (‘off-chain’) for centralised platforms27, and 
not at each transaction, while it occurs on DLT for decentralised platforms (‘on-chain’). 

Crypto-asset  brokers/dealers  (or  exchanges)  are  entities  that  offer  exchange  services 
for  crypto-assets,  usually  for  a  fee  (i.e.  a  commission).  By  providing  broker/dealer 

26 Study from the European Parliament on ‘Cryptocurrencies and Blockchain’, July 2018.   
27 The transaction is recorded on the blockchain when the users leaves the platform.  

7 

 
 
 
                                                           
services, they allow users to sell their crypto-assets for fiat currency or buy new crypto-
assets with fiat currency. Some brokers/dealers are pure crypto-to-crypto broker/dealers, 
which means that they only accept payments in other crypto-assets (for instance, bitcoin). 
In contrast with trading platforms, exchanges engage in the buying and selling of crypto-
assets themselves on own account and act as the counterparty to users. 

There would be currently around 200 to 500 trading platforms and exchanges operating 
in  the  world,  although  trading  is  concentrated  on  a  handful  of  them28.  The  largest 
platforms  by  volume  and  value  of  transactions  are  currently  located  in  Asia  and  in  the 
US29. Anecdotal evidence suggest that around a third of those platforms would be in the 
EU30.  

Crypto-asset wallets are used to store public and private keys and to interact with DLT 
to allow users to send and receive crypto-assets and monitor their balances. Crypto-asset 
wallets come in different forms. Some support multiple crypto-assets/DLTs, while others 
are  crypto-asset/DLT-specific31.  DLT  networks  generally  provide  their  own  wallet 
functions  (e.g.  bitcoin  or  ether).  Some  wallet  providers,  for  example  custodial  wallet 
providers, not only provide their clients with wallets, but also hold their private keys on 
their behalf. They can also provide an overview of the customers’ transactions. 

Information on the number of crypto-asset users is limited. However, some estimates 
suggest  that  the  user  base  has  expanded  from  the  original  tech-savvy  community  to  a 
broader  audience32.  An  online  consumer  survey  seems  to  suggest  that  9%  of  European 
individuals  would  have  owned  crypto-assets,  with  huge  variations  across  countries33. 
However, actual figures are likely to be lower34. Anecdotal evidence also show that only 
a limited number of merchants accept payment tokens35.  

28ESMA, Advice on ‘Initial Coin Offerings and Crypto-Assets’, January 2019.   
29  See  Satis  Group,  ‘Crypto-asset  market  initiation  coverage’;  see  also  Bruegel,  ‘The  economic  potential 
and risks of crypto-assets: Is a regulatory framework needed?’, 2018.  
30 Based on a sample of 51 exchanges, Hileman et al. (2017) find that 37% of exchanges are based in the 
EU. The EU is followed by Asia-Pacific (27%) and North America (18%). 
31 There are software/hardware wallets and cold/hot wallets. A software wallet is an application that may 
be installed locally (on a computer or a smartphone) on the service provider’s network or run in the cloud. 
A hardware wallet is a physical device, such as a USB key. Hot wallets are connected to the internet, while 
cold wallets are not. 
32 ESMA, Advice on ‘Initial Coin Offerings and Crypto-Assets’, January 2019.   
33 ING, ‘Cracking the code on cryptocurrency: bitcoin buy-in across Europe, the USA and Australia’, 2018. 
Significant disparities exist between Member States (4% in Luxembourg vs. 12% in Romania).   
34 Some studies, based on online surveys, suggest that between 2% and 10% of the population of developed 
economies  own  crypto-assets  (University  of  Cambridge,  2nd  Global  Crypto-asset  benchmarking  study, 
2018;  HM  Treasury,  Financial  Conduct  Authority  and  Bank  of  England,  Crypto-asset  task  force  report, 
2018). Another study estimates that there are around 10.1 million people trading crypto-assets (including 
the  UK  and  Russia  –  see  Chappuis  Halder  report,  ‘How  many  active  crypto  traders  are  there  across  the 
globe?’, 2019, i.e. less than 2% of the EU population.  
35  The  Coinmap.org  site  shows  that  13,000  merchants  worldwide  accept  payment  tokens.  In  the  UK,  for 
instance, only around 500 independent shops, bars and cafés accept bitcoins (Bank of England, ‘Evidence 
submitted by the Bank of England – Treasury select committee on digital currencies’ 2018).  

8 

 
 
 
 
                                                           
1.3. Opportunities and challenges 

The  market  for  crypto-assets  remains  fractional  compared  to  the  market  for 
traditional financial assets. From the peak in January 2018 of around €760 billion, the 
total market capitalisation of crypto-assets had fallen to around €250 billion by February 
202036.  The  market  has  historically  been  prone  to  leverage,  operational  risks  and  high 
volatility. For instance, following the COVID-19 outbreak, the price of bitcoin dropped 
significantly  (by  42%  vs.  19%  for  the  S&P500,  from  1  to  16  March  2020),  before 
recovering.  Fraud,  hacking,  thefts,  money  laundering  and  cyber  incidents  have  plagued 
crypto-asset  markets  as  many  crypto-asset  trading  platforms,  exchanges/brokers/dealers 
and wallet services operate without proper cyber security arrangements37.  

Almost all national authorities as well as international standard-setting bodies have 
issued warnings about the risks related to certain crypto-assets, but have also issued 
positive  statements  about  the  potential  of  the  underlying  technology  (DLT).  The 
European  Commission  has  itself  identified  DLT  as  a  transformative  and  foundational 
technology, including in the financial sector.  

Crypto-assets could deliver many benefits to the economy. When used as a means of 
exchange, payment tokens can enhance competition in the payment market and increase 
the efficiency of payments (especially cross-border) in terms of cost, speed, security and 
user-friendliness by limiting the number of intermediaries (such as banks). The issuance 
of utility tokens can represent a cheaper and less burdensome source of funding for start-
ups  and  early-stage  companies  by  streamlining  the  capital-raising  process  and  not 
diluting the ownership capital of entrepreneurs. They also have the potential to connect 
the  token  issuer  with  a  wide  initial  customer  base.  If  they  were  properly  regulated, 
crypto-assets could also widen investment opportunities for investors (see sections 2.3.1. 
and  2.3.2).  In  theory,  any  asset  can  be  tokenised,  and  rights  to  such  assets  can  be 
represented  on  a  DLT.  Such  tokenisation  processes  have  the  ability  to  make  liquid 
tangible  assets  (such  as  real  estate)  that  would  otherwise  be  illiquid  or  to  facilitate  the 
protection  and  monetisation  of  immaterial  rights  (such  as  intellectual  property  and 
software).  Some  utility  tokens  and  DLT  also  offer  individuals  and  companies  the 
possibility to manage data flows and usage, making data portability in real time possible, 
along with various compensation models.     

Crypto-assets and the underlying DLTs also hold great potential for efficiency gains 
in the ‘traditional’ financial sector. This  potential stems  mainly from two features of 
the technology: (i) the ability to record information in a safe and immutable format; and 
(ii) the capability to make this information accessible in a transparent way to all market 
participants  in  the  DLT  network.  The  tokenisation  of  securities  (shares  or  bonds)  is  an 
example of potential for growth in the near future. This can lead to increased financing 
for companies through securities token offerings (STOs) and efficiency gains throughout 
the value chain, by reducing the need for intermediaries and the automation, resulting in 
faster, cheaper and frictionless transactions (see section 2.3.1.). A number of promising 

36 Crypto-asset data is taken from CoinMarketCap.com. 
37 FSB, Crypto-asset markets ‘Potential channels for future financial stability implications’, October 2018. 

9 

 
 
                                                           
pilots  and  use-cases  have  been  developed  and  tested  by  market  participants  across  the 
EU.    

Fully  deploying  DLT  in  the  financial  sector  is  associated  with  operational 
challenges. For example, building scale to use DLT massively is challenging  given the 
significant  throughput  required  to  cater  to  the  needs  of  global  capital  markets.  The 
interoperability between the different DLT networks should also be developed. However, 
one  of  the  biggest  obstacles  to  unlocking  the  promise  of  crypto-assets  and  DLT  in  the 
financial  sector  remains  legal  certainty,  especially  as  Member  States  are  beginning  to 
put  in  place  national  regimes  for  crypto-assets.  Without  certainty,  start-ups  and 
developers working in this field will not be able to attract the required investments. For 
instance, the potential mis-qualification of some utility tokens as “financial instruments” 
under MiFID2 can be unattractive for developers seeking to innovate. Similarly, without 
clarity on applicable rules, incumbent financial institutions and market infrastructures are 
unlikely, and sometimes unable, to pursue developments in this field. 

10 

 
 
 
 
 
2.  PROBLEM DEFINITION 

Figure 2: Problem tree 

Beyond the issues in the figure above, crypto-assets are likely to raise additional issues in 
terms  of tax compliance38 and data privacy that are not  further discussed in  this impact 
assessment.  When  established  market  participants  operate  on  private  permission-based 
DLT,  robust  governance  rules  and  antitrust  scrutiny  have  to  prevent  restrictions  of 
competition through, for example, exclusionary conduct or entry barriers.  

38 Crypto-assets pose two types of challenges for tax authorities. First, there is uncertainty about the legal 
status  of  crypto-assets,  and  therefore  the  tax  treatment  of  transactions  using  crypto-assets.  The  second 
challenge for tax administrations is that crypto-assets can make it easier to avoid paying tax.  

11 

 
 
 
 
 
 
                                                           
2.1. What are the problem drivers? 

2.1.1.  Lack  of  certainty  as  to  whether  and  how  existing  EU  rules  apply  (for 

crypto-assets that could be covered by EU rules) 

MiFID II is the central piece of EU securities legislation, providing essential definitions, 
such as ‘financial instruments’, ‘transferable securities’ or ‘units of collective investment 
undertaking’. A broader set of rules mentioned above (namely the Prospectus Regulation, 
MAR, EMIR, SFD, CSDR…) also applies to financial instruments and firms that provide 
investment services and activities in relation to them. When considering whether existing 
EU financial regulation applies to crypto-assets, one fundamental question is therefore to 
determine whether the crypto-asset at stake is a ‘financial instrument’ under MiFID II. 

However, the actual classification of a crypto-asset as a financial instrument under 
MiFID II requires a complex case-by-case analysis and varies depending on how the 
notion of ‘transferable security’ has been implemented by Member States. Thus, it is 
possible  that  the  same  crypto-asset  could  be  considered  as  a  ‘transferable  security’  or 
another  financial  instrument  in  one  jurisdiction  and  not  in  another,  which  gives  rise  to 
market fragmentation of the EU single market (see Section 2.2.4.)39. This situation stems 
from two main factors.  

First,  the  notion  of  ‘financial  instruments’  and  in  particular  of  ‘transferable 
securities’  under  MiFID  II  is  harmonised  in  a  broad  manner.  EU  Member  States 
have  not  always  interpreted  and  implemented  the  MiFID  II  Directive  in  a  similar  way. 
ESMA  has  found  that  while  a  majority  of  national  competent  authorities  (NCAs)  (16) 
have no specific criteria in their national legislation to identify transferable securities in 
addition  to  those  set  out  under  MiFID  II,  other  NCAs  (12)  do  have  such  criteria.  This 
results in different interpretations of what constitutes a “transferable security” 40. 

Second,  the  range  of  crypto-assets  is  diverse  and  many  of  them  have  hybrid 
features. While some investment tokens could be considered as transferable securities or 
as other financial instruments, payment tokens and utility tokens are more likely to fall 
outside the scope of the existing EU financial services legislation. The situation can be 
more  complicated  for  hybrid  tokens  that  exhibit  components  of  two  or  all  three  of  the 
archetypes  (i.e.  hybrid  utility/investment  tokens,  hybrid  currency/investment  tokens, 
hybrid currency/investment/utility tokens)41.  

Even where a crypto-asset would qualify as a MiFID II financial instrument (the so-
called  ‘security  tokens’),  there  is  a  lack  of  clarity  on  how  the  existing  regulatory 
framework for financial services applies to such assets and services related to them. 

39  ESMA,  Report  on  ‘Licensing  of  FinTech  Business  models’,  2019.  In  its  report,  ESMA  indicates: 
“Almost all NCAs indicated having difficulty in determining when crypto-assets are regulated and when 
they are not. NCAs raised the question of the legal nature of the crypto-assets and whether they fit into the 
definition of MiFID financial instruments, and more specifically, transferable securities”.  
40 All Member States, except Poland. In addition, two EEA Member States (Liechtenstein and Norway). 
ESMA, Annex I – legal qualification of crypto-assets – survey to NCAs, January 2019. 
41 Dr. Philipp Hacker, Dr. Chris Thomale, ‘Crypto-Securities Regulation: ICOs, Token Sales and 
Cryptocurrencies under EU Financial Law’. 

12 

 
 
                                                           
As  the  existing  regulatory  framework  was  not  designed  with  crypto-assets  in  mind, 
NCAs  face  challenges  in  interpreting  and  applying  the  various  requirements  under  EU 
law42. Those NCAs may therefore diverge in their approach to interpreting and applying 
existing EU rules. This diverging approach by NCAs creates fragmentation of the market 
and opportunities for regulatory arbitrage (see Section 2.2.4.).  

2.1.2.  Absence  of  rules  at  EU  level  and  diverging  national  rules  for  crypto-

assets that would not be covered by EU rules 

For  crypto-assets  that  would  not  be  covered  by  EU  financial  services  legislation,  the 
absence of rules exposes consumers and investors to substantial risks. 

In the absence of rules at EU level, three Member States (France, Germany and Malta) 
have already put  in  place national  regimes that regulate certain  aspects  of crypto-assets 
that  neither  qualify  as  financial  instruments  under  MIFID  II  nor  as  electronic  money 
under  EMD2.  These  regimes  differ:  (i)  rules  are  optional  in  France  while  they  are 
mandatory in Malta and Germany; (ii) the scope of crypto-assets and activities covered 
differ; (iii) the requirements imposed on issuers or services providers are not the same; 
and (iv) the measures to ensure market integrity are not equivalent (for more information 
– see Annex 4).  

Other  Member  States  could  also  consider  legislating  on  crypto-assets  and  related 
activities43.  

2.2. What are the problems? 

2.2.1.  Regulatory obstacles to and gaps in the use of security tokens and DLT in 

the EU financial services legislation  

As the existing regulatory framework was not designed with DLT in mind44, there 
are provisions in existing legislation that may preclude or limit the use of “security 
tokens”  (i.e.  crypto-assets  that  can  qualify  as  MiFID  II  financial  instruments).  While 
security  token  issuances  have  gained  traction,  there  is  a  lack  of  market  infrastructures 
using DLT and providing trading45, clearing46 and settlement services47 for those security 
tokens.  Without  a  secondary  market  able  to  provide  liquidity,  the  primary  market  for 

42 ESMA, Advice on ‘Initial Coin Offerings and Crypto-Assets’, January 2019. 
43  In  2019,  the  Italian  Companies  and  Exchange  Commission  (CONSOB)  published  a  document  for 
discussion  on  ‘Initial  Coin  Offerings  and  Crypto-Assets’  and  published  its  final  report,  proposing  a 
regulatory approach. 
44 ESMA, Advice on ‘Initial Coin Offerings and Crypto-Assets’, January 2019. 
45A trading venue will receive orders from buyers and sellers and match them according to pre-defined 
rules.  
46 Clearing consists of activities between the execution and settlement of a trade. The purpose of these is to 
calculate the actual obligations of parties to a trade and make sure that any required assets are in place so 
that a trade can be settled. In many cases a third party, the central clearing counterparty (CCP), will act as 
the counterparty to both parties involved in the trade, managing risks (e.g. by margining procedures) and 
guaranteeing delivery and payment. In addition, the CCP can calculate a clearing member’s final position 
over multiple trades and only settle differences (netting). 
47Settlement is the actual exchange of cash and securities between parties to a trade. Securities settlement 
systems are operated by a central security depositary.  

13 

 
 
                                                           
security  tokens  will  never  expand  in  a  sustainable  way.  In  a  recent  survey,  77%  of  the 
respondents indicated that the implementation of EU regulation can seriously hinder the 
development  of  security  tokens48.  The  regulatory  issues  related  to  the  deployment  of 
security  tokens  and  DLT  in  the  financial  services  sector  can  be  grouped  into  five 
categories.   

Some EU rules cannot be applied to DLT and security tokens as they were tailored 
to ‘traditional’ financial instruments and are not fully technology neutral49.. This is 
the case, for instance, for some pre-and post-trade and reporting requirements under the 
MiFID II/MiFIR framework or for some provisions of the Short Selling Regulation.    

Some  regulatory  gaps exist  due  to  legal,  technological  and  operational  specificities 
related to the use of DLT that are not addressed by existing requirements50. There 
are no reliability  and safety requirements imposed on the protocols and smart  contracts 
underpinning security tokens and no specific rules on the resulting liability issues51. The 
underlying  technology  could  also  pose  some  novel  forms  of  cyber  risks  that  are  not 
appropriately addressed by existing rules52. While the custody of private keys related to 
security  tokens  could  be  the  equivalent  of  the  ‘safekeeping  and  administration  of 
financial instruments for the account  of  clients’ service under MiFID  II, this  activity is 
not currently regulated at EU level.  

Current  EU  rules  prevent  the  development  of  financial  market  infrastructures 
(such  as  trading  venues,  central  clearing  counterparties  (CCPs)  and  central 
securities depositaries (CSDs)) based on decentralised exchanges and permissionless 
DLT networks where activities are not entrusted to a central body53. For instance, it 
is not possible to apply MiFID II or SFD/CSDR rules to them as these rules require the 
existence of a trading venue operator or a CSD to operate the securities settlement system 
(and intermediaries, such as brokers/market members and CSD participants/custodians). 
Given  the  absence  of  a  central  body  and  intermediaries  that  would  be  accountable  for 
applying  the  rules,  decentralised  exchanges  or  permissionless  networks  cannot  be  used 
for security tokens.  

Some  regulatory uncertainties or obstacles  remain for market infrastructures that 
rely  on  centralised  platforms  and  permission-based  DLT  networks.  Activities 
organised by an operator are de facto similar to traditional market infrastructures, such as 

48 FD2A, AMAFI, AFG, ASPIM, Gide 255, Woorton, Consensys, PWC – Questionnaire on security tokens 
– summary of results, May 2019. 
49 A technologically neutral approach means that legislation should not mandate market participants to use 
any particular technology or should not give a particular technology an advantage over another. 
50 ESMA, ‘Advice on Initial Coin Offerings and Crypto-Assets’, January 2019. 
51  The  software  in  which  a  smart  contract  is  embedded  can  be  defective  or  it  may  not  accurately  reflect 
contractual intent. If an error occurs, it can be difficult to resolve it as the operations via smart contracts are 
recorded on the DLT. 
52 While having a copy of the same data on all the computers in the network eliminates the central points of 
failure, the security of the entire network remains dependent on its ‘weakest link’, as an attacker could step 
into  the  breach  created  by  one  unsecured  DLT  participant.  Cyber  risks  may  also  arise  if  all  the  DLT 
participants are corrupted at the same time. As a result, some requirements related to cyber security can be 
necessary investor protection and financial stability. 
53  In  the  trading  context,  going  peer-to-peer  means  having  participants  buy  and  sell  assets  directly  with 
each other, rather than working through an intermediary or third-party service. 

14 

 
 
                                                           
trading  venues  or  CSDs.  However,  even  when  a  central  body  is  identifiable,  existing 
legislation does not fit well with the use of DLT by existing market infrastructures. Legal 
uncertainties  is  a  concern  not  only  for  new  entrants  but  also  for  incumbents  authorised 
market players. For instance, NCAs have reported that the CCP license under EMIR or 
the  CSD  license  under  CSDR  would  not  be  adapted  to  a  blockchain  environment.  It 
results from an ESMA survey that only an estimated 0.7% of all regulated FinTech firms 
in  the  EU  perform  counterparty  clearing  or  operate  a  CSD.  MiFID  rules  on  trading 
venues would not be proportionate enough to enable small-scale trading of crypto-assets 
comparable to shares and bonds. The regulation also prevents the widespread testing of 
DLT capabilities to determine to what extent the technology is mature enough to replace 
or complete existing market infrastructures54.     

Current  rules  hamper  the  development  of  financial  market  infrastructures  that 
could merge certain activities (trading, clearing, settlement and custody), as it does 
not  take  into  account  the  specific  benefits  of  security  tokens  and  DLT.  Today,  EU 
financial services legislation follows the lifecycle of a transaction (trading, clearing and 
settlement).  It  requires  the  presence  of  market  intermediaries  (i.e.  a  broker,  clearing 
members,  custodians)  and  market  infrastructures  (a  trading  venue,  CCP,  CSD)  and 
imposes  specific  requirements  on  those  entities.  The  use  of  DLT,  with  all  transactions 
recorded  in  a  decentralised  ledger,  can  expedite  and  condense  trading,  clearing  and 
settlement  to  nearly  real-time55  and  could  enable  the  merger  of  some  activities  in  the 
chain56. This  simplification of the multi-step post-trade process could  free  up collateral 
(by  reducing  the  counterparty  risks  during  the  settlement  period57)  and  improve 
efficiency  (by  reducing  intermediation,  the  need  for  reconciliations  and  the  risks  of 
errors).  However,  as  current  rules  envisage  the  performance  of  these  activities  by 
separate legal entities58 (trading venue, CCP, CSD) on grounds of stability, security and 
competition,  these  benefits  cannot  be  sufficiently  unlocked59.  For  instance,  CSDR 
(Article 3(2)) requires that the securities admitted to trading on a MiFID II trading venue 
are  recorded  with  a  CSD,  while  the  DLT  network  could  be  potentially  used  as  a 
decentralised version of such depository. By contrast, the use of DLT and security tokens 
to operate trading, clearing and/or settlement at the same time would raise new risks that 
are not currently mitigated by EU rules (such as new forms of cyber risks).  

54 ESMA, Report on ‘Licensing of FinTech Business models’, 2019. 
55 OECD, the Tokenisation of Assets and Potential Implications for Financial Markets, 2020.  
56 When securities are issued on a DLT, the latter also serves as the recordkeeping mechanism that makes 
separate  CSDs  superfluous.  As  for  CCPs,  the  majority  of  their  functions  could  be  performed  by  smart 
contracts on the DLT, including cash calls on network participants in times of need.  
57 The settlement period is the time between the execution of a trade and the performance of all duties 
necessary to satisfy all parties’ obligations. Most of the trades are settled on T+2.  
58 Dutch Authority for the Financial Markets (AFM)/Dutch National Bank, Cryptos - Recommendations for 
a regulatory framework, December 2018.  
59  33%  of  the  respondents  to  the  Commission’s  public  consultation  on  crypto-assets  considered  that  the 
regulatory  separation  of  trading  and  post-trading  activities  can  prevent  the  development  of  alternative 
business  models  based  on  DLT  that  could  be  more  efficient  to  manage  the  trade  lifecycle  (against  20% 
saying ‘no’ and 47% without opinions). 

15 

 
 
 
                                                           
2.2.2.  Consumer or investor protection risks and risks of fraud (for unregulated 

crypto-assets) 

Where  crypto-assets  would  not  qualify  as  MiFID  II  financial  instruments  or  as 
electronic  money  under  EMD2,  users  who  purchase  them  would  not  benefit  from 
the guarantees granted by the EU acquis. Yet, those ‘unregulated’ crypto-assets can 
pose a range of risks to consumers. 72% of the respondents to the public consultation 
considered  the  risks  to  consumer/investor  protection  as  important  or  very  important60. 
Some  NCAs  and  EBA  have  also  been  warning  consumers  about  crypto-currency  risks 
since 201361. In 2017, many NCAs and ESMA published warnings about risks inherent 
to initial coin offerings (ICOs)62 and crypto-assets. There are three types of risks. 

Consumers  can  purchase  unsuitable  products  without  having  access  to  adequate 
information.  Crypto-asset  issuances  are  sometimes  accompanied  by  “white  papers” 
describing  the  crypto-assets  and  the  ecosystem  around  it.  However,  these  are  not 
standardised  and  the  quality,  transparency  and  disclosure  of  risks  vary  greatly63.  As 
‘white  papers’  often  feature  exaggerated  or  misleading  information,  investors  or 
consumers may not understand the rights associated with crypto-assets and the risks they 
present. Advertising materials can also overstate the benefits and rarely warn of volatility 
risks,  the  fact  that  consumers  can  lose  their  investment,  and  the  lack  of  regulation64. 
Consumers may therefore suffer large losses as a result of buying crypto-assets that are 
ill-suited to their needs and risk profile. The high volatility of crypto-assets, which may 
attract investors, can also lead to substantial losses. Such losses can be amplified when 
trading platforms offer leveraging trading65.    

Consumers  are  also  at  risk  of  losses  resulting  from  fraudulent  activities  and 
deceptive  practices.  As  the  issuance  and  the  provision  of  services  related  to  crypto-
assets are unregulated, this makes the market susceptible to illicit practices. In particular, 
the promise of high-yield returns makes it easy for fraudsters to attract customers. While 

60 51% very important, 21% important, 14% neutral, 7% rather not important, 4% not important at all, 3% 
no opinion. 
61 ESMA Securities and Markets Stakeholder Group, Own initiative Report on initial coin offerings and 
crypto-assets, 2018. 
62 ICOs are an innovative way of raising money from the public. In an ICO, a business or individual issues 
coins or tokens and puts them for sale in exchange of traditional currencies, such as the Euro, or more often 
virtual currencies, e.g. bitcoin or ether. The features of the tokens vary across ICOs. Some tokens serve to 
access or purchase a service or product that the issuer develops using the proceeds of the ICO (e.g. utility 
tokens).  Others  provide  voting  rights  or  a  share  in  the  future  revenues  of  the  issuing  venture  (e.g. 
investment  tokens).  Some  have  no  tangible  value  (e.g.  some  payment  tokens).  When  an  offer  concerns 
tokens qualifying as MiFID II financial instruments, the term ‘security tokens offerings’ is often used. The 
term  ICO  is  a  misnomer  used  by  the  industry  for  marketing  purposes  to  resemble  IPO  (initial  public 
offering). The term ‘token sale’ would reflect better the substance of the phenomenon.   
63 ESMA, ‘Advice on ‘Initial Coin Offerings and Crypto-Assets’, January 2019. 
64 HM Treasury, Financial Conduct authority and Bank of England, Cryptoassets Taskforce: final report, 
October 2018. 
65 Leveraging is a form of margin trading where the trader borrows certain funds from a service provider to 
create  a  position  that  is  larger  than  would  normally  be  possible  without  any  leverage.  Given  the  high 
fluctuations  of  crypto-assets,  most  trading  platforms  are  reluctant  to  offer  such  services.  However,  some 
platforms  offer  leveraging  from  x2  to  x100  with  a  median  of  x3.3  (University  of  Cambridge,  2 nd  Global 
crypto-asset benchmarking study, 2018). 

16 

 
 
                                                           
fraudulent  activity  exists  across  the  range  of  crypto-assets,  it  is  also  likely  to  differ 
between different types. For instance, the risk of fraud is high in ICOs. Fraud estimates 
range from 5 to 25% of ICO offerings66 and up to 81%67, depending on the classification. 
In some cases, the crypto-assets do not exist, the developer disappears just after the ICO 
or  the  projects  lack  appropriate  plan  or  capability  to  deliver  the  product  or  service68. 
Users’  lack  of  understanding  of  the  intricacies  of  the  underlying  technology  may  also 
exacerbate the risk of fraud.  

Consumers  may  also  be  at  risk  due  to  the  immaturity  or  failings  of  service 
providers.  As  there  are  no  legal  minimum  standards  on  operational  risks  (including 
cyber risks), the service providers are not encouraged to put in place appropriate systems 
and controls, exposing consumers to losses arising from hackers’ attacks, software errors 
or data loss. Cyber hacks (e.g. to obtain users’ private keys) can put consumers at risk of 
large  losses,  as  crypto-assets  are  viewed  as  high-value  targets  for  theft69.  Operational 
issues may also lead to temporary disruptions of systems (due to activity peaks), which 
can delay or deny consumers’ access to their funds and/or secondary market trading. In 
periods of disruption, holders of crypto-assets are not able to carry out transactions when 
they  like  and  may  therefore  suffer  losses  due  to  fluctuations  during  that  period.  Some 
trading  platforms  or  exchanges  have  stopped  trading  and  users  have  lost  their  entire 
holdings,  in  some  cases70.  Anecdotal  evidence  also  suggest  that  service  providers  can 
charge  high  and  variable  fees  that  are  not  properly  disclosed  to  consumers.  Solving 
consumer  conflicts  can  be  difficult,  especially  when  the  service  providers  have  no 
internal procedures in place for handling complaints or when they are located outside the 
EU71.   

2.2.3.  Market integrity risks (for unregulated crypto-assets) 

Market integrity, i.e. the fairness or transparency of price formation in financial markets, 
is  an  important  basis  for  investor  protection  and  fair  competition.  The  Market  Abuse 
Regulation  (MAR)  prohibits  market  abuse  (such  as  insider  dealing,  the  unlawful 
disclosure  of  inside  information  and  market  manipulation)  in  relation  to  financial 
instruments  admitted  to  trading  on  an  EU  trading  venue  authorised  under  MiFID  II. 
When crypto-assets do not qualify as MiFID II financial instruments, they fall outside the 
scope  of  MAR.  However,  market  integrity  may  be  undermined  by  the  trading  of 
‘unregulated’  crypto-assets.  71%  of  respondents  to  the  public  consultation  considered 
market integrity risks as important or very important72. This may damage confidence and 
prevent the crypto-asset market from operating effectively.  

66 Catalini, Christian and Joshua S. Gans, Initial Coin Offerings and the Value of Crypto Tokens, 2018. 
67 Dowlat, Sherwin and Hodapp, Michael (2018), ICO Quality: Development & Trading, Satis Group LLC 
publications. 
68 ESMA, Advice on ‘Initial Coin Offerings and Crypto-Assets’, January 2019. 
69 Some of the largest and most recent hacks and thefts include Coincheck ($540 million stolen in January 
2018), Mt  Gox (nearly $500 million stolen in February 2014) and Zaif ($60 million stolen in September 
2018), all in Japan, and Bithumb ($32 million stolen in South Korea).   
70 FMA Focus Bitcoin & Co, Crypto-assets, 2018. 
71 CNMV, Banco de Espana, Joint press statement on ‘cryptocurrencies’ and initial coin offerings, 2018. 
72 42% very important, 29% important, 14% neutral, 9% rather not important, 3% not important at all, 3% 
no opinion. 

17 

 
 
                                                           
Some  of  the  behaviours  in  crypto-asset  markets  are  similar  to  market-abuse  style 
activities  observed  in  some  traditional  financial  markets.  For  instance,  market 
manipulation  (such  as  ‘pump  and  dump’,  spoofing,  layering73)  includes  false  signals 
about 
the  supply  and  demand  for  crypto-assets  and  distort  price  formation.  
Dissemination  of  false  or  misleading  information  by  market  participants  (including  by 
issuers) can lead investors to make misguided investment decisions and cause mispricing 
and dysfunction in the market.  

Crypto-asset  markets’  vulnerability  to  market  manipulation  is  heightened  by 
several factors, such as the novelty and complexity of the technologies used as well as 
the  low  liquidity,  price  volatility  and  concentration  issues  (which  can  lead  actors  with 
large  holdings  to  use  their  dominant  position  to  influence  the  price).  Furthermore,  as 
trading  platforms  are  not  subject  to  transparency  requirements  or  conflicts  of  interest 
rules74, equal  access  to  information  and a fair price are not  guaranteed, which raise the 
risk  of  market  manipulation.  Anecdotal  evidence  also  suggest  that  some  large  crypto-
trading platforms allow investors to conduct wash trades75.   

Crypto-assets can also pose significant risks to financial integrity, as they may create new 
opportunities  for  money  laundering,  terrorist  financing  and  other  illicit  financing 
activities.  

2.2.4.  Market fragmentation and risks to the level playing field 

Where crypto-asset would qualify as financial instruments,  market fragmentation, 
results from divergent national interpretations of how financial services legislation 
applies  to  security  tokens  (i.e.  crypto-assets  that  could  qualify  as  financial 
instruments)76  giving  rise  to  regulatory  arbitrage.  Some  market  players  (e.g.  market 
infrastructures) could be tempted to locate their activities in Member States with a more 
flexible approach towards the use of DLT, in  order to  benefit from the EU passporting 
system. In contrast, market fragmentation can also incentivise issuers or service providers 
related  to  crypto-assets  to  operate  in  Member  States  where  the  definition  of  ‘financial 
instruments’  is  more  restrictive  in  order  to  avoid  the  application  of  the  full  financial 
services framework. As a result, capital could flow to crypto-assets that are equivalent to 
financial instruments  but  not  treated as  such by the Member State where the activity is 
conducted.  This  would  expose investors to  risks  due to  the lack of adequate regulatory 
protection. 

73  In  a  ‘pump  and  dump’,  a  massive  crypto-asset  purchase  pushes  up  its  price,  encouraging  further 
purchasing amongst other investors. Once the price has risen, the organiser offloads the crypto-asset for a 
profit, leaving consumers with expensive and often illiquid crypto-assets. Spoofing and layering are trading 
strategies where a trader makes and then cancels orders that they never intend to have executed in hopes of 
influencing the stock price. While layering involves orders at different prices, spoofing entails orders at the 
top of the order book.  
74 Report from the UK crypto-assets taskforce, October 2018. 
75  See  Cristina  Cuervo,  Anastasia  Morozova,  Nobuyasu  Sugimoto  (IMF),  Finech:  Regulation  of  crypto-
assets, Note/19/03. 
76  Bank  of  Latvia,  Guidelines  on  securities  tokens  2019;  Autorité  des  Marchés  Financiers,  Review  and 
Analysis  of  financial  regulations  to  security  tokens  and  position  providing  clarifications  regarding  the 
notion of trading venue in particular to financial instruments registered in a digital ledger, 2020; Maltese 
FSA’s Feedback Statement to the Consultation Document on Security Token Offering, 2020.   

18 

 
 
                                                           
Beyond  the  national  variations  in  the  implementation  of  MiFID  II  and  other 
sectoral  legislation,  the  proliferation  of  bespoke  rules  at  national  level  for  all  or  a 
subset of crypto-assets that do not qualify as ‘financial instruments’ may also lead 
to a substantial regulatory fragmentation. This market fragmentation also gives rise to 
regulatory arbitrage and distorts competition in the single market77.  Service providers or 
issuers  of  crypto-assets  could  operate  in,  or  decide  to  (re)locate  their  activities  to 
jurisdictions  where  crypto-assets  are  not  regulated  (beyond  the  obligations  imposed  by 
the AML/CFT framework).            

Divergent national rules could create considerable complexity and legal uncertainty 
for  crypto-asset  service  providers  keen  to  extend  operations  on  a  cross-border 
basis78. They could be obliged to adjust their business models according to the rules of 
separate  jurisdictions.  An  obligation  to  seek  a  license  from  a  supervisory  authority  in 
different  Member  States  could  create  additional  cost  barriers,  due  to  licensing  and 
advisory fees. The proliferation of national approaches is also a concern for crypto-asset 
issuers,  as  they  are  obliged  to  check  the  requirements  from  each  national  legislation 
where  the  crypto-asset  is  to  be  marketed,  distributed,  traded  and  otherwise  used.  This 
makes issuances across the single market costly and difficult79.  

Market  fragmentation  may  also  undermine  investor/consumer  protection  and 
market integrity in the EU. In most Member States, users of crypto-assets and related 
services are not protected. In other Member States, bespoke regulation may protect users 
(through  disclosure  obligations  on  the  crypto-asset  issuances,  limits  on  the  maximum 
amount that can be invested, requirements imposed on service providers). Nevertheless, 
even  when  Member  States  have  legislated,  the  level  of  investor  protection  and  the 
measures against market abuse still differ. 

2.2.5.  Financial  stability  and  monetary  policy  risks  raised  by  stablecoins  and 

global stablecoins 

Currently, 54 ‘stablecoins’ are in existence80, of which 24 are operational. Their market 
capitalisation almost tripled from €1.5 billion in January 2018 to more than €4.3 billion 
in  July  2019.  Between  January  and  July  2019,  the  average  volume  of  ‘stablecoin’ 
transactions was €13.5 billion per month81.  

The crypto-asset market (including existing stablecoins) remains small and does not pose 
a  risk  to  financial  stability82.  However,  some  stablecoins  (backed  by  a  reserve  of  real 
assets  or  fiat  currencies)  can  raise  additional  challenges  in  terms  of  financial  stability, 
monetary policy transmission and monetary sovereignty for three main reasons (Annex 4 
provides a detailed analysis of these vulnerabilities).    

77 EBA Report with advice on crypto-assets, January 2019. 
78  Association  for  Financial  Markets  in  Europe  (AFME),  Recommendations  for  delivering  supervisory 
convergence on the regulation of crypto-assets. 
79 Global legal insights, FinTech 2019.  
80 In existence means that a stablecoin initiative is either operational or traded or has been active by 
committing code and operational details. 
81 ECB Occasional Paper, ‘In search for stability in crypto-assets: Are stablecoins the solution?’, 2019.  
82 Financial Stability Board, ‘Crypto-asset markets, Potential channels for future financial stability 
implications’, Glossary, October 2018. Available at http://www.fsb.org/wp-content/uploads/P101018.pdf 

19 

 
 
                                                           
Different activities within a ‘stablecoin’ arrangement, in particular those related to 
managing  the  reserve  assets  aimed  at  stabilising  their  value,  increase  its 
interconnectedness  with  the  existing  financial  system.  A  ‘stablecoin’  is  generally 
supported by an ecosystem of entities that collectively facilitate its issuance, redemption, 
the  stabilisation  mechanism,  transfer  and  retail  interface  (storage  through  wallet 
providers; exchanges and trading platforms). While some of these functions are relevant 
for all  crypto-assets, the existence of the stabilisation mechanism  creates two functions 
specific  to  asset-backed  ‘stablecoins’:  (i)  managing  the  reserve  of  assets  and  (ii) 
providing  custody  for  these  reserve  assets.  Runs  on  a  ‘stablecoin’  arrangement  could 
occur if users lose confidence in the issuer or its network, in particular if they realise that 
the reserve assets are losing value, thereby casting doubts on the value of the stablecoins. 

Some ‘stablecoins’ could in the near future become widely used by consumers and 
reach a global scale. A number of stablecoin initiatives, sponsored by large technology 
and/or financial  firms,  have recently emerged  (such as Facebook’s crypto-asset,  Libra). 
Thanks to these companies’ large customer base, which may also be cross-border, these 
new  ‘stablecoins’  have  the  potential  to  gain  a  substantial  geographical  footprint.  These 
are  referred  to  as  ‘global  stablecoins’83.  If  a  global  stablecoin  is  successful  in  reducing 
price  volatility,  it  can  become  widely  used  as  a  means  of  payment  and  as  a  store  of 
value84.  The  ECB  has  estimated  the  potential  size  of  the  reserve  of  assets  backing  a 
multi-currency  Libra  coin85.  The  Libra  Association’s  assets  under  management  could 
range from €152.7 billion in the ‘means of payment’ scenario to about €3 trillion in the 
most extreme ‘store of value’ scenario (see Annex 4 for more details).  If a ‘stablecoin’ 
arrangement  becomes  systematically  important,  it  is  more  likely  to  raise  challenges  to 
financial stability and monetary policy transmission. 

Depending on their design, stablecoin arrangements may be particularly difficult to 
fit  into  the  existing  EU  framework,  leaving  the  above  financial  stability  risks 
unaddressed.  While  some  ‘stablecoins’  arrangements  confer  a  claim  or  redemption 
rights  against  the  issuer  or  the  underlying  assets  and  could  therefore  fall  into  existing 
regulatory categories86, a large number of ‘stablecoins’ do not grant such rights and fall 
outside existing EU financial services legislation.  

83 G7 Working Group on Stablecoins, Report on ‘investigating the impact of global stablecoins’, 2019. 
84  ECB  Occasional  paper,  ‘A  regulatory  and  financial  perspective  on  global  stablecoins’,  2020  [to  be 
published].  
85 On 16 April 2020, the Libra Association has published a second version of it white paper. Among other 
changes, the Association has indicated that, beyond the multicurrency-backed Libra, it will also launch 
stablecoins backed by single-fiat currency (euro-Libra, dollar-Libra…).  
86 For instance, they can qualify as electronic money directive under the Electronic Money Directive 2 or as 
an  alternative  investment  fund  under  the  Alternative  Investment  Fund  Directive.  The  qualification  as  a 
‘derivative contract’ can also be considered in some cases. Stablecoins are also likely to be considered as a 
‘virtual currency’ under AMLD5. 

20 

 
 
                                                           
2.3. Consequences 

2.3.1.  Missed efficiency gains in the trading and post-trading areas 

In  the  EU  and  in  Europe,  several  projects  for  the  creation  of  security  token 
platforms87 or in the post-trade area88 have been identified, but few are already in 
operation or are limited in scale (testing phase or limited to small and medium-sized 
companies), for both operational and legal reasons.  Given the regulatory constraints, 
it  is  difficult  for  traditional  market  infrastructures  to  use  DLT  rather  than  continuing 
running their business as they are used to. Legal obstacles may also prevent new entrants 
from  offering  financial  services/activities  through  DLT  solutions  and  competing  with 
traditional  players.  The  need  for  legal  certainty  has  also  continuously  been  highlighted 
throughout engagement with stakeholders from the financial industry 

Nevertheless, security tokens and DLT hold the potential to transform the way that 
financial instruments are issued and exchanged. 77% of the respondents to the public 
consultation  considered  that  DLT  could  bring  substantial  benefits  in  the  trading,  post-
trading  and  asset  management  areas,  notably  in  terms  of  efficiency89.  Figure  3 
summarises these benefits:  

Figure 3: Potential benefits of the adoption of DLT in the trade and post-trade area (Euroclear, Oliver 
Wyman, 2017) 

87  Three  platforms  in  Germany  have  been  identified  (StartMark,  Bitbond  AG,  Boerse  Stuttgart  Digital 
Exchange) and one in Austria (Conda AG). The London Stock Exchange Group carried out tests are due to 
be  conducted  in  2019  to  experiment  DLT  on  the  secondary  market  for  equities.  The  Liechtenstein 
Cryptoassets  Exchange  (LCX)  targets  professional  investors  and  plans  to  provide  trading,  custody, 
portfolio  management  and  analysis  services  that  target  all  types  of  crypto-assets.  The  Swiss  Digital 
Exchange will also propose trading, settlement and custody for security tokens.     
88  In  France,  LiquidShare  –  backed  by  major  European  Institutions  –  uses  DLT  solutions  for  the  post-
trading of non-listed SMEs; Deutsche Börse and Swisscom digitalised the shares of a Swiss company and 
then settled transactions of securities through DLT.  
89 54% completely agree, 23% rather agree, 7% neutral, 1% rather disagree, 3% completely disagree, 12% 
without opinion 

21 

 
 
 
 
 
 
                                                           
Trading,  clearing  and  settlement  of  security  token  transactions  could  become 
almost  instantaneous,  as  trade  confirmation,  affirmation,  allocation  and  settlement 
could  be  combined  into  a  single  step  and  reconciliations  would  become  practically 
superfluous.  This  would  in  turn  have  a  number  of  benefits,  including  reduced 
counterparty  risk  (see  Section  2.2.1.),  and  potentially  reduced  settlement  failures  and 
penalties90. DLT could also enable security tokens to be traded beyond current markets 
hours91.  

DLT  could  improve  collateral  management.  Shorter  settlement  cycles  would  reduce 
credit risk for spot trades and the need to mitigate them through central collateral posting. 
For  term  transactions  (e.g.  derivatives)  that  require  the  posting  of  collateral  to  cover 
counterparty risk, the use of security tokens and DLT could facilitate reconciliations and 
accelerate  collateral  movements.  This  could  ultimately  lead  to  more  collateral  being 
available in the market.  

DLT may also facilitate the recording and safekeeping of securities. It may improve 
the traceability of transactions and make ultimate ownership transparent  throughout  the 
security  life  cycle  by  providing  a  single  ‘golden  record’  that  would  be  shared  across 
market participants.  

The  use  of  DLT  and  security  tokens  could  enhance  reporting  and  supervision 
functions  at  firms  and  regulators,  by  facilitating  the  collection,  consolidation  and 
sharing of data for reporting and risk management purposes. With a DLT, multiple 
market  participants  could  access  a  single,  accurate  and  verifiable  ledger  source  in  real 
time.  As  far  as  regulators  are  concerned,  they  could  be  granted  special  access  rights  to 
consult or retrieve data stored on DLT ledgers, e.g. details on transactions made by some 
market participants or their risk exposure levels.   

The use of ‘smart contracts’ could improve the enforcement of contract terms and 
the automation of back office processes, e.g. the processing of some corporate actions 
(such  as  dividend  or  coupon  payments).  This  could  in  turn  reduce  errors  and  legal 
disputes. 

Security  tokens  and  their  underlying  technology  may  have  certain  advantages 
relative to current systems when it comes to security and resilience to a cyber-attack 
or a system breakdown. The distributed and shared nature of the system could make it 
easier to recover both data and processes in the event of an attack (assuming that not all 
the validating nodes are corrupted at the same time). This could also reduce the need for 
costly  recovery  plans92.  Sophisticated  encryption  techniques  could  also  provide  an 
additional layer of protection to pools of information stored on DLT compared to existing 
systems. 

90 ESMA, Report on ‘Distributed Ledger Technology Applied to Securities Markets’, 2016.  
91 AFME, Recommendations for delivering supervisory convergence on the regulation of crypto-assets in 
Europe, 2019.  
92 A common market practice is to maintain business continuity in the event of a system failure is to have a 
second  system  which  can  take  over  until  the  first  is  repaired.  This  transfer  between  database  can  be 
complex and costly. DLT is different in that multiple participants (nodes) contain the same record. In the 
event of failure of one node, the others are still able to continue operating.  

22 

 
 
                                                           
The above benefits of DLT could lead to a cost reductions for post-trade processes, 
including  clearing,  settlement,  custody,  registrar  and  notary  services  in  the  medium  to 
long  term,  once  investments  have  been  amortised93.  Reporting,  compliance  and  risk 
monitoring costs may decrease as well. The widespread use of DLT gains would imply a 
significant  reduction  in  costs  of  around  €540  million  per  year  for  the  EU  cash  equity 
market alone94. It has been estimated that DLT could reduce bank’s infrastructure costs 
attributable  to  cross-border  payments,  securities  trading  and  regulatory  compliance  by 
between  $15  to  $20  billion  per  year95.  Another  study  considers  that  a  widespread 
adoption of DLT could  remove 50% of the total  capital  market  back  and middle office 
costs of $100 billion per year or more96. 

2.3.2.  Missed  financing  opportunities  for  small  businesses  and  companies  due 
to a low level of initial coin offerings and security token offerings 

An  Initial  Coin  Offering  (ICO)  is  an  operation  in  which  companies  and 
entrepreneurs raise capital for their projects in exchange for crypto-assets that they 
create. Offers of utility tokens, in particular, represent an innovative method of funding 
innovative  projects  that  complements  other  sources,  such  as  crowdfunding,  venture 
capital or a listing of shares on a public market (through an initial public offering – IPO). 
As well as providing capital to companies that sometimes have no alternative, token sales 
also put pressure on existing sources of financing to compete and provide better terms for 
small and medium-sized enterprises (SMEs)97.  

There  are  also  specific  benefits  to  ICOs,  compared  to  traditional  market-based 
sources  of  financing.  ICO  of  utility  tokens  provide  start-ups  with  a  means  to  pre-sell 
access  (potentially  at  a  discount)  to  software  that  is  under  development98.  Unlike  other 
means of financing, such tokens are not equity securities and they do not grant any rights 
to participate in the governance of the company. They therefore allow for SME funding 
without diluting entrepreneurs’  equity  ownership.  ICOs can also  be  carried out  without 
intermediaries, such as banks, which means that the cost of the transaction can be lower. 
For instance, it has been estimated that ICO costs are around 3% of the funds raised for 
offerings  about  $1  million,  compared  to  10-12%  for  an  IPO99.  ICOs  are  also  faster  to 
implement  compared  to  IPOs,  at  least  in  the  current  state  of  play  of  the  crypto-asset 
market100.  They  are  also  a  more  inclusive  method  of  financing  compared  to  other 
traditional financing mechanisms. An ICO effectively enrols future users, which allows 
the  company  to  gain  appreciation  of  the  demand  for  the  product  or  service  before  it 
becomes operational. The benefit of an ICO is  also linked to the liquidity of the token. 

93 ESMA, Report on Distributed Ledger Technology Applies to Securities Markets. 
94 Goldman Sachs, Cboe Global Markets and own calculations. According to Goldman Sachs, DLT could 
result  in  an  estimated  $2  billion  in  annual  cost  savings  for  the  US  Cash  equity  markets  (by  reducing 
duplicative,  often  manual  affirmation  and  reconciliation  of  trade  across  buy-side  clients,  broker-dealers, 
custodian banks and capital required at the CSD).     
95 Banco Santander, Oliver Wyman, Anthemis Group, InnoVentures, FinTech 2.0 Paper. 
96 Swift Institute, The impact and potential of blockchain on the securities transaction lifecycle, 2016. 
97 OECD, Initial Coin Offerings for SME Financing, 2019. 
98Software that is not protected by intellectual property rights are less attractive for venture capital funding. 
ICOs may sometimes represent the only means for start-ups to develop open source software.  
99 OECD, Initial Coin Offerings for SME Financing, 2019.   
100 OECD, Initial Coin Offerings for SME Financing, 2019.  

23 

 
 
 
                                                           
Unlike  venture  capital  and  crowdfunding  where  the  instruments  are  illiquid,  a  large 
number of utility tokens can be traded on a secondary market (even if the liquidity is not 
guaranteed)101.  

Figure  4:  Amount  raised  by  successful  ICOs  in  the  EU-28  (source:  coinschedule.com  and  own 
calculations)  

4.000

3.000

2.000

1.000

0

Amount raised by successful ICOs in the EU28 in millions of € 

3.133,00 

981,60 

22,20 

2016

2017

2018

307,70 

2019

Despite  these  advantages,  the  amounts  raised  in  the  EU  through  ICOs  are  still 
relatively small and have significantly decreased since the second half of 2018. The 
financing  through  ICOs  in  2018  (record  year)  only  represented  15%  of  the  funding  by 
venture capital investments (€20.5 billion in 2018)102.    

Security  Tokens  Offerings  (STOs,  i.e.  offers  of  crypto-assets  that  could  qualify  as 
financial  instruments  under  MiFID  II)  have  developed  in  a  second  step  and  seem  to 
respond  to  the  need  of  institutional  investors  who  prefer  operating  in  a  regulated 
environment. However, while there are still very few of STO projects in the EU, there are 
specific  advantages  rooted  in  this  type  of  issuances.  These  include  in  particular  for  the 
issuers:  (i)  the  automation,  via  smart  contracts,  of  compliance  with  regulatory 
requirements  and events affecting the life of securities (corporate actions, like dividend 
or  coupon  payments)  and  lower  operational  costs;  (ii)  potential  enhanced  transparency 
for  issuers  on  the  investors  who  actually  hold  the  securities;  (iii)  optimisation  of  the 
settlement  and  delivery  processes;  (iv)  an  ability  to  reach  new  categories  of  potential 
investors and a diversification of the investors103.   

101  Amsden  R.  and  D.  Schweizer,  ‘Are  Blockchain  Crowdsales  the  New  ‘Gold  Rush’?  Success 
Determinants of Initial Coin Offerings”, 2018. Analysing 1009 tokens from 2015 to 2018, this study shows 
that 42% of tokens are listed on a secondary market after their ICO.   
102 European Commission, European Financial Stability and Integration Report, 2019. 
103 FD2A, AMAFI, AFG, ASPIM, Gide 255, Woorton, Consensys, PWC – Questionnaire on security 
tokens – summary of results, May 2019. 

24 

 
 
 
 
 
 
                                                           
Figure  5:  Amount  raised  by  successful  STOs  in  the  EU-28  (source:  coinschedule.com  and  own 
calculations)

50

40

30

20

10

0

Amount raised by successful STOs in the EU-28 in € millions 

46,90 

25,30 

2017

2018

12,60 

2019

2.3.3.  Missed  opportunities  in  terms  of  financial  inclusion  and  cheap,  fast, 

efficient payments  

Domestic  payments,  in  most  instances,  are  increasingly  convenient,  instantaneous 
and  available  24/7.  International  cross-border  payments,  however,  remain  slower, 
more  expensive  and  not  as  transparent,  especially  for  retail  payments  and 
remittances104.  Payment  tokens  have  the  potential  to  enable  cheap,  fast,  efficient  and 
inclusive  payments  and  increase  competition  by  providing  alternatives  to  traditional 
payment  instruments,  especially  on  a  cross-border  basis.  These  benefits  are  potentially 
higher  for  ‘stablecoin’  arrangements,  if  they  achieve  their  goal  of  price  stability  and 
become a reliable store of value and means of payment.  

Payment tokens can allow for lower transaction costs, compared to other means of 
payments (such  as  payment cards  and bank transfers), especially  for cross-border 
transactions.  Anecdotal  evidence  suggest  that  the  costs  tend  to  be  less than  1%  of  the 
transaction  amount,  compared  to  2-4%  for  traditional  payment  instruments  used  on  a 
cross-border  basis105.  These  lower  costs  are  explained  by  the  absence  or  fewer 
intermediaries  involved  in  the  transaction.  The  payee  in  cross-border  payment  token 
transactions also benefits from no direct foreign exchange costs. However, a payee that 
keeps  an  amount  of  payment  token  for  future  usage,  is  exposed  to  exchange  rate  risk, 
which can be significant given the huge volatility of some payment tokens. ‘Stablecoins’ 
could resolve this issue, by reducing the need for converting the payment tokens into fiat 
currency.  

While the cost differential between traditional payments and payment tokens is less 
pronounced in the Single Euro Payments Areas (SEPA)106, a clear case for the use 
of  payment  tokens  is  remittances.  Flows  of  money  sent  by  EU  residents  to  non-EU 
countries  amounted  to  €32.7  billion  in  2017,  while  inflows  of  money  totalled  €10.7 

104 G7 Working Group, Report on ‘investigating the impact of global stablecoins’, 2019. 
105 EBA opinion on virtual currencies, 2014. 
106 The EU regulation on equality of cross-border payment charges eliminates the differences in charges for 
cross-border  and  national  payments  in  euros,  therefore  reducing  the  potential  cost  advantage  of  using 
payment tokens inside the EU. 

25 

 
 
 
 
                                                           
billion107.  Despite  political  agreement  (G7,  G20)  to  lower  the  cost  of  remittances,  the 
global  average  cost  is  currently  6.79%  of  the  amounts  sent108.  Payment  tokens  and 
‘stablecoins’  offer  opportunities  to  lower  such  transaction  costs.  However,  this  will 
depend  on  the  fulfilment  of  several  conditions,  such  as  the  widespread  use  of 
smartphones  in  emerging  economies  (as  cryptographic  wallets  require  a  smartphone)109 
or  the  acceptance  of  payment  tokens  by  local  merchants.  The  higher  fees  charged  for 
traditional  means  of  payments  are  partly  due  to  the  regulatory  requirements.  Should 
payment  tokens  and  ‘stablecoin’  arrangement  be  regaled,  compliance  costs  could 
diminish their competitive advantage. Payment tokens also hold potential for financial 
inclusion, as access to wider financial services is often limited to people with access 
to traditional transaction accounts110. Despite the Payment Accounts Directive (PAD) 
adopted in April 2014 that aims to provide cheap basic bank accounts to EU citizens, the 
number of unbanked people is  around 30 million in  the EU111. Even if payment  tokens 
require a certain level of financial literacy (especially for older people and those without 
digital skills), payment tokens could be an alternative way for some individuals to carry 
out payment transactions. 

Transactions  using  payment  tokens  can  potentially  be  verified  and  settled  faster 
than those in fiat currency. The length of the settlement may differ among the various 
payment tokens, but it is usually less than one hour for decentralised payment tokens and 
instantaneous  for  centralised  ones.  Another  advantage  of  payment  tokens  is  that 
payments can be validated 24/7, whereas traditional payment systems only have several 
clearing  sessions  per  day  and  do  not  operate  during  holidays  and  weekends.  These 
advantages  are  less  significant  for  EU  Member  States  that  have  already  established 
instantaneous  and  24/7  payment  services  and  for  SEPA,  where  the  payee  needs  to  be 
credited at the latest by the next business day. However, as the speed of verification and 
settlement  does  not  depend  on  the  location  of  the  sender  and  receiver,  payment  tokens 
still  offer  advantages  compared  to  credit  transfers  or  card  payments,  particularly  for 
payments between different currency areas.  
Payment  tokens  can  also  provide  some  opportunities  in  terms  of  efficiency.  One 
notable  advantage  is  that  the  validation  of  payment  transactions  is  distributed  over 
multiple subjects  (i.e. validating nodes) and that  the use of DLT could  improve system 
resilience,  given  the  lack  of  a  central  system  which  could  be  subject  to  outages  or 
failures.  Under  certain  conditions,  payment  tokens  could  also  improve  the  traceability 
and  transparency  of  transactions.  Payment  tokens  may  also  hold  the  key  to 
‘programmable money’ (‘delivery vs. payment’ or ‘invoice vs. payment’), by enabling 
the functioning of smart contracts. A simple example of programmable money could be 
blocking  the  funds  for  a  transaction,  which  are  then  automatically  released  to  the 

107 Eurostat, Personal Transfers in the EU, 15 November 2018. 
108 World Bank, remittances prices database. 
109 Feature phones (i.e. first-generation mobile phone with button-based input and a small display) are still 
prevalent in the regions where an outflow of EU personal transfers is directed. For instance, 20% and 14% 
of those remittances are directed to Asia and Sub-Saharan Africa (source: Eurostat, 2018), while the rate of 
adoption of smart phones is only 43% and 33.5% (source: GSMA intelligence database, 2018).    
110 Benoît Cœuré ‘Fintech for the people’, 2019. 
111 World Bank, Global Findex Database 2017. The impact of PAD cannot be seen yet, as it has just been 
fully transposed (the last two transpositions were in May and July 2019). 

26 

 
 
 
                                                           
recipient  only when specific conditions  are met (for example the confirmed delivery of 
goods)112.  

2.4. How will the problem evolve? 

Given the lack of (long-term) experience coupled with often abrupt changes in the market 
(e.g.  erratic  price  swings)  and  the  strong  impact  of  unforeseeable  external  factors  (e.g. 
regulatory changes in third countries), it is very difficult to predict how these markets and 
the  problems  identified  will  develop.  Nevertheless,  there  are  certain  assumptions  that 
appear plausible in terms of future developments. 

In the absence of regulation, it is likely that crypto-assets falling outside the scope of 
EU legislation will still give rise to consumer protection and market integrity issues. 
Most  of  the  crypto-assets  have  developed  outside  the  regulated  space.  Supervisory 
actions at EU and national level (such as warning about the risks of cryptocurrencies or 
initial coin offerings) have had mixed results in terms of protecting investors or reducing 
criminal activities. Anecdotal evidence show that fraud remains significant and does not 
decrease.  Cyber-attacks  are  still  a  major  threat  and  hacking  of  wallet  providers, 
exchanges and trading platforms are not uncommon.   

Figure 6: Total number of fraud cases in main crypto-asset markets, 2017-2019 (source: chainanalysis)

The  benefits  offered  by  crypto-assets  (alternative  cheap  and  fast  means  of 
payments,  funding  sources  for  SMEs,  benefits  linked  to  a  decentralised  data 
economy) are unlikely to be reaped in the absence of a regulatory framework.  The 
lack  of  trust  in  the  integrity  of  crypto-asset  markets  remains  a  major  hurdle  to  the 
widespread use of tokens as a means of exchange or as new investment opportunities for 
a wider set of investors113. Buyers of tokens are therefore usually some retail  and other 
investors  (such  as  family  offices)  with  a  high-risk  tolerance.  High  levels  of  price 
volatility  in  the  crypto-markets  reinforce  the  general  public’s  lack  of  confidence  in 

112 HM Treasury, Financial Conduct Authority and Bank of England, Cryptoassets Task Force, final report 
2018. 
113 One  survey found that two of the biggest obstacles to the adoption of DLT are regulatory uncertainty 
and  lack  of  trust  among  users  (PwC,  Blockchain  is  here,  What’s  your  next  move?,  PwC’s  Global 
Blockchain Survey, 2018). 

27 

 
 
 
                                                           
crypto-asset markets. The lack of trust also allows the most reliable service providers that 
support crypto-asset markets to charge high prices, which further inhibits liquidity114.  

To address this, self-regulatory initiatives could emanate from the industry115. However, 
non-binding  principles  and  the  lack  of  an  enforcement  mechanism  would  only  achieve 
limited  effects  on  a  market  that  has  so  far  developed  outside  the  regulatory  perimeter. 
Furthermore, consumer groups are typically not invited to help develop best practice116. 
Therefore, crypto-asset markets are unlikely to further develop without a comprehensive 
regulatory framework for issuers and service providers117. 

Furthermore, in the absence of regulatory action at EU level, more Member States will 
pursue reforms at national level to address the problems highlighted above, giving rise to 
further regulatory fragmentation. National regimes would not provide an optimal base for 
a  genuine  single  market  for  crypto-assets  as  service  providers  would  face  regulatory 
hurdles  when  operating  across  borders.  Because  of  the  cross-border  nature  of  crypto-
assets, national legislation aimed at consumer protection would not significantly reduce 
risks for consumers118. The largest trading platforms, exchanges or wallet providers used 
by  consumers  in  one  Member  State  can  be  located  in  another  Member  State  or  even 
outside the EU, where no rule may apply. 

‘Stablecoins’ are likely to follow a different path to other crypto-assets. By seeking 
to  stabilise  the  price  of  the  token,  stablecoins  could  resolve  the  main  shortcoming  of 
others  crypto-assets  –  high  volatility.  In  a  short  time  span,  ‘global  stablecoins’  can 
become largely accepted as a means of exchange and used as a store of value. This would 
introduce  a  host  of  challenges,  including  risks  to  financial  stability,  monetary  policy 
transmission  and  monetary  sovereignty.  The  risks  to  financial  stability  would  also  be 
amplified  if  a  pioneer  project  triggers  similar  initiatives  from  other  BigTech119.  While 
becoming  systemically  important  right  after  their  launch120,  some  global  “stablecoin” 
initiatives  could  also  try  to  be  launched  outside  the  EU  financial  services  framework. 
Promoters of stablecoins could be tempted to follow an ‘act first, seek forgiveness later’ 
approach towards regulation, by framing their business model in a way that does not fit 
into any existing regulatory classification.  

Crypto-assets that fall within existing EU legislation (those which would qualify as 
MiFID II  financial instruments) face a different set of problems. The market  may 
never meaningfully develop unless the applicable regulatory framework is clarified. 

114 International Securities Service Association, Infrastructure for Crypto-assets: A review by infrastructure 
providers, October 2018. 
115 See for instance, the Investment Industry Regulatory Organisation of Canada that has been preparing ‘a 
preparation of regulation for blockchain applications and digital assets’; Virtual Commodities Working 
Group in the USA.  
116 University of Cambridge, the Global crypto-asset regulatory landscape study (2019) 
117  68%  of  the  respondents  to  the  Commission’s  public  consultation  have  indicated  that  an  EU  bespoke 
regime for crypto-assets (that are not currently covered by existing legislation) would enable a sustainable 
crypto-asset ecosystem in the EU (vs. 22% ‘no’ and 10% without opinion). 
Dutch Authority for the Financial Markets (AFM)/Dutch National Bank, Cryptos - Recommendations for a 
regulatory framework, December 2018. 
119 See for instance, Dirk A. Zetzche, Douglas W. Arner, Regulating Libra: The Transformative Potential 
of Facebook’s cryptocurrency and possible regulatory responses, 2019. 
120 G7 Working Group on Stablecoins, Report on ‘investigating the impact of global stablecoins’, 2019. 

28 

 
 
                                                           
As  indicated  above,  DLT  systems  could  have  numerous  benefits  when  applied  to  the 
issuance,  trading  and  post-trading  areas.  However,  despite  significant  interest  from 
market  participants,  there  are  only  very  sporadic  cases  of  ‘security  token’  issuances  to 
date, and none of the security tokens have been admitted to trading on a trading venue or 
been recorded with a central securities depositary. 

While  the  industry  is  attempting  to  solve  the  operational  issues  that  DLT  systems  still 
face (such as the harmonisation of technical standards and scalability issues), the lack of 
legal  certainty and some provisions of existing EU regulations could  act  as a barrier to 
the introduction of this technology and the benefits of DLT may never materialise121. EU 
regulation could require the artificial replication of the traditional steps of the lifecycle of 
a transaction (such as trading and post-trade activities) and doing so would erode most of 
the efficiency gains offered by the technology. In fact, it can be assumed that costs will 
be  higher  compared  to  traditional  financial  instruments  given  that  it  would  constitute  a 
novel  approach  (lack  of  economies  of  scale,  specialist  knowhow  etc.).  As  such,  the 
uptake of security tokens is largely dependent on adapting the regulatory requirements in 
a way that would allow service providers and market infrastructures using DLT to realise 
the efficiency gains.   

If  the  regulatory  challenges  related  to  DLT  are  resolved  in  other  third  country 
jurisdictions,  this  may  put  both  the  EU  financial  sectors  and  EU  investors,  at  a 
competitive  disadvantage122.  As  the  financial  industry  has  advocated  for  more 
regulatory  guidance on the compatibility of  DLT with  EU financial  services legislation 
for  some  time123,  the  lack  of  an  EU  response  could  give  rise  to  divergent  views  and 
interpretations  from  NCAs,  leading  to  further  market  fragmentation  and  regulatory 
arbitrage.    A  recent  study  has  quantified  annual  DLT  spending  in  financial  services  at 
over $1 billion in 2017, with an estimated annual figure of $1.7 billion going forward124. 
However,  the  investments  in  the  EU  could  stop  if,  due  to  regulatory  hurdles,  market 
participants  are  prevented  from  shifting  from 
to  real-world 
implementation.  Ultimately,  while  not  having  any  direct  detrimental  impact,  it  implies 
that (total) costs of financial transactions will remain higher than necessary in the EU.        

trials  and 

testing 

3.  WHY SHOULD THE EU ACT? 

3.1. Legal basis 

The  Treaty  on  the  Functioning  of  the  European  Union  (TFEU)  confers  upon  the  EU 
institutions the competence to lay down appropriate provisions that have as their object 
the establishment and functioning of the internal market (Article 114 TFEU). Depending 
on  the  policy  option  chosen  and  the  specific  design  of  the  rules,  the  appropriate  legal 
base  could  also  be  Article  53(1)  TFEU  on  the  taking-up  and  pursuing  of  activities  by 

121 Randy Priem, Distributed ledger technology for securities clearing and settlement: benefits, risks and 
regulatory implications, 2020. 
122 Switzerland in particular has recently introduced targeted amendments to their legislative framework. 
This will in effect establish a bespoke set of rules for infrastructures dealing with DLT securities, clearing 
the path for the industry to create solutions that harness the potential of the technology 
123 See, for instance the European Central Securities Depositories Association’s response to the public 
consultation on FinTech, 2017. 
124 See HSBC, Distributed ledger technology in the capital markets, 2020.  

29 

 
 
                                                           
self-employed persons, which is used to regulate the access of financial intermediaries to 
their activities.  

3.2. Subsidiarity: Necessity of EU action 

For  crypto-assets  that  are  covered  by  EU  legislation  (mostly  those  which  qualify  as 
financial instruments under MIFID II), a legislative proposal bringing targeted legislative 
amendments to the existing EU financial services regulatory framework in order to allow 
for a wider use of DLT could only be carried out through legislative action at EU level. 
Furthermore,  different  interpretations  on  how  the  current  financial  services  legislation 
applies  to  DLT  can  lead  to  disparities  in  terms  of  investor  protection,  market  integrity 
and competition across the single market and they can lead to regulatory arbitrage, thus 
justifying a common EU approach.    

For crypto-assets that fall outside the scope of existing EU financial services legislation, 
some Member States have put in place (or are considering) bespoke national regimes to 
regulate  crypto-assets.  As  outlined  above,  these  national  regimes  follow  different 
approaches  and  can  make  the  cross-border  provision  of  services  in  relation  to  crypto-
assets  difficult.  The  proliferation  of  national  approaches  also  poses  risks  to  the  level 
playing  field  in  the  single  market  in  terms  of  investor/consumer  protection,  market 
integrity  and  competition.  Furthermore,  while  some  risks  are  mitigated  in  the  Member 
States  that  introduced  a  bespoke  regime  on  crypto-assets,  consumers,  investors  and 
market  participants  in  other  Member  States  would  remain  unprotected  against  some  of 
the  most  significant  risks  posed  by  crypto-assets  (e.g.  fraud,  cyber-attacks,  market 
manipulation…).  

3.3. Subsidiarity: Added value of EU action 

Action  at  EU  level  would  present  more  advantages  compared  to  actions  at  national 
level125.  

For  crypto-assets  that  are  covered  by  EU  regulation  (i.e.  those  that  could  qualify  as 
‘financial instruments’ under MiFID  II or as ‘e-money’ under EMD2), an action at  EU 
level (either by soft-law measures or regulatory action) would provide clarity on whether 
and  how  the  EU  framework  on  financial  services  applies.  Enhanced  legal  certainty  by 
legislation  and/or  guidance  at  EU  level  could  facilitate  the  take-up  of  primary  and 
secondary markets for ‘security tokens’ across the single market, while ensuring financial 
stability and a high level of investor protection. By contrast, the proliferation of guidance 
and interpretations at national level could lead to a fragmentation of the internal market 
and a distortion of competition.       

125 ESMA, Report on licensing of business models, 2019. In this report, ESMA indicates: ‘almost all NCAs 
in their responses referred to the area of crypto-assets and ICOs as the areas that need to be addressed at 
EU level. NCAs reported the lack of clarity with respect to the definition of financial instruments and the 
legal  nature  of  crypto-assets  and  related  activities.  A  timely  and  coherent  response  from  the  EC  to  the 
uncertainties  in  the  crypto  area  could  prevent  divergence  in  national  regime  and  favour  a  consistent 
approach across Member States’.  

30 

 
 
                                                           
For crypto-assets that are not currently covered by EU legislation, an action at EU level, 
such  as  the  creation  of  an  EU  regulatory  framework,  completing  also  the  anti-money 
laundering existing rules, would set the ground on which a larger cross-border market for 
crypto-assets  and  crypto-asset  service  providers  could  develop,  thereby  reaping  the  full 
benefits of the single market. An EU regime would significantly reduce the complexity 
as  well  as  the  financial  and  administrative  burdens  for  all  stakeholders,  such  as  the 
service providers, issuers and investors/users. Harmonising operational requirements on 
service  providers  as  well  as  the  disclosure  requirements  imposed  on  issuers  could  also 
bring clear benefits in terms of investor protection and financial stability. 

4.  OBJECTIVES: WHAT IS TO BE ACHIEVED? 

4.1. General objectives 

The objective of this initiative are as follows:   

-  This  initiative  aims  at  providing  legal  clarity  as  regards  whether  and  how  EU 

financial services legislation applies to crypto-assets (and related services);  

- 

-  The  initiative  should  support  innovation  and  fair  competition  by  creating  a 
conducive framework for the issuance of, and the provision of services related to 
crypto-assets;   
It should ensure a high level of consumer and investor protection and market 
integrity in the crypto-asset markets;  
It should address financial stability and monetary policy risks that could arise 
from a wide use of crypto-assets and DLT.   

- 

4.2. Specific objectives 

The specific objectives of this initiative are as follows:  

-  Removing  regulatory  hurdles  to  the  issuance,  trading  and  post-trading  of 
security  tokens  (i.e.  crypto-assets  that  qualify  as  financial  instruments  under 
MiFID II), while respecting the principle of technological neutrality126;  
Increasing the sources of funding for companies through increased Initial Coin 
Offerings and Securities Tokens Offerings;  

- 

-  Limiting  the  risks  of  fraud,  money  laundering  and  illicit  practices  in  the 

crypto-asset markets;  

-  Allowing EU consumers and investors to access  new investment opportunities 
or  new  types  of  payment  instruments,  competing  with  existing  ones,  to 
deliver  fast,  cheap,  and  efficient  payments,  in  particular  for  cross-border 
situations.  

5.  WHAT ARE THE AVAILABLE POLICY OPTIONS? 

The policy options analysed in this impact assessment have been grouped into three areas 
of  action:  (i)  policy  options  for  crypto-assets  that  are  not  currently  covered  by  the  EU 

126 A technologically neutral approach means that legislation should not mandate market participants to use 
any particular technology or should not give a particular technology an advantage over another. 

31 

 
 
 
   
                                                           
regulation (mainly for certain payment and utility tokens); (ii) policy options for crypto-
assets that could qualify as financial instruments under MiFID II; (iii) policy options for 
‘stablecoins’ and global ‘stablecoins’. This last category has been assessed separately, as 
‘global stablecoins’ can pose new risks to financial stability, compared to other crypto-
assets. 

Table 7: Summary of the options assessed in the impact assessment 

Type of crypto-assets 
Crypto-assets that are currently unregulated at EU 
level 

Crypto-assets that qualify as financial instruments 
under MiFID II 

‘Stablecoins’ and global ‘stablecoins’ 

Policy options 

Option 1: Opt-in regime 
Option 2: Full harmonisation regime   
Option 1: Non-legislative measures 
Option 2: Targeted amendments to sectoral 
legislation 
Option 3: Pilot/experimental regime on DLT market 
infrastructure 

Option 1: Bespoke legislative measures on 
stablecoins/global stablecoins  
Option 2: Bringing stablecoins and global 
stablecoins under the Electronic Money Directive 2 
Option 3: Measures limiting the use of stablecoins 
and global stablecoins  

5.1. What is the baseline from which options are assessed?  

The baseline is similar to section 2.3. (How will the problem evolve?).  

5.2. Description of the policy options 

5.2.1.  Policy  options  for  crypto-asset  that  are  not  currently  covered 

by the EU financial framework for financial services 

Option 1: Opt-in regime for unregulated crypto-assets 

For  crypto-assets  that  fall  outside  the  EU  financial  services  framework,  Option  1 
would  consist  in  an  optional  regime  for  the  issuance  of,  and  services  related  to, 
crypto-assets  (such  as  trading  platforms,  exchanges,  wallet  providers…).  In  such  a 
case, crypto-asset issuers and service providers would have the possibility to opt-in to an 
EU-wide regime if they want to operate throughout the single market. Issuers or service 
providers that would decline to opt-in would remain unregulated or be subject to national 
bespoke  regimes.  The  regime  would  not  apply  to  crypto-assets  that  may  qualify  as 
‘financial instruments’ under MiFID II or as ‘electronic money’ under EMD2. The opt-in 
regime would be built on four building blocks.   

The first building block would relate to the issuance of crypto-assets. If they opt-in 
for  this  regime,  issuers  would  benefit  from  a  passport  regime  across  the  single  market, 
allowing  them  to  market  and  offer  their  crypto-assets  in  all  Member  States.  In  return, 
they  would  be  subject  to  some  requirements  imposed  at  EU  level.  The  fundamental 
requirement imposed on the crypto-asset issuer should be the disclosure of clear, accurate 
and non-misleading information through an information document/white paper (such as a 
technical  and  economic  description  of  the  project,  the  nature  of  the  crypto-assets,  the 

32 

 
 
 
 
 
 
rights  or  the  absence  of  rights  associated  with  them,  the  risks  they  present  and  finally 
whether and where they are tradeable)127. These provisions would apply only to crypto-
assets that are issued (i.e. created and then sold by the issuer or his agent, as opposed to 
those simply awarded to the miners128 or those that are distributed to the public for free).  

Under this option, the issuer would be obliged to create a legal entity or to have a legal 
representative in the EU that would be accountable to the national competent authority. 
The  issuer  could  also  be  subject  to  further  requirements,  such  as  advertising  rules 
ensuring  that  marketing  and  promotional  materials  are  not  misleading.  The  issuer 
managers would also be subject to fitness and probity standards. 

The  second  building  block  would  concern  the  services  related  to  crypto-assets. 
Three  main  categories  of  services  would  be  in  scope:  1)  the  trading  platforms  of 
crypto-assets: 2) the brokerages/exchanges (fiat-to-crypto and crypto-to-crypto) and 
3) the custodial wallet providers. Those entities would be subject to the following key 
requirements129, summarised in the table below.   

Table 8: Summary of the requirements on crypto-asset service providers 

requirements 

Key 
crypto-asset service providers  

for 

all 

Additional 
exchanges 
platforms 

requirement 

for 
trading 

and 

-  Reporting 

Legal presence in the EU - Governance arrangements (e.g. in terms of 
operational resilience and ICT security) - Rules on conflicts of interest 
- Prudential requirements (including capital requirements) – Business 
continuity  requirements  -  Adequate  complaints  handling  and  redress 
procedures 
(including  and  beyond 
requirements 
AML/CFT  requirements)  -  Liability  towards  the  customers  for  the 
crypto-assets  given  in  custody  –  Segregation  of  users’  assets  from 
those held on own account - Obligation to keep appropriate records of 
users’ transactions - Rules, surveillance and enforcement mechanisms 
to deter potential market abuse - Advertising rules to avoid misleading 
marketing/promotions  –  Obligation  to  provide  information  in  the 
context  of  criminal 
investigations  upon  requests  of  national 
authorities, according to national laws 

Obligation  to  provide  a  certain  degree  of  pre-  and  post-trade 
transparency  (bid-offer  spreads  and  transaction  volumes,  price)  - 
Access to  services in an undiscriminating way – Obligation to screen 
crypto-assets against the risk of fraud 

Additional 
trading platforms 

requirement 

for 

Adequate rules to ensure fair and orderly trading 

Additional 
wallet providers  

requirement 

for 

Minimum  conditions  for  their  contractual  relationship    with  the 
consumers/investors 

The  third  building  block  would  be  consumer  protection  and  market  integrity 
measures.  Crypto-asset  service  providers  would  have  to  apply  additional  measures  to 
ensure investor/consumer protection (such as suitability checks and/or issuing warnings 

127 59% of the respondents to the public consultation on crypto-assets indicated that the crypto-asset issuer 
should provide information on crypto-assets, 29% said that disclosure of information should depend on the 
nature of the assets, 5% indicated that there should be no disclosure and 7% were without opinion.  
128 Miners provide the necessary computational power to validate transactions and include them in the next 
block of transactions in the chain. This terms is especially used for permissionless DLT.  
129 These key requirements were presented in the consultation document on crypto-assets.  

33 

 
 
 
                                                           
on  the  risks).  A  legislative  proposal  could  also  integrate  measures  aimed  at  preventing 
market abuse (market manipulation, insider dealings and disclosure of false information) 
related to crypto-assets when they are traded on a secondary market.  

The fourth pillar would be the supervision of issuances of, and the services related 
to crypto-assets. Given the limited scale of service providers in the crypto-asset market, 
supervision at national level would seem more justified. Those providers would have to 
be  authorised  by  an  NCA  before  providing  services.  When  authorised  in  one  Member 
State, they would be allowed to provide services in all Member States (EU passport). The 
legislation  should  also  include  rules  on  the  withdrawal  of  authorisations.  The  issuer  or 
sponsor would also be required to register their  white paper describing the crypto-asset 
issuance with the NCA of the jurisdiction where it is established. While the white paper 
would not be subject to  prior approval, the NCA would be empowered to require more 
information  or,  if  necessary,  stop  the  issuance  process.  The  opt-in  regime  would  also 
include provisions on investigations by NCAs, administrative sanctions and cooperation 
between NCAs.  

Under  Option  1,  all  unregulated  crypto-assets  (except  stablecoins  that  would  require  a 
specific  set  of  measures  –  see  section  5.2.3.)  would  be  covered,  as  this  option  aims  at 
regulating activities and service providers rather than the specific crypto-assets. Whereas 
for example disclosure requirements on the issuance could  be envisaged to  be different 
depending on the specific attributes of an unregulated crypto-asset (e.g. utility tokens that 
offer access to a service or a product would require an information different compared to 
other  crypto-assets),  all  service  providers  (e.g.  trading  platforms,  custodian  wallets  and 
exchanges/brokerage  services)  would  be  covered  regardless  of  the  crypto-assets  they 
offer.  

Additionally, Option 1 for unregulated crypto-assets, would take into account the updated 
international  recommendations  on  AML/CFT  from  the  FATF.  Building  on  the 
recommendations  from  both  EBA  and  ESMA,  the  framework  would  cover  relevant 
service  providers  as  these  are  defined  in  the  FATF  recommendations,  preparing  the 
ground for the upcoming updated EU AML/CFT policy.  

Option 2: Full harmonisation for unregulated crypto-assets 

Option  2  would  introduce  a  mandatory  EU  framework  for  the  issuance  and  the 
services  related  to  crypto-assets  that  are  currently  not  covered  by  EU  legislation. 
This  legislation  would  cover  the  four  pillars  mentioned  under  Option  1.  The  main 
difference  with  Option  1  would  be  that  all  issuers  and  crypto-asset  service  providers 
would  have  to  comply  with  the  legislation.  This  means  that  crypto-asset  issuers  would 
have  to  publish  an  information  document.  However,  some  measures  would  also  ensure 
that  the  requirement  related  to  this  information  document  is  proportionate  (e.g. 
exemptions  for  issuances  below  a  certain  threshold  or  distributed  to  a  small  number  of 
users/investors). Service providers would be required to apply the requirements set out in 
Table 8 (see above). Under Option 2, all issuances of crypto-assets in the EU as well as 
service  providers  would  benefit  from  an  EU  passport.  National  bespoke  regimes  on 
crypto-assets would cease to apply. 

Like Option 1, Option 2 would also build on the FATF recommendations.  

34 

 
 
 
 
5.2.2.  Policy Options for crypto-assets that may qualify as financial 

instruments under MiFID II 

Option 1: Non-legislative measures to provide guidance on the applicability of the 
EU framework on financial services to security tokens and DLT  

Under this option, there would be no proposed legislative measures for crypto-assets that 
are currently  covered by EU  financial services legislation (at  least in  the  short/medium 
term).  Instead,  a  series  of  non-legislative  measures  (e.g.  a  Commission’s  interpretative 
Communication,  eventually  complemented  by  and/or  Guidelines130,  Questions  and 
Answers131 from the ESAs depending on the nature of the issue at stake) would be issued 
to  set  out  a  common  view  on  the  applicability  of  existing  EU  legislation  to  increase 
supervisory convergence.  

Those non-legislative measures would provide guidance on: (i) the conditions and criteria 
under which crypto-assets (including investment tokens, hybrid tokens and ‘stablecoins’) 
qualify  as  ‘transferable  securities’  or  as  other  financial  instruments  (money  market 
instruments,  units  of  collective  investment  undertaking,  derivative  contracts)  under 
MiFID  II;  (ii)  the  conditions  under  which  trading  platforms  for  crypto-assets  (either 
centralised or decentralised) qualify as a trading venue or as any investment firm under 
MiFID II;  (iii) the application of the Prospectus Regulation to security tokens offerings;  
and  (iv)  the  application  of  post-trading  rules  (in  particular  CSDR  and  SFD)  to  CSDs 
using a DLT and more widely in a DLT context.    

Option 2: Targeted amendments to the EU framework on financial services 

Building  on  the  outcomes  of  the  public  consultation  on  crypto-assets,  Option  2  would 
bring  targeted  amendments  to  sectoral  legislation  applying  to  MiFID  II  financial 
instruments.  Option  2  would  therefore  only  entail  limited  changes  to  the  body  of 
legislations governing the securities lifecycle, namely issuance (Prospectus Regulation), 
trading  and  provision  of  investment  services  (MiFID  II/MiFIR  framework),  settlement 
activities (CSDR and SFD). Option 2 would address the regulatory challenges linked to 
the use of permission-based and centralised trading platforms for crypto-assets, and not 
the wider concerns raised by permissionless and decentralised trading platforms.  

The  first  aim  of  such  changes  would  be  to  remove  obstacles  to  the  use  of  DLT  in 
level 1 and/or level 2 legislation, to ensure that service providers using this technology 
can offer their products and services, compete with and complement the legacy financial 
market  infrastructures.  The  targeted  amendments  would  strive  to  maintain  the 
technology-neutral  approach  taken  by  the  current  financial  services  legislation.  These 
measures  could  introduce,  for  instance,  the  creation  of  a  specific  prospectus  schedule 
under  the  level  2  of  the  Prospectus  Regulation  to  remove  regulatory  hurdles  to  the 

130 In order to promote supervisory convergence, ESMA has the power to issue guidelines (Article 16 of 
ESMA Regulation 1095/2010), which are addressed to the NCAs or to the market participants. Each NCA 
must confirm whether it complies or intends to comply with the guidelines. Where it does not comply, it 
must inform ESMA and provides reasoning. ESMA can decide to publish any NCA non-compliance.   
131 Under  Article 16b of ESMA Regulation, ESMA can develop ‘questions  & answers’. The answers by 
ESMA are not binding.  

35 

 
 
                                                           
 
issuance  of  security  tokens.  They  could  also  include  a  modification  of  Article  3(2)  of 
CSDR to allow for the recording of financial instruments admitted to trading on a MiFID 
II trading venue on a DLT.  

Second,  some  targeted  modifications  would  be  brought  to  existing  EU  rules  to 
ensure that some novel risks raised by the use of DLT (operational, including cyber 
risks) are addressed. For instance, this can include technical changes to the legislation 
applying  to  ‘custody  services’  to  specify  that  the  control  of  ‘private  keys’  related  to 
security  tokens  is  the  equivalent  of  the  ‘administration  and  safekeeping  of  financial 
instruments on behalf of clients’.         

Option  3:  Pilot/experimental  regime  –  creation  of  a  DLT  market  infrastructure 
facility for security tokens  

A  pilot  or  experimental  regime  would  create  a  new  type  of  market  infrastructures 
dedicated to the trading and/or settlement of crypto-assets that would qualify as MiFID II 
financial instruments (‘security tokens’). The scope of ‘financial instruments’ that could 
be traded and/or settled on the DLT market infrastructure would be limited, in order to 
avoid risks. Given the regime’s experimental nature, the DLT market infrastructure could 
be  allowed  to  implement  innovative  business  models  (e.g.  admission  of  unregulated 
participants,  such  as  retail  investors,  use  of  permission-based  and  permissionless 
DLT…).   

The DLT market infrastructure would be exempted from certain requirements stemming 
from  sectoral  legislation  (e.g.  MiFID  II,  CSDR,  SFD)  applying  to  financial  market 
infrastructures  that  may  not  be  adequate  in  a  DLT  environment.  However,  high-level 
principles of those pieces of legislation would be replicated in a broad manner, in order 
to address ‘traditional risks’ that would not be sufficiently reduced by the use of DLT to 
ensure,  among  other  things,  an  appropriate  level  of  investor  protection,  infrastructure 
robustness, trading transparency, financial stability. Other rules, such as market integrity 
rules from the Market Abuse Regulation or the EU AML/CFT framework would apply in 
full to these DLT market infrastructures. The DLT market infrastructures would also be 
subject to additional requirements (not specified by existing legislation) to mitigate new 
risks raised by the use of DLT (such as novel forms of cyber risks). The applicant for a 
DLT market infrastructure license would have to demonstrate that its project can achieve 
compliance with these requirements.  

The operator of a DLT market infrastructure would have to request an authorisation from 
a NCA. In order to avoid regulatory arbitrage and to ensure a level-playing field, ESMA 
would be in charge of coordinating experimentations. After three years of application, the 
Commission (in cooperation with ESMA) would have to review results. The Commission 
would also evaluate whether: (i) the temporary regime should become permanent; (ii) it 
should be extended to other types of  financial instruments  and/or  (iii) whether targeted 
amendments to existing legislation should be proposed. The report should also take into 
account  the  needs  of  businesses  that  would  have  committed  resources  to  build  DLT 
market infrastructure under the pilot regime.   

36 

 
 
 
5.2.3.  Policy options for stablecoins and global stablecoins  

Option  1:    Bespoke  legislative  regime  aimed  at  addressing  the  risks  posed  by 
‘stablecoins’ and global ‘stablecoins’ 

These legislative measures could complement and be part of the legislative proposal on 
crypto-assets  (that  are  not  currently  covered  by  existing  EU  legislation),  as  described 
under  section  5.2.1.  (Options  1  and  2).  These  legislative  measures  would  make  a 
distinction  between  the  three  types  of  ‘stablecoins’:  (i)  ‘stablecoins’  backed  by  other 
crypto-assets;  (ii)  ‘stablecoins’  backed  by  real  assets  or  funds  and  (iii)  algorithmic 
stablecoins. Further requirements would be imposed on ‘stablecoins’ backed by a reserve 
of real assets (second category) that could reach a global scale132.  

The proposed measures would aim at mitigating the specific risks raised by this type of 
crypto-assets.  The  issuer  or  promoter  of  ‘stablecoins’  would  be  subject  to  additional 
disclosure  requirements  (such  as  information  on  the  governance  of  the  ‘stablecoin’ 
arrangements,  on  the  stabilisation  mechanism,  potential  rights/claims  attached  to  the 
tokens) compared to issuers of other crypto-assets. The reserve of real assets (depending 
on  their  nature,  some  of  those  requirements  could  be  applied  to  stablecoins  backed  by 
other  crypto-assets)  should  also  be  subject  to  requirements.  Table  9  lists  the  potential 
requirements. 

Table 9: Summary of requirements for ‘stablecoin’ issuers 

Key requirements  for 
stablecoins backed by a 
reserve of real assets or by 
other crypto-assets 

  Obligation on the reserve assets (segregation from the issuer’s balance 
sheet, assets are not pledged as collateral, assets held in custody with 
a credit institution, periodic auditing of the assets…) 

  Governance  arrangements  (physical  presence  in  the  EU,  contractual 
arrangements  between  issuer  and  other  entities  in  the  arrangement, 
conflicts of interest rules…) 

  Periodic  disclosure  requirements  (number  of  ‘stablecoins’,  value  of 

the reserve…) 

  Prudential (including capital and liquidity) requirements rules  
  Continuous 

risk  assessments,  contingency  preparedness  and 

 

continuity planning  
Issuance  of  “stablecoins”  always  lower  or  equal  to  the  value  of  the 
funds of the reserve  

  Requirements in case of insolvency/wind-down 
  Complaints handling and redress procedures 
  Assessment  of  how  the  technology  and  rules  for  transferring  coins 

provide assurance of settlement finality  

Key additional 
requirements for ‘global 
stablecoins’  

 
 
 

Investment of reserve in safe and liquid assets 
Flow tools to limit sudden outflows from the SC arrangement. 
Interoperability requirements 

132 At this stage, it can be considered that a ‘stablecoin’ can reach global scale if it becomes a real store of 
value and a trusted means of payment. This will be only the case if there is a sufficient degree of assurance 
that the value of the ‘stablecoin’ is actually stable and that it is backed by a reserve of assets whose value is 
also stable. It can be therefore possible to consider that only ‘stablecoins’ that are linked or backed with 
highly  liquid  and  stable  assets,  such  as  fiat  currencies  and  short-term  government  bonds  with  an 
‘investment grade’ ratings can be really deemed stable.   

37 

 
 
 
                                                           
Key additional 
requirements for 
algorithmic ‘stablecoins’  

  Disclosure of the algorithm 

Option  1  would  set  specific  requirements  for  ‘global  stablecoins’  based  on  their 
potential to achieve widespread adoption and thereby become systemic. To mitigate 
potential risks to financial stability and monetary policy transmission, for example, they 
would be subject to specific requirements regarding the management of the reserve, for 
instance, and would be subject to an EU authorisation. Under this Option, the issuer of a 
‘global stablecoin’ would need an authorisation from a European Supervisory Authority 
as  such  a  proposition  could  become  pan-European  very  quickly  after  its  launch.  It  is 
envisaged to grant supervisory authorities the power to refuse authorisation to the issuer 
of a stablecoin if there are objective grounds to believe that the specific business model 
can  raise  unmanageable  issues  in  terms  in  financial  stability  and  monetary  policy 
transmission.  Additionally,  there  would  be  rules  on  withdrawal  of  authorisations, 
enabling supervisory authorities to withdraw a stablecoin issuer’s authorisations in case 
of non-compliance.  

Option 2: Regulating ‘stablecoins’ under the e-money directive 

The Electronic Money Directive 2 (EMD2) defines electronic money as: “electronically, 
including  magnetically,  stored  monetary  value  as  represented  by  a  claim  on  the  issuer 
which  is  issued  on  receipt  of  funds  for  the  purpose  of  making  payment  transactions  as 
defined  in  point  5  of  Article  4  of  [Payment  Services  Directive  -  PSD2]  and  which  is 
accepted  by  a  natural  or  legal  person  other  than  the  electronic  money  issuer”133.  In 
addition to the above elements, e-money has to be issued at par on the receipt of funds 
(1:1). It is also obliged to be redeemed at any moment and at par value134. This means, for 
instance, if a user purchases e-money valued at €10, he will later be able to redeem that 
e-money for €10. 

Option  2  would  not  modify  the  definition  of  e-money  and  would  keep  unchanged  the 
requirements of issuance and redeemability at par value. However, the EMD2 would be 
modified in order to oblige all the issuers of ‘stablecoins’ to give the users a claim on the 
issuer. Under Option 2, a definition of a ‘stablecoin’ would be introduced in EMD2 and 
would define a ‘stablecoin’ as any crypto-asset that aims to maintain a stable value. This 
option  is  in  line  with  the  Financial  Stability  Board  high-level  recommendations  on 
‘stablecoins’  that  indicate:  “Authorities  should  ensure  that  GSC  arrangements  provide 
legal clarity to users on the nature and enforceability of any redemption rights and the 
process for redemption, where applicable […] Authorities should consider implications 
of GSC arrangements’ decisions to grant users and/or intermediaries a direct legal claim 
against the GSC issuer or its reserve portfolio, including for “run” risks.”.  

Option 2 would require ‘stablecoin’ issuers to comply with existing legislation that may 
not  be  fit  for  purpose.  Although  EMD2  and,  by  extension  PSD2,  could  cover  some 

133 Article 2(2) of EMD2. 
134 Article 11 of EMD2. 

38 

 
 
 
 
                                                           
service providers within ‘stablecoin’ arrangements, it might not mitigate adequately the 
most significant risks to consumer protection raised by for example wallet providers. In 
addition,  EMD2  does  not  set  specific  provisions  for  an  entity  that  would  be  systemic, 
which is what ‘global stablecoins’ could potentially become.  

Option 3: Measures aimed at limiting the use of stablecoins within the EU 

In a joint statement published in December 2019 on ‘stablecoins’, the Commission and 
the  Council  stated  that  “all  options  should  be  on  the  table,  including  any  measure  to 
prevent  the  creation  of  unmanageable  risks  by  certain  ‘global  stablecoins’.  Therefore, 
Option 3 would limit the use of ‘stablecoins’ within the EU.  Under this option, the EU 
framework would define ‘stablecoins’135. Then, the legislative intervention would specify 
that the following activities are not available in the EU: (i) any issuance of ‘stablecoins’ 
in the EU and (ii) any offer of services and activities involving ‘stablecoins’ in the EU or 
by  an  entity  incorporated  in  the  EU  (e.g.  wallet  providers,  exchanges  or  trading 
platforms).    

Options discarded at an early stage: Creating a new category ‘crypto-assets’ in the 
list of “financial instruments” (Annex I C of MiFID II) 

Under this option, the difference between crypto-assets that are currently regulated (i.e. 
mostly  those  that  qualify  as  MiFID  II  financial  instruments)  and  those  that  fall  outside 
(i.e. utility tokens or payment tokens) would no longer exist, as a new category of crypto-
assets would be added to the Annex listing financial instruments in MiFID II. 

However, ESMA advice on “initial coin offerings and crypto-assets” has showed limited 
support from NCAs to create a new category of financial instruments for crypto-assets, as 
the  creation  of  a  new  category  C12  would  create  confusion  and  regulatory  arbitrage 
between  existing  categories  (e.g.  traditional  ‘transferable  securities’)  and  the  new  one 
(e.g. investment tokens that present the same features as traditional transferable securities 
but issued on a DLT). Furthermore, this Option would have brought all crypto-assets that 
are currently unregulated under MiFID II. This solution could have been burdensome for 
issuers  and  service  providers  in  connection  with  these  assets.    Please  see  Annex  5  for 
further details.  

6.   WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? 

6.1. Policy options for crypto-asset that are not currently covered by the EU   

financial framework for financial services 

Option 1:  ‘Opt-in’ regime for unregulated crypto-assets 

135 The term ‘stablecoin’ commonly refers to a crypto-asset that aims to maintain a stable value relative to a 
specified asset, or a pool or basket of assets. 

39 

 
 
 
 
                                                           
Such an opt-in regime would instil a degree of trust in the crypto-asset market, by 
somewhat  enhancing  investor  protection  and  market  integrity.  When  the  issuer  of 
crypto-assets decides to opt-in, it will be required to produce an information document/a 
white paper. The disclosure of accurate and comprehensive information about issuers and 
crypto-assets  themselves  would  build  sustained  investor  confidence  and  allow  for  an 
informed assessment of the crypto-assets. Disclosure requirements could also assist with 
market  efficiency,  allowing  for  more  accurate  asset  pricing.  In  the  same  way,  when 
service  providers  decide  to  apply  the  EU  regime,  governance  requirements  on  those 
entities would provide a certain  degree of assurance  on the reliability of their business. 
Market abuse rules and surveillance mechanisms would also improve market integrity in 
the crypto-asset markets.  

The  positive  effect  on  investor  protection  and  market  integrity  could  however  be 
limited.  The  opt-in  regime  could  create  a  ‘two-tier’  crypto-asset  market,  where  some 
issuers and service providers are subject to EU requirements, while others (depending on 
the Member States where they operate their business) would not be subject to any rules. 
Some  users  would  therefore  be  adequately  protected,  while  others  would  remain  either 
unprotected or their protection would depend on national legislation. The existence of co-
existing  regimes  (at  EU  level  and  national  level  in  a  subset  of  Member  States)  is  also 
likely  to  create  confusion  among  users  and  investors.  Service  providers  with  weaker 
governance  arrangements  may  establish  their  activities  in  countries  with  lower 
requirements.  It  is  therefore  not  certain  that  such  an  opt-in  regime  could  reduce  the 
exposure of consumers to potentially fraudulent offers.  

The  opt-in  regime  would  allow  service  providers  to  scale  up  their  activities  on  a 
cross-border  basis  in  the  single  market,  without  stifling  innovation.  Smaller  actors 
that  wish  to  remain  national  and  operate  in  one  or  a  subset  of  Member  States  would 
remain bound by the rules in that or those Member States or would remain unregulated136 
if they operate in a jurisdiction without bespoke regime on crypto-assets. The possibility 
to  opt-out  presents  advantages,  as  many  issuers  of  tokens  are  at  an  early  stage  of  their 
development137 and service providers are relatively small firms138. For issuers and service 
providers  that  opt-in,  they  could  benefit  from  a  reduction  of  market  entry  costs  (e.g. 
regulatory and supervisory costs), as there would be only one authorisation to operate in 
the  EU  and  the  regime  would  be  lighter  and  proportionate  compared  to  the  MiFID  II 
framework  applying  to  investment  firms.  Crypto-asset  service  providers  authorised 
according to  the EU rules would also  benefit from  a moderate regulatory license effect 
that  would  attract  more  users.  Users  would  benefit  from  lower  costs  for  services,  as 
service providers that opt-in would be able to compete on a cross-border basis.     

The  business  case  for  issuers  and  service  providers  that  would decline  to  opt-in  is 
however  limited.  Issuers  would  only  be  able  to  market  their  crypto-assets  in  Member 

136 Depending on their activity (i.e. wallet provider or fiat-to-crypto exchange), they could be subject to the 
EU AML/CFT framework. 
137 See OECD, Initial Coin Offerings (2019): ‘ICOs are in their majority project-based and the financing 
raised is actually allowing the start-up to finance the undertaking of a specific project’.  
138 University of  Cambridge, 2nd Global crypto-asset benchmarking study (2018). This study provides an 
overview  of  the  median  number  of  full  time  employees  for  various  type  of  service  providers.  Despite  a 
strong  growth,  those  numbers  are  still  relatively  low:  20  for  exchanges,  14  for  wallet  providers,  8  for 
payment services and 33 for service providers offering more than one service.    

40 

 
 
                                                           
States  without  bespoke  regime  or  to  comply  with  the  various  requirements  set  in  the 
national  regimes.  The service providers opting out  could  only solicit clients  residing in 
their Member State or potentially comply with various national requirements, which can 
be costly and legally complex. An opt-in regime may not be adapted to the crypto-asset 
market that relies on decentralised platforms and permissionless DLT for which it may be 
challenging  to  determine  a  geographic  location139.  In  such  circumstances,  maintaining 
national regimes can present limited advantages. 

By  setting  out  an  opt-in  regime,  the  legislation  would  limit  the  potential  for 
regulatory  arbitrage  between  the  EU  and  third  countries.  Regulatory  changes  or 
enhanced supervisory monitoring can result in a shift towards non-EU jurisdictions with 
no regulatory regime for crypto-assets140. However, under Option 1, issuers and service 
providers would be less tempted to establish their activities out of the EU, as they would 
still have the possibility to opt-out and to conduct their activities in Member States with 
no bespoke regime or less stringent rules.  

However,  the  opt-in  regime  would  not  reduce  market  fragmentation  in  the  single 
market.  Member  States  would  still  be  allowed  to  adopt  national  bespoke  measures  for 
issuers  and  service  providers  choosing  not  to  opt-in.  Regulatory  divergence  would 
therefore remain, casting doubts about the adequate legal basis for such an opt-in regime.   

Option 2: Full harmonisation 

Full  harmonisation  for  all  offerings  and  services  provided  in  relation with  crypto-
assets in the EU would provide legal clarity for users, issuers and service providers 
alike. Stakeholders would know that all crypto-asset issuers and service providers in the 
EU  would  be  covered  by  regulation,  either  because  they  are  covered  by  MIFID  II  as 
financial  instruments,  as  electronic  money  under  EMD2  or  under  this  new  legislation. 
This  increased  legal  certainty  would  help  build  confidence  in  the  trustworthiness  and 
reliability  of  crypto-assets  and  associated  services.  A  harmonised  regime  would  also 
reduce regulatory ambiguity that is slowing down the adoption rate of DLT and crypto-
assets,  as  market  participants  are  uncertain  of  the  conditions  under  which  they  can 
participate  in  such  markets  in  their  own  or  in  other  Member  States  and/or  engage 
investors and users.   

Under  Option  2,  all  investors  and  users  of  crypto-assets  would  benefit  from  the 
same  level  of  investor  protection  and  market  integrity  across  the  single  market. 
Disclosure requirements imposed on issuers would reduce information asymmetries, lack 
of  transparency  and  plain  fraud,  for  example  by  imposing  requirements  at  the  issuance 
stage,  limiting  the  risks  of  misleading  promises  by  the  issuer  about  the  qualities  of  a 
crypto-asset  or  Ponzi  schemes.  A  harmonised  regime  on  the  issuance  of  crypto-assets 
would also ensure a fair and equitable treatment of all users and investors in the EU. In 
the same way, Option 2 would also guarantee that all services providers would be subject 
to the same regulatory standards within the EU. Users would be ensured that all service 
providers  operating  in  the  EU  have  the  necessary  resources  to  run  their  business  and 

139 International Monetary Fund note 19/03, Regulation of Crypto-Assets 
140 University of Cambridge, the Global crypto-asset regulatory landscape study (2019) 

41 

 
 
 
                                                           
adequate  processes  and  control  in  place  that  would  mitigate  the  risks  of  hacking  and 
theft, for instance. Crypto-asset service providers will be subject to capital requirements, 
governance standards, and the obligation to segregate their clients’ assets from their own 
assets and will be subject to IT requirements to avoid the risks of cyber thefts and hacks. 
All transactions in crypto-assets traded in the secondary markets in the EU would also be 
subject  to  market  abuse  rules,  therefore  ensuring  a  high  and  consistent  level  of  market 
integrity.  Such  rules  will  for  example  include  a  requirement  for  crypto-asset  to  put  in 
place  surveillance  mechanisms  to  identify  market  abuse.  This  enhanced  investor 
protection should increase confidence in crypto-assets and attract new investors.   

By regulating all crypto-asset service providers, Option 2 would also contribute to 
ensure financial stability, if the size of the crypto-asset market grows in the future. 
While  users  can  hold  and  trade  crypto-assets  with  their  peers  by  using  any  personal 
device with an internet connection, the majority of users and investors are more likely to 
rely  on  the  crypto-asset  ‘gatekeeping’  services  (e.g.  custodian  wallet  providers,  trading 
platforms and exchanges). By regulating those services, Option 2 would allow risks to be 
addressed  at  the  point  where  they  can  enter  and  propagate  into  the  regulated  financial 
sector.  This  would  also  facilitate  monitoring  of  crypto-assets  via  transparency  and 
reporting  obligations  that  would  otherwise  not  be  possible  to  impose  or  enforce  on 
unregulated activities141.    

Full  harmonisation  would  also  prevent  or  at  least  minimise  the  risk  of  regulatory 
arbitrage within the Union, as offerings and services related to crypto-assets would be 
subject  to  the  same  rules.  A  mandatory  regime  at  EU  level  would  harmonise  and 
supersede national rules. This would ensure a level-playing field and foster competition 
among  service  providers  in  the  single  market  with  potential  benefits  for  users  and 
investors.  

However,  an  EU  mandatory  framework  would  impose  costs  on  all  crypto-asset 
issuers  and  service  providers.  Currently,  in  a  majority  of  Member  States,  there  is  no 
rule applying to the offering of crypto-assets or the provision of services related to this 
type of assets.  However, the cost burden imposed on those market players should not be 
overstated  for  four  reasons.  First,  some  Member  States  (France,  Malta,  and  Germany) 
have  already  established  a  mandatory  or  voluntary  bespoke  regime  on  issuers  and/or 
some  service  providers.  As  the  regulatory  standards  envisaged  under  Option  2  are 
proportionate  to  the  risks  raised  by  the  activities,  it  is  not  certain  that  the  EU  regime 
would  increase  the  costs  incurred  by  issuers  and  service  providers.  Second,  the 
requirements are aimed at filtering out unscrupulous and poorly organised and capitalised 
service  providers.  Reputable  and  reliable  providers  would  already  be  meeting  many  of 
the requirements that would be set out in the regulatory regime. Third, the EU passport 
would enable issuers and service providers to operate on a cross-border basis, while the 
co-existence of diverging national regimes could prevent firms from scaling up or could 
significantly  raise  the  compliance  costs  borne  by  firms  operating  in  several  countries. 
Fourth,  some  provisions  would  ensure  that  the  obligation  to  produce  an  information 
document do not apply to small size crypto-asset issuances or to crypto-asset distributed 

141 ECB Occasional papers, Crypto-assets: implications for financial stability, monetary policy and 
payments and market infrastructures, 2019. 

42 

 
 
                                                           
to  a  small  circle  of  users  or  investors.  This  would  ensure  the  proportionality  of  the 
framework, especially for SME issuers.  

While reducing the risks of regulatory arbitrage inside the EU level, there is a risk 
that a mandatory regime in the EU would increase the risk of regulatory arbitrage 
with third countries. This can be the case in particular if the EU regime is perceived as 
imposing more stringent rules than elsewhere. However, the risk of regulatory arbitrage 
should be weighed against the risks to consumer protection and market integrity posed by 
crypto-assets.  Market  access  restrictions  on  service  providers  that  do  not  fulfil  the 
standards therefore do not seem disproportionate. The risk of regulatory arbitrage is also 
limited by the fact that operating in the EU would require an authorisation under the EU 
regime.  Furthermore,  with  a  fully  harmonised  regime,  the  EU  could  lead  by  example, 
given the lack of comprehensive regulation on crypto-assets in third countries.  

 As  it  would  focus  on  the  regulation  of  crypto-asset  service  providers,  Option  2 
would  not  tackle  the  issue  raised  by  peer-to-peer  transactions.  One  legal  or  natural 
person  can  trade  crypto-assets  and  record  the  transactions  on  the  DLT  without  the 
intermediary  of  a  third  party  (e.g.  trading  platforms).  In  such  a  case,  the  consumer 
protection  measures,  as  envisaged  under  Option  2,  would  not  apply.  However,  from  a 
consumer  protection  angle,  when  a  legal  or  natural  person  engages  in  peer-to-peer 
transactions  (by  for  instance  creating  their  own  wallet),  they  expressly  renounce  the 
safeguards  provided  by  transacting  through  a  trusted  intermediary  (i.e.  an  authorised 
crypto-asset  service  provider).  Secondly,  from  a  market  integrity/market  abuse  angle,  a 
legal  or  natural  person  could  potentially  engage  in  peer-to-peer  transactions  to  commit 
insider dealings or market manipulation. However, the challenges raised by this situation 
are not dissimilar to those encountered in traditional securities markets, when participants 
engage  in  some  over-the-counter  (OTC)  transactions  (i.e.  outside  regulated  ‘trading 
venues’).  Furthermore,  even  if  one  participant  to  a  trade  use  its  own  wallet,  the  other 
party  to  the  transaction  can  trade  through  an  intermediary  (through  a  custodial  wallet 
providers) and be caught under the surveillance mechanism of the authorised crypto-asset 
service provider. As for AML/CFT, the FATF is currently carrying out an anlysis on the 
potential risks of peer-to-peer transactions (especially those by ‘stablecoin’ arrangement). 
Whereas a global ‘stablecoin’, with wider reach than normal crypto-assets, is considered 
to increase the risks of peer-to-peer transactions, the assessment remains that the actual 
use  of  peer-to-peer  remains  very  limited,  compared  to  transactions  that  goes  through 
crypto-asset  service  providers.  This  is  mainly  due  to  the  ease-of-use  of  the  trusted 
intermediaries’  service,  and  the  risks  associated  with  holding  your  own  assets  (no 
recovery procedure in  case of lost keys for example). Lastly, all transactions, including 
peer-to-peer, are registered on the distributed ledger, which in fact offer traceability not 
available in other value transfer systems. More and more companies offer services to this 
effect, working together with law enforcement agencies. 

Comparison of the options for crypto-asset that would not currently be covered by 
the EU financial framework for financial services 

EFFECTIVENESS 

      Objectives 

Objective 1 
Legal clarity 

Objective 2  
Supporting 

Objective 3 
Consumer 

Objective 4 
financial 

EFFICIE
NCY 

(cost-

Coherence 

SCORE 

43 

 
 
   
  
Policy  
option  

 Baseline 
scenario 
Option 1. 
Opt-in regime 
Option 2. Full 
harmonisation 

innovation 

protection / 
market 
integrity 

stability 

effectivene
ss) 

0 

+ 

++ 

0 

++ 

+ 

0 

+ 

0 

≈ 

++ 

      + 

0 

+ 

+ 

0 

≈ 

++  

0 

5 

9 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

Issuers of crypto-
assets 

Crypto users and 
investors 

Crypto-asset 
service providers 

NCAs / 
Supervisors 

0 

↑ 

0 

≈ or ↑  

0 

↑ 

0 

≈ or ↑ 

↑ or ↑↑ 

↑↑ 

↑ or ↑↑ 

↑ 

Baseline scenario 

Option 1. Opt-in 
regime  

Option 2. Full 
harmonisation 

Option 2 would provide better legal clarity, especially for crypto-asset users that would 
be ensured that all issuers and service providers are subject to the same rules across the 
EU. By  creating  a single EU framework  for crypto-assets  that are currently outside the 
regulated  space,  Option  2  would  address  the  issue  of  market  fragmentation  within  the 
single  market,  while  Option  1  would  maintain  the  existence  of  national  bespoke  and 
divergent  national  regimes.  Full  harmonisation  therefore  represents  a  more  coherent 
approach compared to an opt-in regime.     

By  requiring  issuers  to  publish  an  information  document  on  the  offer  and  by  obliging 
service providers to be authorised by an NCA, Option 2 would provide a higher level of 
consumer  and  investor  protection  to  crypto-asset  users  compared  to  Option  1.  It  would 
also  better protect  users  against market  abuse.  In terms  of cost-efficiency, both  options 
give an EU passport and the possibility for companies to scale-up their activities within 
the  single  market.  Option  1  could  potentially  entail  lower  supervisory  and  compliance 
costs  for  providers  and  issuers  that  choose  to  stay  outside  the  opt-in  regime.  However, 
under  that  option,  Member  States  would  still  have  the  possibility  to  adopt  bespoke 
national regimes and it is not certain that those national regimes would be less costly to 
comply with  than  a harmonised EU regime that is  commensurate to  the risks raised by 
crypto-asset  activities.  Finally,  some  benefits  (such  as  reduced  amounts  of  frauds)  can 
only be realised through harmonisation at EU level, while it can be expected that the less 
reliable  issuers  and  service  providers  would  remain  outside  the  scope  of  the  opt-in 
regime. The preferred option is therefore Option 2.     

44 

 
 
 
               
 
 
 
6.2. Impact of policy options for crypto-assets that could qualify as financial 

instruments under MiFID II 

Option 1: Non-legislative measures to provide guidance on the applicability of the 
EU framework on financial services to security tokens and DLT  

Non-legislative  measures  envisaged  under  Option  1  would  assist  in  clarifying  on 
when crypto-assets could qualify as financial instruments under MiFID II. This may 
facilitate  solving  one  of  the  most  pressing  issues  raised  by  NCAs  “that  report  having 
difficulty  in  determining  when  crypto-assets  are  regulated  and  when  they  are  not”142. 
Such a guidance would also facilitate the distinction between crypto-assets that fall into 
the  scope  of  existing  legislation  and  those  that  would  be  covered  by  a  potential  new 
framework  on  crypto-assets  (as  envisaged  in  sections  6.1).  The  guidance  could  also 
support  the  primary  market  (by  providing  further  clarification  on  how  the  prospectus 
regulation  could  applies  to  this  type  of  issuances),  and  to  some  extent  the  secondary 
market  (by specifying how a trading platform for crypto-assets  could  operate under the 
MiFID  II/MiFIR framework) as  well as the development of post-trading infrastructures 
for security tokens. This holistic approach (with various soft-law measures on different 
technical  points, eventually complemented by ESAs’  guidance) would  avoid  regulatory 
arbitrage  in  the  single  market  and  could  foster  regulatory  and  supervisory  convergence 
across  the  EU143.  A  set  of  soft-law  measures  could  also  support  the  emergence  of 
innovative  services  based  on  DLT  and  security  tokens,  as  market  participants  will  be 
clearer on how the rules could apply to their activities, particularly when conducting their 
business  across  several  Member  States144.  If  soft-law  measures  are  issued,  market 
participants  would  not  incur  the  costs  linked  to  legislative  changes.  Greater  clarity  on 
how the EU framework on financial services applies to  security tokens and DLT-based 
activities could potentially decrease compliance and legal costs for market participants.  

Non-legislative measures present a strong advantage in terms of flexibility. The use 
of security tokens and the operationalisation of DLT in the financial sector is going to be 
a  “gradual  step-by-step  evolution  rather  than  a  big  bang  revolution”145.  The  business 
models relying on security tokens and DLT are not fully stable and it might be premature 
to  bring  significant  modifications  to  the  EU  legislation  on  financial  services.  Soft-law 
measures could therefore be better suited to an evolving landscape compared to hard law 
amendments.  Non-legislative  measures  can  foster  for  the  take-up  of  innovation  in  the 
short-medium  term  while giving more time and concrete examples for the Commission 
and  ESMA  to  assess  any  necessary  adaptations  of  the  EU  legal  framework  to  be 

142 ESMA, Report on ‘Licensing of FinTech Business models’, 2019. 
143  Several  NCAs  are  already  providing  their  interpretations  on  how  the  EU  framework  can  apply  to 
security token offerings (for instance, the  French  Autorité  des  marches financiers or Bank of Lithuania). 
This  proliferation  of  national  interpretation  may  create  a  risk  of  distortions  in  the  single  market  and 
regulatory arbitrage.  
144 Association for financial Markets in Europe, Recommendations for delivering supervisory convergence 
on  the  regulation  of  crypto-assets  in  Europe,  2019.  It  should  also  be  noted  that  the  Swiss  Financial 
Supervisory  Authority  (FINMA)  issued  several  guidance  on  how  the  Swiss  regulatory  framework  can 
apply  to  initial  coin  offerings  and  stablecoins,  in  order  to  provide  legal  clarity  to  market  participants, 
including investors.   
145 Randy Priem, Distributed ledger technology for securities clearing and settlement: benefits, risks, and 
regulatory implications, 2018. 

45 

 
 
                                                           
considered  at  a  later  stage.  They  could  be  issued  swiftly.    Finally,  the  type  of  soft-law 
measures  (Commission  interpretative  communication,  and  depending  on  the  issues  at 
stake,  potentially  complemented  by  ESMA  guidelines  with  a  “comply  or  explain” 
mechanism, ESMA questions & answers) could be adapted to the type and the intensity 
of the issue at stake.  

Non-legislative  measures  would  also  preserve  the  current  high  level  of  investor 
protection,  market  integrity  and  financial  stability,  underpinned  by  the  sectoral 
legislation  (MiFID  II,  the  Prospectus  Regulation,  CSDR,  EMIR,  UCITS  or  the 
Alternative  Investment  Fund  Directive).  Soft-law  measures  envisaged  under  option  1 
would  keep  the  EU  regulatory  framework  technology  neutral.  Activities  related  to 
tokenised ‘financial instruments’ would be still regulated in the same manner as activities 
based on traditional ‘financial instruments’ and raising the same type of risks.   

However, non-legislative measures  under option 1 could also  have a limited effect. 
By nature, soft law measures are not binding and one Member State or one NCA could 
decide  not  to  apply  the  guidance.  The  guidance  on  which  crypto-assets  constitute 
‘financial instruments’ under MiFID II could have limited effects due to the difference in 
transposition  of 
legislations. 
Furthermore,  soft  law  measures  would  not  contribute  to  the  development  of  entities 
providing integrated trading and post-trading services on DLT as such entities could still 
find it hard to comply with all the requirements of sectoral legislation that regulates these 
services separately.  

the  notion  of  ‘financial 

instruments’ 

in  national 

Option 2:  Targeted amendments to the EU framework on financial services 

This Option would provide a high degree of legal clarity to market participants and 
NCAs on how the EU financial services legislation applies to services related to the 
issuance, trading and settlement of security tokens. In principle, targeted amendments 
in  well-defined  areas  (Prospectus  Regulation,  CSDR,  SFD)  can  be  highly  effective  to 
enable the use of DLT by market participants. For instance, a modification of Article 3 of 
CSDR (which requires the recording of ‘financial instruments’ admitted to trading on a 
MiFID  II  trading  venue  with  a  CSD)  could  allow  for  the  direct  recording  of  security 
tokens with the DLT network itself. This would eliminate the mandatory intermediation 
by a CSD and could enable the development of trading venues for security tokens as well 
as the settlement of security token transactions on a DLT network146. Targeted changes to 
the  Prospectus  Regulation  and  its  implementing  measures  (such  as  the  creation  of  a 
specific  prospectus  schedule)  would  also  facilitate  the  issuance  of  security  tokens  and 
capital-raising by EU corporates. While, in principle, legislative changes normally come 
with  a  cost  for  market  participants,  the  envisaged  amendments  should  trigger  limited 
costs  or  even  eliminate  some  of  them.  In  particular,  legal,  compliance  and  operational 
costs  would  be  reduced  by  providing  legal  certainty  on  how  the  EU  framework  for 
financial  services  applies.  Option  2  could  potentially  avoid  the  replication  of  market 

146 Provided that the DLT network is not designated as a securities settlement system by a Member States, 
in accordance with SFD. In such as case, a CSD would be necessary to operate the DLT network.    

46 

 
 
 
                                                           
infrastructures  or  some  layers  of  intermediation  (such  as  the  mandatory  presence  of  a 
CSD in case of financial instruments on a trading venue). These regulatory adjustments 
would also be effective to address the risk of regulatory fragmentation within the single 
market, due to divergent interpretations of the EU financial services legislation by NCAs. 

Option  2  would  also  address  the  specific  operational  resilience  risks  raised  by  the 
use  of  crypto-assets  and  DLT  and  would  ensure  financial  stability  and  investor 
protection.  Legislative  amendments  would  also  bring  clarity  about  what  constitutes 
safekeeping  services  related  to  tokenised  ‘financial  instruments’  (i.e.  the  control  of 
private keys), thereby fostering investor protection.           

However, those targeted amendments taken in isolation could have a limited impact 
to  support  the  take-up  of  security  tokens  and  DLT  in  the  financial  sector.  Under 
Option 2, the number of amendments to existing legislation would be relatively limited. 
As  DLT  and  security  tokens  are  in  nascent  stages,  it  is  difficult  to  identify  many 
regulatory  obstacles  that  would  require  immediate  legislative  action.  Without  sufficient 
evidence, an in-depth modification of the legislative framework could endanger investor 
protection and financial stability. Likewise, it is difficult to precisely assess the risks that 
may  arise  when  security  tokens  and  DLT  will  be  deployed  at  scale  and  to  frame 
mitigating  measures  accordingly.  Furthermore,  those  targeted  amendments  would  only 
accommodate activities related to security tokens via permission-based DLT network and 
centralised  platforms  (as  a  central  operator  able  to  apply  regulation  applying  to  market 
infrastructures  would  be  needed  to  operate  such  services).  However,  Option  2  will  not 
allow for the testing of permissionless DLT networks and decentralised platforms (with 
no  identifiable  operator),  while  such  DLT  network,  such  as  Ethereum147  could,  in 
principle,  be  used  for  the  issuance  and  trading  of  securities.  Finally,  even  if  there  are 
limited  in  terms  of  numbers,  those  adjustments  could  be  quite  controversial,  as  they 
would  create  a  particular  DLT  approach  in  the  post-trading  area.  They  could  raise 
legitimate  questions  as  regards  their  coherence  with  the  risk-reduction  strategy  in  the 
post-trading  area  underpinned  by  CSDR  and  SFD  and  it  could  be  difficult  to  fully 
address  those  criticisms,  given  the  limited  market  experience  to  date.  Finally,  some  of 
these  changes  could  entail  a  long  legislative  process  so  that  the  proposed  amendments 
could be outdated or insufficient when entering into application.       

Option 3: Pilot/experimental regime – the creation of a DLT market infrastructure 

The regime could give existing investment firms and market players the possibility 
to test the use of DLT on a larger scale, by offering trading and settlement services 
at  the  same  time.  DLT  can  allow  for  near  real-time  settlement,  thereby  reducing  the 
counterparty risk during the settlement process. The distributed nature of DLT could also 
mitigate some cyber risks that centralised market infrastructures raise, such as the single 
point  of  failure.  The  use  of  DLT  could  decrease  costs  by  freeing  up  capital  through 
reduced need for collateral posting and through automated process (with the use of smart 
contracts) that could simplify some back offices processes (e.g. reconciliation). Realising 
the  full  benefits  of  DLT  are  however  currently  hindered  by  the  EU  framework  on 

147 Ethereum is an open source, public, blockchain-based distributed computing platform and operating 
system featuring smart contract functionality.  

47 

 
 
                                                           
financial  services  that  makes  the  trading  and  settlement  by  a  single  platform  almost 
impossible  (as  the  same  platform  would  be  obliged  to  cumulate  the  status  of  a  trading 
venue and a CSD, which is not technically feasible or very costly)148. The pilot regime 
would  allow  market  participants  to  remove  other  regulatory  constraints  that  can  inhibit 
the development of market infrastructure underpinning the secondary market for security 
tokens149.  

The pilot/experimental regime could facilitate the emergence of a more reliable and 
safe  secondary  markets  for  security  tokens.  Without  well-functioning  secondary 
markets underpinned by market infrastructures able to provide both liquidity and ensure 
investor  protection,  the  primary  market  for  security  tokens  is  unlikely  to  develop  on  a 
significant  scale.  At  the  current  juncture,  trading  in  security  tokens  is  carried  out  by 
platforms organised on a ‘broker-dealer’ model and mainly takes place over-the-counter 
(OTC)150.  The  DLT  market  infrastructure  could  allow  for  the  execution  of  a  higher 
volume of transactions and, in a safer way, as settlement services would also be provided.      

This  regime  would  enable  EU  companies  to  innovate  and  to  compete  with  their 
counterparts  in  other  jurisdictions.  Several  third  countries  (such  as  the  USA151  or 
Switzerland152)  have  adopted  an  open-minded  approach  towards  experimentation  as 
regards the use of DLT for the secondary markets in security tokens. 

The  safeguards  under  the  pilot  regime  would  preserve  a  high  level  of  investor 
protection and financial stability, by limiting the type of securities that can be admitted 
on  the  platforms,  for  instance.  The  DLT  market  infrastructure  would  operate  under  the 
close supervision of a NCA, in close coordination with ESMA to ensure a level-playing 
field and avoid the proliferation of undue risks across the EU. 

This experimental regime would create “real  use-cases” and market experience by 
which a permanent EU regulatory regime could be inspired. At the current juncture, 
there is a large number of proofs of concept developed by market participants illustrating 
that  DLT  and  security  tokens  could  yield  a  large  number  of  benefits  in  the  financial 
industry153. However, the projects that are developed try to replicate one segment of the 
market (either trading platforms, or CCP, or CSD using a DLT), which would not allow 

148 See Autorité des Marchés Financiers, Review and Analysis of the application of financial regulations to 
security tokens 2020. 
149e.g. wider access to the platforms to both authorised entities (such as credit institutions and investment 
firms) and natural persons, use of permissionless blockchain etc.  
150 PwC: New Swiss Regulation for secondary trading security tokens explained, 2019. 
151  For  instance,  in  October  2019,  the  American  Securities  and  Exchange  Commission  published  a  ‘no 
action  letter’  concerning  Paxos.  This  firm  has  been  exempted  from  a  formal  registration  as  a  ‘clearing 
agency’  while  being  allowed  to  settle  equity  securities  trades  of  US  listed  companies’  shares  on  a 
blockchain platform. This no-action relief was granted under certain conditions (Letter from the US SEC to 
Paxos Trust Company LLC). 
152 In November 2019, the Swiss Federal Council also announced its intention to introduce a new category 
of market infrastructure, the DLT Trading facility that will be authorised to conduct trading, settlement and 
custody  activities  at  the  same  time  (‘Projet  de  loi  fédérale  sur  l’adoption  du  droit  federal  aux 
développements de la technologie des registres électroniques distribués’). 
153Randy  Priem,  Distributed  ledger  technology  for  securities  clearing  and  settlement:  benefits,  risks,  and 
regulatory implications, 2018. 

48 

 
 
                                                           
for  reaping  the  full  benefits  of  DLT154.  The  experimental  DLT  market  infrastructure 
could  solve  this  issue,  by  allowing  for  the  merging  of  some  steps  in  the  transaction 
lifecycle and the identification of regulatory barriers that may have to be removed so that 
DLT and security tokens could be fully adopted in the longer term. A three-year review 
clause would be introduced in the framework. At the end of the period, the Commission 
(in  cooperation  with  ESMA  and  the  NCAs)  would  have  the  obligation  to  report  on  the 
experiment  and  would  propose  a  way  forward  (such  as  continuing  the  experiment, 
extending  the  experiment  to  other  instruments  such  as  derivative  contracts,  making  the 
DLT  market  infrastructure  status  permanent,  bringing  modifications  to  the  EU 
framework on financial services…).  

The  experimental  regime  also  presents  some  limits.  It  could  lack  the  flexibility 
necessary to allow for the development of certain innovative solutions in the secondary 
market for security tokens. It could frame the business model of firms in a way that might 
not  be  fully  adequate.  The  industry  could  be  reluctant  to  commit  resources  to  build  a 
DLT market infrastructure that could be subject to significant regulatory changes in the 
short-term.  The  scalability  and  interoperability  of  such  DLT  market  infrastructures  are 
also key to attract a widespread interest in security tokens. The pilot regime could lead to 
the  development  of  ‘niche’  DLT  market  infrastructure,  raising  risks  of  incompatibility 
and market fragmentation. However, the issue of interoperability of DLTs networks is a 
widespread  concern155. Furthermore, the experimental regime envisaged under option 3 
would enable EU authorities to gain experience on these issues. 

Comparison  of  the  options  for  crypto-asset  that  could  qualify  as  financial 
instruments under MiFID II  

      Objectives 

Objective 1 
Legal clarity 

EFFECTIVENESS 

Objective 2  
Supporting 
innovation 

Objective 3 
Consumer 
protection / 
market 
integrity 

Objective 4 
financial 
stability 

EFFICIENCY 
(cost-
effectiveness) 

Coherence 

SCORE 

0 

+ 

++ 

0 

+ 

+ 

0 

≈ 

+ 

0 

≈ 

       ≈ 

0 

+ 

+ 

0 

+ 

+  

0 

4 

6 

Policy  
option  
 Baseline 
scenario 
Option 1. 
Non-
legislative 
measures 
Option 2. 
Targeted 
amendments 

154 See Deloitte, ‘Are token assets the securities of tomorrow?’, 2019: ‘An option for the future may be the 
use  of  DLT  within  a  limited  section  of  the  specific  value  chain  for  specific  instruments,  following  the 
existing security lifecycle organised within the legacy environment. […] we believe this model does not do 
justice  to  the  potential  offered  by  DLT  and  tokens.  This  model  would  improve  the  status  quo  in  some 
respects  but  would  still  be  up  for  debate  given  the  need  to  find  adequate  profiles  or  restructure  old 
banking/custody systems’.  
155 Randy Priem, Distributed ledger technology for securities clearing and settlement: benefits, risks, and 
regulatory implications, 2018. 

49 

 
 
 
   
  
 
 
               
                                                           
Option 3. 
Experimental / 
pilot regime 

+ 

++ 

+ 

      ≈ 

+ 

+ 

6 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

Issuers of security 
tokens 

 Investors 

Investment 
firms/Financial 
market 
infrastructures 

NCAs / 
Supervisors 

1. Baseline 
scenario 
Option 1. Non-
legislative 
measures 
Option 2. Targeted 
amendments 

Option 3. 
Experimental / 
pilot regime 

0 

↑ 

↑↑ 

↑ 

0 

↑ 

↑ 

↑ 

0 

↑ 

↑ 

↑ or ↑↑ 

0 

 ↑ 

↑ 

↑ 

The  effectiveness  of  the  three  considered  options  appears  broadly  similar  even 
though  these  options  would  not  address  the  same  issues  equally.  By  providing 
guidance on whether a crypto-asset qualifies as a financial instrument and other technical 
issues  raised  by  sectoral  legislation,  Option  1  would  clarify  how  EU  financial  services 
legislation  applies  to  crypto-assets  and  related  services  and  limit  regulatory  arbitrage 
across the EU.  However, the reach of Option 1 would be limited as it could not remove 
regulatory  obstacles  imbedded  in  existing  legislation.  In  contrast,  Option  2  could  fully 
remove legal hurdles that prevent the deployment of security tokens and DLT but only in 
limited  areas  which  have  been  clearly  identified  in  recent  assessments.  If  carefully 
crafted, Option 3 could be highly effective by providing a clear experimental framework 
for  the  trading  and/or  settlement  of  security  tokens.  However,  these  benefits  could 
disappear  if  the  experimental  regime  is  not  extended  after  the  three-year  period.  Under 
Option 1, the level of investor protection and financial stability ensured by the existing 
framework  on  EU  financial  services  would  remain  unchanged.  By  contrast,  Option  2 
would address  some specific risks raised by the  use of DLT but  it could  also  eliminate 
some  requirements  in  the  post-trading  areas.  Under  Option  3,  appropriate  safeguards 
(such  as  limits  on  the  type  of  traded  ‘tokenised’  financial  instruments)  would  preserve 
financial stability and investor protection. Option 3 presents a clear advantage compared 
to  the  others  in  terms  of  support  to  innovation,  by  building  a  regime  adapted  to  the 
specific characteristics of DLT and security tokens.  

The  cost-efficiency  of  the  three  options  is  also  equivalent.  In  terms  of  efficiency, 
Option 1 would potentially reduce legal and compliance costs of market participants, by 
providing  increased  clarity  on  the  application  of  existing  rules.  Options  2  and  3  would 
entail costs for market participants (due to regulatory changes) but the expected benefits 
should be larger, as they would allow the development of a secondary market for security 
tokens.  

50 

 
 
 
 
 
 
 
 
The  three  options  are  equally  coherent  with  the  existing  legislation  and  the 
Commission’s  objectives  as  regards  a digital  economy.  Option  1  would  complement 
existing  legislation  but  it  would  not  represent  a  major  breakthrough  enabling  the 
development of innovative solutions. A distinct advantage of Option 2 is that all market 
infrastructures  would  be  kept  under  the  existing  framework  but  it  would  also  modify 
certain  requirements  of  EU  post-trade  legislation  aimed  at  ensuring  financial  stability. 
Option 3 is highly coherent with the Commission’s digital agenda, as it would allow for 
innovation in the trading and post-trading for security tokens. It would also provide EU 
authorities  with  live  cases  to  assess  whether  further  amendments  to  the  EU  regulatory 
framework would be necessary at a later stage. The downside of Option 3 is the potential 
creation  of  a  potential  branching  off  from  the  existing  financial  market  infrastructures, 
which  would  make  the  EU  framework  on  financial  services  less  coherent  (at  least 
temporarily). As the overall effects of those options could complement each other, the 
preferred approach would be to proceed cautiously by a combination of Options 1, 
2  and  3.  Such  an  approach  would  also  be  consistent  with  the  need  for  a  gradual 
regulatory approach in the context of a nascent market.    

6.3. Impacts of policy options for stablecoins and global stablecoins 

Option  1:  Bespoke  legislative  regime  aimed  at  addressing  the  risks  posed  by 
“stablecoins” and global ‘stablecoins’ 

Under  Option  1,  users  would  have  the  possibility  to  buy  and  use  ‘stablecoins’, 
therefore  benefiting  from  the  potential  advantages  of  new  types  of  payment 
instruments,  competing  with  existing  ones,  to  deliver  fast,  cheap,  and  efficient 
payments, in particular for cross-border situations. 

A  clear  legal  basis  would  also  ensure  that  ‘stablecoin’  issuers  and  other  service 
providers within the arrangement do not operate in a regulatory vacuum. Currently, 
depending  on  their  structure  and  the  rights  they  provide  to  users,  some  ‘stablecoins’ 
could be designed to qualify as e-money and/or as an alternative investment fund under 
AIFMD.  However,  many  ‘stablecoins’  fall  outside  the  scope  of  EU  financial  services 
legislation, in particular, those which do not provide end-users with a formal claim on the 
issuer  or  on  the  assets  backing  the  coins.  The  existence  of  a  clear  legal  basis  for 
‘stablecoins’ in the EU would allow companies and developers to innovate and compete 
on an equal footing in the single market. This would allow to harness the benefits of this 
relatively  new  form  of  payment  tokens  without  undermining  consumer  protection  and 
financial  stability.  The  existence  of  an  EU  legal  framework  would  also  ensure  that  EU 
legislation meets the expectations of international standard-setting bodies, including the 
10  high-level  recommendations  issued  by  the  Financial  Stability  Board  (FSB)156.  The 
FSB indicates: “authorities should be prepared to […] supplement financial regulations 
that  do  not  adequately  capture  the  risks  of  GSC  […]  activities  […]  to  address 
uncaptured risks”.   

Option  1  would  ensure  an  adequate  level  of  investor  protection  across  the  EU  as 
regards  the  risks  posed  by  issuers  of  ‘stablecoins’  and  ‘global  stablecoins’.  Under 

156 See Draft report from the FSB, Addressing the regulatory and supervisory challenges raised by global 
stablecoin arrangements, 2020.  

51 

 
 
                                                           
option  1,  ‘stablecoin’  issuers  would  be  required  to  provide  users  and  other  market 
participants with the information needed to understand the functioning of the ‘stablecoin’ 
arrangement.  Issuers  would  be  required  to  provide  additional  information  compared  to 
other crypto-assets, as their structure and functioning is more complex. This would also 
ensure that information provided by ‘stablecoin’ issuers to users in the EU is in line with 
recommendations from international organisations and standard-setting bodies157.  

Option  1  (in  combination  with  Option  2  for  other  unregulated  crypto-assets,  as 
described  in  Section  5.2.1.)  would  create  a  comprehensive  and  holistic  EU 
framework on stablecoins, in line with the risks identified by the Financial Stability 
Board’s  (see  Annex  6),  in  particular  financial  stability  risks.  ‘Stablecoins’  are 
complex  arrangements  and  comprise  many  interdependent  functions  and  legal  entities. 
The  regulatory  approach  under  Option  1  would  cover  the  different  functions  usually 
present  in  such  arrangements  (governance  body,  asset  management,  payment  and 
customer-interface  functions)  and  would  also  capture  the  different  interactions  between 
those entities that can amplify the risk to financial stability. Those specific requirements 
would also ensure that ‘stablecoins’ operating in the EU would be subject to equivalent 
measures to those applied in other jurisdictions. As the organisation of a ‘stablecoin’ or 
global  ‘stablecoin’  could  be  highly  decentralised,  with  various  entities  operating  in 
different  jurisdictions,  the  regulatory  action  at  EU  level  may  not  be  sufficient. 
Coordinated actions may be needed to preserve financial stability and therefore, the EU 
legislation may be updated according to international standards. 

In addition, Option 1 would address consumer protection and financial stability by 
way  of  coordinated  supervision,  giving  powers  to  both  national  and  European 
supervisors. For example, the issuer of a ‘global stablecoin’ would need an authorisation 
from  a  European  Supervisory  Authority  as  such  a  proposition  could  become  pan-
European  very  quickly  after  its  launch.  Furthermore,  individual  parts  of  the  wider 
‘stablecoin’  arrangement,  would  be  authorised  in  the  Member  States  where  they  are 
located, such as custodian wallets and exchanges. The European Supervisor would in this 
example be responsible for approving the issuer and its white paper detailing the terms of 
the 
the  ‘stablecoin’ 
requirements put to crypto-asset service providers.   

the  national  supervisors  would  enforce 

issuance,  whereas 

Option  1  would  impose  some  regulatory  and  supervision  costs  on  the  issuers  of 
‘stablecoins’. However, the requirements envisaged under Option 1 would follow a strict 
risk-based approach (see Annex 6) and would not go beyond what is necessary to ensure 
financial  stability  and  investor  protection,  given  the  sheer  size  that  global  ‘stablecoin’ 
may reach. The measures would not prescribe a particular business model (e.g. the use of 

157  International  Monetary  Fund,  FinTech  notes  19/03  on  the  Regulation  of  crypto  assets.  The  IMF 
indicates  that  ‘Authorities  should  mandate  that  the  disclosure  requirements  provide  a  comprehensive 
description of the features and risks of each assets. For offer of stablecoins, for instance, this would likely 
include the assessment of the collateral underlying the coins, an explanation of rights governing access to 
the  collateral,  and  a  discussion  of  their  stabilisation  and  governance  mechanisms’.  In  the  same  way,  the 
FSB’s working group on ‘Regulatory Issues of Stablecoins’ has developed ten high-level recommendation 
for  the  regulation,  supervision  and  oversight  of  stablecoins.  One  of  them  states  that  ‘Authorities  should 
ensure  that GSC arrangements provide to users and relevant stakeholders comprehensive and transparent 
information necessary to understand the functioning of the GSC arrangement, including with respect to its 
stabilisation mechanism’. 

52 

 
 
                                                           
a public or private blockchain, the investment in one specific type of assets to back the 
value  of  the  coins…)  and  would  leave  sufficient  flexibility  for  companies  to  innovate. 
Furthermore,  the  authorisation  would  give  an  EU  passport  to  ‘stablecoin’  issuers  that 
could expand their business throughout the single market. 

At  the  same  time,  introducing  bespoke  measures  provides  the  flexibility  needed  to 
differentiate between the different types of ‘stablecoins’ to avoid regulatory arbitrage.  

‘Stablecoins’  that  reference  a  single  currency,  would  not  be  subject  to  currency 
fluctuations,  making  them  even  more  likely  to  function  as  payment  instruments,  and 
practically  indistinguishable  from  e-money.  To  avoid  circumvention  of  the  rules  on  e-
money  and  instil  consumer  confidence  in  those  ‘stablecoins’,  it  might  be  necessary  to 
subject these to the same requirements as e-money. 

Option 2: Regulating ‘stablecoins’ under EMD2 

‘Stablecoins’ whose value is backed by real funds or assets are close to the definition 
of e-money under EMD2. The aim of many ‘stablecoin’ initiatives is to create a “means 
of  payments”  and,  when  backed  by  a  reserve  of  assets,  some  ‘stablecoin’  arrangement 
could  become  a  credible  means  of  exchange  and  store  of  value.  In  that  sense, 
‘stablecoins’ can arguably have common features with e-money, as the latter is a digital 
representation of fiat money stored on an electronic device.  

Regulating  ‘stablecoins’  under  EMD2  could  oblige  ‘stablecoin’  issuers  to  be 
authorised in the EU158. To obtain an authorisation, the legal entity must be established 
in  an  EU  Member  State.  Neither  EMD2  nor  the  Payment  Services  Directive  (PSD2) 
include  any  third  country  equivalence  provisions.    Therefore,  if  ‘stablecoins’  are  e-
money,  their  issuer  should  have  at  least  one  branch  in  the  EU,  meaning  that  one  NCA 
would  be  responsible  for  authorising  and  supervising  such  an  institution.  NCAs  would 
also  have  the  possibility  to  prohibit  unauthorised  ‘stablecoins’  if  it  is  accessible  to  EU 
consumers without authorisation159.  

If  ‘stablecoins’  are  considered  as  e-money,  issuers  would  be  subject  to  capital 
requirements  and  safeguarding  requirements,  thus  protecting  user  funds.  EMD  2 
establishes (i) initial capital requirements (at least EUR 350,000) and (ii) ongoing capital 
requirements/own  funds  for  ‘e-money  institutions’  (2%  of  the  average  outstanding  e-
money). Capital is required to be held as a buffer, absorbing both unexpected losses that 
arise  while  the  business  is  going  concern  as  well  as  the  first  losses  if  it  is  wound  up. 
Furthermore,  e-money  institutions  are  subject  to  organisational  arrangements  to  protect 

158 EMD 2 prohibits persons  who are  not  ‘electronic  money  issuers’  from issuing electronic  money. The 
definition  of  electronic  money  issuer  includes  (but  is  not  limited  to)  “credit  institutions”  and  “electronic 
money  institutions”,  which  must  have  at  least  a  branch  located  within  the  EU.  This  suggests  that  access 
from a third country on a cross-border services basis (i.e. without the establishment of a branch) would be 
prohibited. 
159  Article  18  of  EMD  2  states  that  ‘Member  States  shall  prohibit  natural  or  legal  persons  who  are  not 
electronic money issuers from issuing electronic money’. 

53 

 
 
 
 
 
                                                           
customers’ funds received in exchange for e-money issued. Those funds are either placed 
in  a  separate  account  from  the  institution’s  working  capital  and  other  funds,  or  are 
covered  by  an  appropriate  insurance  policy  or  comparable  guarantee.  The  inclusion  of 
asset-backed ‘stablecoins’ into the scope of EMD2 would be a way to deal with the most 
pressing  issues  in  terms  of  financial  stability  (through  the  safeguarding  and  capital 
requirements).  However,  if  some  ‘stablecoin’  arrangements  reach  scale  relatively  soon, 
the e-money directive framework could appear as a relatively “light” regulatory regime 
(as the initial capital requirements are relatively low). 

Despite  the  fact  that  EMD2  and,  by  extension  PSD2,  could  cover  some  services 
providers  of  ‘stablecoin’  arrangements,  it  may  not  mitigate  adequately  the  most 
significant  risks  to  consumer  protection  raised  by  wallet  providers. If  a  firm  offers 
services  such  as  transfer  of  ‘stablecoins’,  this  service  could  fall  under  the  PSD2  as 
‘stablecoins’  would  be  considered  to  be  “funds”  under  PSD2.  PSD2  defines  funds  as 
cash,  scriptural  money  and  e-money.  Therefore,  if  ‘stablecoins’  are  e-money,  and 
services  involving  the  transfer  of  ‘stablecoins’  will  have  to  be  considered  payment 
services.  This  means  that  not  only  the  ‘stablecoins’  but  also  other  participants  in  the 
‘stablecoin’ arrangement would have to be licensed as a payment service provider, thus 
fostering 
to  some  extent  consumer  protection.  However,  users  of  ‘stablecoin’ 
arrangements  -  subject  to  EMD2  -  would  still  need  the  services  of  wallet  providers  to 
hold  ‘stablecoins’.  It  is  not  certain  that  the  provision  of  wallet  services  could  be 
assimilated  to  a  payment  service  under  PSD2.  Furthermore,  even  if  PSD  2  applied,  its 
requirements  in  terms  of  security  policy  would  not  be  fully  sufficient  to  a  DLT 
context160.  As  a  result,  users  may  not  be  adequately  protected  against  hacking  and 
security breaches targeting their wallets. 

The granting of interest for holding ‘stablecoins’ would be prohibited, thus limiting 
the risks of ‘shadow banking’. The risk of shadow banking arising from ‘stablecoins’ is 
not negligible. Some entities can collect ‘stablecoins’ from users for a small fee and lend 
them to other domestic or foreign users. If ‘stablecoins’ qualify as e-money, the granting 
of  interest  or  any  other  benefit  related  to  the  length  of  time  during  which  a  user  holds 
‘stablecoins’  will  be  prohibited161.  This  prohibition  of  granting  interests  may  limit  the 
risks of shadow banking, as ‘stablecoin’ holders would not have any interest in lending 
their holdings.  

Bringing all ‘stablecoins’ backed by assets or funds within the scope of EMD2 could 
considerably limit the type and the number of ‘stablecoins’ offered in the EU. At the 
current stage, some but not all ‘stablecoins’ confer a contractual claim against the issuer 
and/or the underlying assets or confer direct redemption rights162. Option 2 would impose 
on all ‘stablecoins’, backed by a reserve of real assets or funds, to provide a claim on the 
issuer.  ‘Stablecoin’  issuers  that  do  not  currently  confer  a  claim  would  have  the  choice 

160 For instance, Article 2(j) of PSD2 states: ‘security policy document, including a detailed risk assessment 
in relation to its payment services and a description of security control and mitigation measures taken to 
adequately protect payment service users against the risks identified, including fraud and illegal use of 
sensitive and personal data’. 161 Article 12 of EMD- 
161 Article 12 of EMD- 
162 FINMA, Supplement to the Guidelines for enquiries regarding the regulatory framework for initial coin 
offerings, 11 September 2019. 

54 

 
 
 
 
 
                                                           
between  either  modifying  their  business  model  to  comply  with  the  modifications  of 
EMD2 or ceasing activities in the EU. Furthermore, under EMD2, the e-money issuer has 
the obligation to invest the funds in its reserve in safe assets163. This would also restrict 
the  type  of  ‘stablecoins’  that  could  be  actively  marketed  in  the  EU,  as  several 
‘stablecoins’ are currently backed or linked to various type of assets (e.g. commodities, 
such as  gold  and oil, real  estate, securities other  than short-term  government  bonds…). 
Finally, the requirement to invest in safe assets combined with the obligation to issue and 
redeem  at  par  value  would  de  facto  limit  the  possibility  to  have  a  reserve  invested  in 
different  fiat  currencies.  Option  2  could  therefore  hinder  innovation  in  the  EU,  by 
limiting  the  type  of  ‘stablecoin’  arrangements  and  the  business  models  to  be 
proposed in the EU (as shown in red in the table- the document shows the type of assets 
that could not be proposed under Option 2).   

Figure 10: Types of stablecoins that would not be available to users in the EU under Option 2 (source: 
Kondif.io and Commission)          

Option 3: Measures aimed at limiting the use of stablecoins within the EU 

Under this option, the issuance of ‘stablecoins’ and the provision of services related 
to  this  type  of  crypto-assets  would  be  restricted.  This  approach  could  be  potentially 
justified,  as  the  risks  posed  by  ‘stablecoins’  and  in  particular  those  that  could  reach 
global  scale  (including  risks  to  financial  stability,  monetary  policy  and  monetary 
sovereignty) would exceed the benefits offered to EU consumers in terms of fast, cheap, 
efficient  and  inclusive  means  of  payment.  For  instance,  EU  consumers  already  have 
access  to  relatively  fast  and  affordable  means  of  payment  within  SEPA.  Under  this 
option,  EU  consumers  would  be  still  able  to  buy,  hold  and  use  ‘stablecoins’  issued 

163 Article 5 of EMD2. 

55 

 
 
 
 
 
 
 
                                                           
outside the EU and not actively marketed in the EU164. Issuers would still be allowed to 
issue  ‘stablecoins’  within  the  conditions  of  existing  regulatory  frameworks  (e.g. 
Electronic Money Directive or the alternative investment fund directive).  

However,  this  limitation  of  the  use  of  ‘stablecoins’  within  the  EU  could  raise  a 
number of challenges. First, any restriction on the offerings of ‘stablecoins’ at EU level 
should  be  considered  in  the  context  of  the  Union’s  competences.  It  would  require  a 
suitable legal basis being identified and should rely on sound evidence. In particular, the 
principle of proportionality (Article 5 TFEU) would have to be respected (as well as the 
principles flowing form  the Charter, such as the freedom to conduct a business, Article 
16)165.  

For  the  time  being,  it  is  not  certain  that  the  conditions  necessary  to  impose  such 
restrictions are met, as the market capitalisation of existing ‘stablecoins’ (EUR 4.3 billion 
as  of  July  2019),  and  the  risks  they  pose  are  rather  limited.  While  some  ‘global 
stablecoins’  can  raise  financial  stability  concerns,  none  of  them  are  in  operation  yet. 
Secondly,  any  regulatory  restriction  on  the  use  and  access  to  ‘stablecoins’  in  the  EU 
could send out a negative signal as how innovation is treated in the single market. Global 
‘stablecoins’  could  be  potentially  be  the  first  mainstream  application  of  blockchain 
technology in retail financial services and the EU has repeatedly expressed our interest in 
the potential of that technology for financial markets.  

Furthermore, it  is  not  certain  that this  measure would  be effective to  preserve financial 
stability  and  ensure  investor  protection.  EU  consumers  will  still  have  the  possibility  to 
hold  stablecoins  issued  by  third  country  issuers  and  use  services  provided  by  firms 
established  outside  the  EU.  This  could  leave  EU  users  unprotected  against  some  risks 
(misleading  information  by  the  issuer,  theft  or  hacks  at  an  exchange  or  trading 
platform…).  Finally,  a  stablecoin  issued  in  a  third  country,  depending  on  its  structure, 
can have an impact on the EU financial sector (e.g. if the assets backing the stablecoins 
are euro-denominated and there is a sudden sell-off of such assets). 

Comparison of the options for stablecoins and global stablecoins  

EFFECTIVENESS 

      Objectives 

Objective 1 
Legal clarity 

Objective 2  
Supporting 
innovation 

Policy  
option  

 Baseline 
scenario 
Option 1. 
Bespoke 
legislative 

0 

++ 

0 

++ 

Objective 3 
Consumer 
protection / 
market 
integrity 

0 

++ 

Objective 4 
financial 
stability 

EFFICIENCY 
(cost-
effectiveness) 

Coherence 

SCORE 

0 

++ 

0 

+ 

0 

++ 

0 

11 

164 EU consumers would be able to buy those stablecoins if they have approached a third country issuer or 
a  service  provider  (exchange,  trading  platforms)  on  their  own  initiative  with  the  intention  of  purchasing 
such crypto-assets. 
165 Article 63 of the TFEU provides that ‘all restrictions on payments between Member States and between 
Member States and third countries shall be prohibited’.   

56 

 
 
   
  
 
               
                                                           
 
measures 

Option 2. 
Regulating SC 
under EMD2 
Option 3. 
Limiting the 
use of SCs 

+ 

++ 

≈ 

-- 

+ 

+ 

      + 

     + 

+ 

- 

+  

- 

5 

0 

Magnitude of impact as compared with the baseline scenario (the baseline is indicated as 0): ++ strongly 
positive; + positive; – – strongly negative; – negative; ≈ marginal/neutral; ? uncertain; n.a. not applicable 

Issuers of 
stablecoins 

User of 
stablecoins 

Crypto-asset 
service providers 

NCAs / 
Supervisors 

Baseline scenario 
Option 1. Bespoke 
legislative measures 
Option 2. Regulating 
SC/GSCs under 
EMD2 
Option 3. Limitation 
of SC use in the EU 

0 

↑↑ 

↑ 

↓↓ 

0 

↑↑ 

↑ 

0 

≈ or ↑ 

≈ or ↓ 

≈ or ↓ 

↓ 

0 

≈ or ↑ 

≈ or ↑ 

≈ 

The three envisaged options would provide a certain degree of clarity as regards the legal 
treatment of ‘stablecoins’ in the EU. Nevertheless, Option 2 may require further guidance 
(by the ESAs) on how the provisions of EMD2 and PSD2 could be effectively applied to 
‘stablecoin’  issuers.  Option  1  would  allow  the  development  of  different  types  of 
‘stablecoins’ business models while Options 2 and 3 would considerably limit innovation 
(either by only recognising ‘stablecoins’ fitting the e-money definition or by  restricting 
their  use  of  such  crypto-assets  in  the  EU).  By  following  a  strict  risk-based  approach, 
Option 1 would address the different risks to consumer protection and financial stability 
raised  by  ‘stablecoin’  arrangements.  Bringing  ‘stablecoins’  within  the  e-money 
framework  would  also  ensure  a  certain  degree  of  investor  protection  and  financial 
stability. However, some provisions of EMD2 (and by extension PSD2) may not be fully 
adequate in a DLT context (e.g. the protection of e-money issued in a DLT context) or 
adapted  to  a  ‘stablecoin’  that  reach  a  global  scale  (as  EMD2  caters  to  the  needs  of 
relatively small institutions). By introducing bespoke measures, it would be possible to 
apply  relevant  parts  of  existing  legislation,  while  addressing  these  additional  risks. 
Option  3  could  incentivise  users  to  buy  ‘stablecoins’  from  third  country  providers  that 
may  offer  an  uncertain  level  of  investor  protection.  That  situation  could  also  create 
financial stability concerns.  

In  terms  of  cost-effectiveness,  either  Options  1  or  2  would  entail  supervisory  and 
compliance  costs  for  ‘stablecoin’  issuers.  However,  the  expected  benefits  can  be  larger 
for the economy under Option 1 compared to Option 2, as it would enable the take-up of 
a wider range of innovative payment solutions. Option 3 would not only create costs for 
‘stablecoin’ arrangements already in operation but it would also prevent the deployment 
of  any  benefits  related  to  this  new  type  of  crypto-assets.  Option  1  would  be  highly 
coherent, by introducing bespoke measures on ‘stablecoin’ arrangements in a general EU 
regulatory  framework  on  crypto-assets.  Option  2  would  also  be  coherent  as  it  would 
bring  under  existing  legislation  an  innovation  that  presents  some  similarities  with  e-

57 

 
 
 
 
money. By contrast, Option 3 would not be consistent with the objectives set at EU level 
to promote innovation in the financial sector. Overall, given the impact of the options, 
the preferred approach would be a mix between Option 1 and 2.  

7.  PREFERRED OPTIONS 

7.1. Overall impact of preferred options 

Problem/Problem 
drivers impacted 

Table 11 – Summary of the preferred options 

Preferred options 

Option for crypto-assets that fall outside the scope of existing EU legislation 

Consumer protection risks 

Market integrity risks 

Market Fragmentation 

Option 2 (full harmonisation): (i) publication of an information document 
by  crypto-asset  issuers;  (ii)  requirements  (governance,  operational,  capital) 
on  wallet  providers,  fiat-to-crypto  and  crypto-to-crypto  exchanges  and 
trading  platforms;  (iii)  application  of  consumer  protection  and  market 
integrity rules; (iv) authorisation by NCAs   

Options for crypto-assets that could qualify as financial instruments under MiFID II 

Legal uncertainty as 
regards whether and how 
existing legislation applies 

Market fragmentation 

Option 1 (non-legislative measures): (i) the conditions under which crypto-
assets  could  qualify  as  financial  instruments  under  MiFID  II;  (ii)  the 
conditions  under  which  crypto-assets  trading  platforms  can  qualify  as 
“trading  venue”  or  as  any  investment  firm  under  MiFID  II;  (iii)  the 
application  of  PR  to  security  token  offerings  (e.g.  modifications  of  the 
guidelines on risk factors for security tokens) and (iv) the application of post-
trading rules (in particular CSDR and SFD) to CSD  using a DLT and more 
widely in a DLT context.    
Option 2 (targeted legislative  amendments):  e.g. (i) creation of a  specific 
prospectus schedule for security tokens and (ii)  Article 3(2) of CSDR 

Option  3  (pilot/experimental  regime  on  DLT  trading  facility):  (i) 
experimental regime for the trading and/or settlement of security tokens; (ii) 
exemptions  from  some  requirements  from  MiFID  II,  SFD,  CSDR;  (iii) 
additional requirements to address novel risks (e.g. operational/cyber risks); 
(iv) authorisation by NCA and coordination by ESMA 

Option for stablecoins/global stablecoins 

Financial stability risks 

Risks to monetary policy 
transmission 

Option  1  and  2  (bespoke  legislative  measures,  applying  some  existing 
legislation):  (i)  publication  of  an  information  document  by  the  stablecoin 
issuer; (ii) requirements on stablecoins backed by a reserve of real assets and 
by  other  crypto-assets;  (ii)  requirements  for  global  stablecoins;  (iv) 
requirements for algorithmic stablecoins 

The  preferred  combination  of  actions  represents  an  evolutionary  approach,  which 
was  also  supported  by  the  public  consultation.  It  is  therefore  envisaged  to  use 
secondary  legislation  to  complement  level  1  legislation  requirements.  The  level  1 
legislation will create a bespoke regime for ‘unregulated’ crypto-assets  by creating rules 

58 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
on  the  issuance,  service  provision,  consumer  protection  and  market  integrity  of  such 
crypto-assets as well as requirements on issuers of ‘stablecoins’ and ‘global stablecoins’. 
For  crypto-assets  already  covered,  level  1  legislation  will  be  amended  to  provide  legal 
certainty and allow for an experimental regime.  

At  the  same  time,  it  is  envisaged  to  use  secondary  legislation  to  complement  level  1 
legislation  requirements  on  crypto-asset  service  providers  (delegated  acts  or  regulatory 
technical standards). Furthermore, the Commission would be empowered to modify the 
‘definitions’ included in the bespoke regime on unregulated crypto-assets, to ensure that 
the bespoke regime keeps pace with innovation, market and technical developments. This 
would be similar to the provision of MiFID II (Article 4(2)) that allows the Commission 
to take delegated acts to adjust definitions to markets, and technological developments 

7.1.1.  Benefits and cost savings 

The preferred options would create a fully harmonised framework for crypto-assets 
that  currently  falls  outside  existing  legislation.  This  would  ensure  a  high  level  of 
investor  protection  and  market  integrity,  by  regulating  the  main  activities  related  to 
crypto-assets  (such  as  crypto-assets  issuance,  wallet  provision,  exchanged  and  trading 
platforms). By imposing requirements (such as governance, operational requirements) on 
all  crypto-service  providers  and  issuers  operating  in  the  EU,  the  preferred  options  are 
likely to reduce the amounts of fraud and theft of crypto-assets. The initiative would also 
introduce bespoke requirements on ‘stablecoin’ and global ‘stablecoin’ arrangements in 
order to address the specific risks to financial stability and monetary policy transmission, 
raised  by  these  projects.  The  full  harmonisation  envisaged  under  the  preferred  options 
would address the risk of market fragmentation and regulatory arbitrage within the single 
market. The existence of a single regime for crypto-asset issuances and service providers 
would also limit the costs that EU entities could face due to the proliferation of national 
regimes triggering supervisory and licensing costs (or even requiring modifications of the 
business model) for service providers in every Member State.    

By  following  a  strict  risk-based  and  proportionate  approach,  these  new  legislative 
measures  would  enhance  user  confidence  in  crypto-asset  issuers  and  service 
providers  and  create  a  conducive  framework  for  the  development  of  crypto-assets 
in the EU.  

First, the measures would allow payment tokens to develop, as fast and cheap means 
of  payment  able  to  compete,  especially  for  cross-border  transactions,  with  existing 
payment  instruments,  provided  by  incumbent  financial  institutions.  For  instance,  retail 
‘stablecoins’ could enable a wide range of payments and replicate the role of transaction 
accounts,  which  are  a  stepping  stone  to  broader  financial  inclusion166.  Cost  savings 

166 G7 Working Group on Stablecoins, Report on ‘investigating the impact of global stablecoins’, 2019. 

59 

 
 
 
 
 
 
 
 
 
                                                           
would be particularly important in the remittances area. Based on estimates, these could 
range up from €220 to 570 million per year167.  

Second, the framework should also enable the take-up of utility token and security 
tokens issuances by EU corporates in the EU, as a complementary financing tool for 
EU  corporates,  including  SMEs.  The  preferred  options  would  therefore  contribute  to 
the objectives of the Capital Markets Union, by diversifying the sources of financing of 
EU companies away from bank lending. The measures would facilitate utility tokens and 
security  tokens  issuances  and  reduce  the  dependency  of  EU  corporates  on  bank 
financing.  It  would  thereby  increase  the  EU's  economic  resilience.  It  is  not  possible  to 
estimate the overall additional funding made available through ICOs as this depends on 
various external factors such as the decision on and need for funding of potential issuers, 
current  market  sentiment  (e.g.  COVID-19  market  stress  that  would  make  issuance 
unattractive) and  competitive reaction of other funding channels.  However, the funding 
costs for utility token issuances are expected to be 20-40% lower than for a comparably 
sized  IPO168.  These  saved  costs  would  directly  contribute  to  the  level  of  funding  of 
respective issuer. 

Third, the preferred options would also have a positive, if limited, impact on crypto-
assets  that  could  qualify  as  financial  instruments  (‘security  tokens’).  The  non-
legislative  measures  would  enhance  clarity  whether  and  how  the  EU  financial  services 
legislation applies to crypto-assets and limit regulatory arbitrage across the EU. The soft-
law  measures,  combined  with  targeted  legislative  amendments  and  the  creation  of  a 
dedicated  DLT  market  infrastructures,  would  facilitate  the  development  of  a  secondary 
market for security tokens. Enhanced liquidity in the secondary market would foster the 
issuance  of  security  tokens  in  the  primary  market.  The  preferred  options  would  also 
foster  competition,  by  enabling  new  market  entrants  to  develop  DLT-based  market 
infrastructures for the trading and/or settlement of ‘tokenised’ financial instruments that 
could compete with the legacy infrastructures in the medium to long term. Several third 
country  regulators  and  central  banks  (e.g.  Australia,  Singapore,  Switzerland…)  are 
allowing trials of DLT-based financial activities to take place in their jurisdictions, which 
acts as a spur for further private sector investment. The preferred options would therefore 
allow  market  participants  in  the  EU  to  test  the  transition  to  security  tokens  and  DLT-
based infrastructure and to compete with entities established in third countries.         

However,  these  measures  might  not  be  sufficient  to  enable  the  full  deployment  of 
security  tokens  and  DLT  in  the  entire  trading  and  post-trading  chain.  Other  factors 
beyond legal uncertainty may inhibit the full deployment of DLT in the financial sector. 
Moving from legacy infrastructure to DLT-based networks require significant investment 
from  market  participants.  Widespread  adoption  of  DLTs  also  requires  the  resolution  of 

167 Based on stakeholder input and Commission market analysis and estimates on average crypto 
transaction costs – Savings would range between €220 – €570 million. This figure assumes a market 
uptake of 30% and does not account for potential competition effects with other payment channels.   
168 ICO costs are estimated to amount to ± 3 -5% of funds raised versus 10-15% for an IPO. The 
application of the envisaged regime however would imply additional costs. Funding costs ultimately will 
depend on various factors, including choices made by the issuing entity in terms of intermediaries, legal 
support etc.     

60 

 
 
 
 
 
                                                           
technical challenges around scalability, given the significant throughput required for the 
settlement  of  financial  instruments169.  The  advantages  of  security  tokens  and  DLT 
network  for  financial  services  in  terms  of  cost  savings  (by  streamlining  shortening 
settlement  times,  enhancing  collateral  use,  disintermediation,  reduction  of  trade  errors 
etc.)  crucially  depend  on  such  further  factors  that  would  allow  the  technology  to 
effectively compete in the market. Given the large range of factors, it is not possible to 
make  any  accurate  predications  as  to  cost  savings.  Assuming  that  the  existing 
technological and legal hurdles are addressed over time (i.e. including a clear regulatory 
regime and legal certainty as regards ownership rights and contract law), they can hold a 
vast cost saving potential. The European derivatives market alone with around 34 million 
open  transaction  and  gross  notional  amount  outstanding  of  ±  €450  trillion170  could  see 
savings in the range of several billion euros over time in relation to clearing, settlement, 
collateral management and other intermediary functions171. Similarly, potential efficiency 
gains  in  the  EU  cash  equity  markets  are  estimated  to  lie  in  the  range  of  €270  to  540 
million  per  year172.  DLTs  could  furthermore  reduce  certain  compliance  costs,  in 
particular  supervisory  reporting  costs  which  are  estimated  to  lie  above  €4  billion173.  A 
large fraction of these costs could be saved over time by the application of self-reporting 
contracts  and  automated  reporting  mechanisms  based  on  DLTs.  Based  on  figures 
presented  in  a  study  from  Banco  Santander  and  Oliver  Wyman,  DLTs  (more  widely, 
including payments) could reduce bank’s infrastructure costs attributable to cross-border 
payments, securities trading and regulatory compliance by between €15 to 19 billion per 
year174. The envisaged regime will form a key stepping-stone to reaping these efficiency 
gains  in  the  medium  to  long  run  by  facilitating  innovation,  supervisory  experience  and 
enabling a gradual EU standard setting process.  

7.1.2.  Costs on issuers, service providers and NCAs   

Under  the  preferred  options,  issuers  of  crypto-assets  that  currently  fall  outside  the 
regulated space and service providers related to these instruments would bear compliance 
costs.  The  preferred  options  would  impose  new  costs  on  issuers,  by  requiring  the 
existence  of  an  accountable  entity  in  the  EU175  and  the  publication  of  an  information 
document,  describing  the  issuance  of  tokens.  Anecdotal  evidence  shows  that  the  costs 
related  to  the  drafting  of  such  information  document  is  relatively  low  while  their 
publication of such documents has been shown to improve the chances of success of an 

169 OECD, The tokenisation of Assets and Potential Implications for Financial Markets, 2020. 
170 ESMA EU derivatives market a first-time overview (2017). 
171 Global post-trade and securities servicing fees are estimated in the region of $100 billion. Depending on 
technological progress and necessary legal adaptation, more than 50% of these costs could be saved over 
time - SWIFT Institute Working Paper 2015-007. 
172 Goldman Sachs, Cboe Global Markets and own calculations.  
173 See Commission Fitness Check of EU Supervisory Reporting Requirements.   
174 Banco Santander, Oliver Wyman, Anthemis Group, InnoVentures, FinTech 2.0 Paper. 
175 See, for instance, Bitcoin Market Journal, How much does it really cost to launch an ICO?, 2018 
according to which costs of having an accountable entity in the EU can be estimated at €4,500.  

61 

 
 
 
 
 
 
                                                           
ICO176. The costs per token issuer can be broadly estimated to lie in the range of €10.000 
–  25.000177.  Additional  fees  for  aspects  such  as  legal  advice  would  also  be  apply. 
Depending on the complexity of the regime, the issuer and the level of attached liability, 
the overall costs are expected to amount to €35.000 – 75.000178 per white paper.  

The compliance costs on crypto-asset service providers is expected to be higher and will 
crucially depend on the type of services for which authorisation is sought respectively179. 
The application of the envisaged regime is estimated to give rise to one-off compliance 
costs between €2.8 – 16.5 million180. On-going compliance costs are estimated to range 
between €2.2 – 24 million181. This estimate does not cover cost placed on potential future 
issuers of global stablecoins. Given the stringent rules envisioned to effectively address 
financial  stability  concerns  their  compliance  costs  are  expected  to  considerably  exceed 
those faced by other crypto-asset issuers.   

The initial pilot regime will bear minimal on-going compliance costs on incumbents such 
as  operators  of  regulated  market  infrastructures  that  would  want  to  opt-in.  Certain 
operational changes may be required but these relate more to the general application of 
the new technology. Newly regulated trading platforms are expected to bear authorisation 
and  on-going  compliance  costs  in  a  range  below  that  of  comparably  sized  MiFID  II- 
authorised multilateral trading facilities of similar size.  

The preferred options would have a limited negative impact on the Member States’ 
budgets.  First,  they  would  impose  new  costs  related  to  the  supervision  of  crypto-asset 
service providers that are currently unregulated at EU level. The supervisory costs related 
to crypto-asset issuers would be relatively low, as it is not envisaged under the preferred 
options to require an approval of the information document prior its publication. Based 
on  anecdotal  evidence  provided  by  Member  States  that  have  put  in  place  a  bespoke 
regime  for  crypto-assets  falling  outside  the  scope  of  existing  EU  legislation,  the 
estimated  supervisory  costs  for  each  Member  State  (including  staff,  training,  IT 
infrastructure  and  dedicated  investigative  tools)  can  range  from  €350,000  to    €500,000 
per year, with one-off costs estimated at EUR 140,000182. However, this negative impact 

176 Lennart Ante, ‘Determinants and Impact of Blockchain-based Startup financing: The Case of Initial 
Coin Offerings’, 2017. This study found that the best predictor for the success of a token sale is the quality 
of the white paper published by the group of developers.  
177 Commission estimate based on anecdotal evidence and current market practice. - See, for instance, 
Bitcoin Market Journal, How much does it really cost to launch an ICO?, 2018, which indicates an average 
cost of USD 15,000 for drafting a white paper. 
178 id. 
179 As national bespoke regimes have been put in place recently, it is not possible to infer the compliance 
costs for service providers from these experiences. A better proxy can be the crypto-asset regime from the 
State  of  New-York.  Anecdotal  evidence  from  this  regime  shows  that  compliance  costs  (including  men 
hours,  IT,  supervisory  costs)  ranges  from  $18,000  (€16,400)  to  $100,000  (€90,100)  depending  on  the 
activities. See: CoinDesk, The real costs of applying for a New York BitLicense, 2015.   
180 Based on stakeholder input and Commission estimates on costs and number of entities falling within the 
regime – Upper and lower bound figures vary greatly due to uncertainty as to the number and type of 
entities, market reaction and scope of the regime.     
181 id. 
182  One  NCA  has  estimated  that  the  cost  of  supervision  (including  staff,  training,  IT  infrastructure  and 
dedicated investigative tools) is estimated at €500,000 per annum. The legislator in another Member State 
has estimated recurring costs to be €347.500 per annum and non-recurring costs to be €137,564.         

62 

 
 
 
 
 
                                                           
on  Member  States  budget  would  be  partially  offset  by  the  supervisory  fees  that  NCAs 
would levy on crypto-asset service providers and issuers183.  

the  NCA  and 

Second,  the  preferred  option  would  also  impose  supervisory  costs  related  to  DLT 
market  infrastructures.  The  costs  of  supervising  such  new  entities  can  be  relatively 
high  given  the  complexity  of  their  functions  (trading  and/or  settlement)  and  the 
continuous  dialogue  between 
that  such 
experimentation would imply. ESMA would also bear some limited costs related to the 
coordination of the supervision of the new DLT infrastructures by NCAs. Those costs are 
estimated  at  approximately  EUR  150.000  –  250.000  per  regulated  platform184.  Initial 
setup  costs  would  apply  in  addition  to  cover  the  development  of  IT  tools,  training  etc. 
The marginal costs would drop with additional regulated entities, however, the expected 
number of authorised entities under the pilot regime should be relatively low and can be 
estimated  at  five  for  the  whole  EU185.  The  supervisory  costs  would  be  partially 
compensated by fees levied by NCAs.  

the  authorised  entity 

Third,  the  supervision  of  ‘stablecoins’  and  global  ‘stablecoins’  will  also  trigger 
costs. The number of stablecoins in operation is relatively low (24 at international level) 
but the supervisory costs are expected to be higher than for other crypto-asset issuer or 
service providers. It is difficult to provide an accurate estimate as to the costs incurred as 
this will strongly depend on (i) the number of issuers (ii) the complexity of stablecoins’ 
setup (including the stabilisation mechanism) and, most importantly (iii) the penetration 
rate  of  respective  stablecoins  (as  a  main  determinant  for  potential  systemic  risks 
stemming  from  them).  In  addition,  costs  will  be  partially  compensated  by  NCA’s 
supervisory fees. 

7.2. Specific impact: small and medium-sized enterprises 

The preferred options should have an overall positive impact on SMEs. They should 
increase non-bank sources of funding for SMEs, through the development of initial coin 
offerings (ICOs) and securities token offerings (STOs). ICOs can offer an opportunity for 
start-ups  to  raise  substantial  amounts  of  funding  at  an  early  stage  of  development.  The 
average  amount  raised  by  ICOs  in  2017  was  around  €15  million,  while  a  start-up 
company can usually expect an investment of €1.3 million from venture capital funds186. 
Furthermore, ICOs are carried out with less intermediaries (such as banks), which lowers 

183 For instance, one NCA has indicated that the one-off application fee for a crypto-asset exchange is 
€24,000. Another NCA has indicated an annual fee of €1,000 at the time of application and then €5,000 of 
recurring fees per year.  
184 European Commission estimate - figure presented assumes need for 1-2 FTE supervisors   
185 In the ESMA Report on Licensing of FinTech business models (2019), NCAs (excluding UK) reported 
a total number of 636 FinTech (regulated or unregulated) and 0.7% regulated of those which are regulated 
(308) operate in the clearing and settlement areas. This gives a rough estimation of five entities that could 
apply for the licensing under the pilot regime.       
186 European Commission, EFSIR Report, 2018. 

63 

 
 
 
 
                                                           
the  cost  of  such  fundraising  compared  to  other  non-bank  financing  (such  as 
crowdfunding)187. 

The preferred options would impose new costs on SMEs, by requiring the publication of 
an  information  document  (a  so-called  ‘white  paper’)  describing  the  issuance  of  tokens. 
However, this requirement would not applied to small offerings below a certain threshold 
and to crypto-assets distributed to small circle of users. When required, the information 
document  should  also  improve  the  prospects  of  success  of  ICOs,  by  providing 
standardised and accurate information to investors. Finally, the overall costs to produce a 
white paper should be relatively low for SMEs (around €35,000).      

7.3. Specific impact: Environmental impact 

The  preferred  options  would  not  have  a  detrimental  impact  on  environment.  The 
initiative would support the use of DLT and blockchain in the EU, which is said to have 
negative  implications  for  the  environment.  However,  this  environmental  impact  should 
not be overstated. The choice of validation mechanism or consensus process determines 
the  amount  of  energy  consumed  for  each  transaction  that  gets  validated  in  a  DLT 
network188.  

The most prominent consensus mechanisms to date are ‘Proof of work’ and ‘Proof 
of  stake’.  The  ‘Proof  of  work’  consensus,  originally  used  by  the  bitcoin  blockchain, 
requires all miners (participants to  the DLT) to  solve complex mathematical  puzzles to 
validate a new transaction, adding a block to the chain and permanently and irreversibly 
recording a new transaction. The first miner who solves the puzzle is given a reward for 
its  work.  The  ‘proof  of  work’  validation  mechanism  is  seen  as  slow  and  as  creating 
scalability issues. As each mining node races to discover the next mathematical puzzle to 
record a block (and claim the mining fee), it also consumes huge amounts of computing 
power189. 

The ‘proof of stake’ consensus seeks to overcome the issues raised by proof of work 
consensus mechanism by reducing the number of network participants working on 
the  verification  and  the  validation  of  new  transactions.  ‘Proof  of  stake’  requests 
participants  to  demonstrate  ownership  of  a  pre-defined  crypto-asset.  The  person  that 

187 The costs of crowdfunding represents between 8% and 18% of the amounts raised, depending on the 
websites of the main platforms (AMF, French ICOs, a new method of financing, 2018), compared to 3% of 
an ICO (OECD study on Initial Coin Offerings for SME financing, 2018).   
188 OECD, The tokenisation of Assets and Potential Implications for Financial Markets, 2020. 
189 In 2018, it was estimated, for instance, that the six major ‘proof-of-work’ crypto-assets (Bitcoin, Bitcoin 
cash, Ethereum, Litecoin, Monero and ZCash) are estimated to collectively consumer between 52 and 111 
terawatt-hours (TWh) of energy a year and bitcoin would represent 75% of this consumption. Taking the 
mid-point  of  the  estimated  range  as  a  reference,  it  can  be  established  that  the  six  crypto-assets  consume 
approximately  as  much  energy  as  Belgium  in  2016.  However,  the  miners  of  these  DLT  networks 
increasingly  use  renewable  energy  for  their  activities  (28%)  and  miners  tend  to  congregate  in  locations 
with excess capacities in renewables (e.g. Western and South-Western China, North-East and North-West 
of the USA, as well as South-Eastern Canada and Iceland). As renewable energy sources fluctuates in their 
production, they can overproduce relative to local demand. Crypto-assets may soak up local overcapacities 
and  prevent  the  waste  of  unused  renewable  energy  (University  of  Cambridge,  2nd  Global  Crypto-asset 
benchmarking study, 2019).   

64 

 
 
 
 
 
                                                           
validates the block transactions is chosen by an algorithm according to how many coins 
he/she  holds.  These  are  energy  efficient  alternative  validation  mechanisms  for  the 
transactions without the need for expensive computations.  

DLT  are  increasingly  shifting  to  ‘proof  of  stake’  mechanisms.  For  instance,  the 
permissionless blockchain Ethereum could move to a ‘proof of stake’ consensus in 2020. 
Depending  on  the  estimation,  between  74  and  85%  of  utility  tokens  use  the  Ethereum 
blockchain190.  Furthermore,  most  of  the  permissioned  DLT  networks  do  not  typically 
require  difficult  energy-intensive  “proofs  of  work”  as  a  consensus  mechanism  because 
network participants are pre-selected and trusted191. As mentioned, many DLT developed 
in  the  financial  sectors  could  be  permission-based.  The  environmental  impact  of  the 
preferred options would therefore be limited.  

8.  HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? 

Providing for a robust monitoring and evaluation mechanism is crucial to ensure that the 
regulatory actions undertaken are effective in achieving their respective objectives. The 
Commission should therefore establish a detailed programme for monitoring the outputs 
and impacts of this initiative. The Commission will be in charge of monitoring the effects 
of  the  preferred  policy  options  on  the  basis  of  the  following  non-exhaustive  list  of 
indicators:  

Table 12 – List of indicators to evaluate the preferred options 

Objectives 
Consumer protection 
Supporting Innovation 

Indicators 

  Number and value of fraud and thefts of crypto-assets in the EU 
  Number  and  volumes  of  crypto-asset  issuances  in  the  EU  (by 

category utility tokens, payment tokens…) 
  Market capitalisation of crypto-assets in the EU 
  Number of entities authorised in the EU as crypto-asset services 
providers (trading platforms, exchanges, wallet providers…) 
  Number of entities authorised in the EU as ‘stablecoin’ or global 

‘stablecoin’ issuers  

  Estimation  of  the  number  of  EU  residents  using  or  investing  in 

crypto-assets 

  Liquidity of crypto-assets  
  Number  of  entities  authorised  by  a  NCA  as  a  DLT  market 

infrastructure under the pilot/experimental regime 

  Volume  of  transactions  traded  and  settled  by  DLT  market 

infrastructure (pilot/experimental regime)  

Market integrity 

  Number  of  market  abuse  cases  involving  crypto-assets  reported 

Financial stability 

to NCAs and investigated by NCAs 

  Size of the reserve backing ‘stablecoins’ (including those backed 
by  a  reserve  of  real  assets  and  those  backed  by  other  crypto-
assets)  

  Market capitalisation of ‘stablecoins’ and global ‘stablecoins’ 

190 See: Vlad Burilov, Utility Token Offerings and Crypto Exchange Listings: how regulation can help?, 
2019. 
191 World Bank, Distributed Ledger Technology and Blockchain, 2017. 

65 

 
 
 
    
 
 
                                                           
Legal certainty 

  Volume  of  payments  through  the  use  of  payment  tokens  and 

‘stablecoins’ 

  Assessment  if  other  crypto-assets/infrastructures  or  market 
participants  using  DLT  and/or  dealing  with  crypto-assets  have 
reached a systemically relevant level 

  Number and volume of security token issuances in the EU 
  Number  of  prospectuses  approved  by  NCAs  in  relation  with 

security tokens  

  Number  of  entities  authorised  by  NCAs  to  provide  services 
under  existing  EU  legislation  (e.g.  MiFID  II/MiFIR,  CSDR, 
SFD) and using a DLT/security tokens 

  Volume  of  transactions  traded  and  settled  by  service  providers 
authorised  under  existing  EU  legislation  (e.g.  MiFID  II/MiFIR, 
CSDR, SFD) and using a DLT/security tokens 

While some parts of the data can be collected via public sources and licenced databases, 
many  of  the  indicators  set  out  in  the  Table  above  would  require  the  help  of  Member 
States,  NCAs,  ESMA  and  service  providers  (either  those  authorised  under  the  new 
regime  or  those  authorised  under  existing  legislation,  such  as  MIFID  II,  CSDR…). 
Beyond those indicators, the Commission would have to produce a report, in cooperation 
with  ESMA, on the pilot  programme for  DLT market  infrastructures, after a three-year 
period.  On  the  basis  of  this  report,  the  Commission  would  inform  the  Parliament  and 
Council on the appropriate way forward (e.g. continuing the experimentation, extending 
its scope, modifying existing legislation…).  

66 

 
 
 
 
 
 
Glossary 

Term or acronym 

Meaning or definition 

AML/CFT 

Anti-money laundering and countering the financing of terrorism 

AMLD 

CCP 

Anti-Money Laundering Directive (Directive 2018/843) 

Central Clearing Counterparty 

CPMI-IOSCO 

Committee on Payments and Market Infrastructures – International Organisation of 
Securities Commissions 

CSD 

DLT 

EBA 

ECB 

EIOPA 

EMD2 

EMIR 

ESAs 

ESMA 

EU 

FATF 

FCD 

FSB 

ICO 

IPO 

ISIN 

LEI 

MAR 

MiFID II 

MiFIR 

MTF 

NCA 

OTC 

OTF 

Central Securities Depositories 

Distributed Ledger Technology 

European Banking Authority 

European Central Bank 

European Insurance and Occupational Pensions Authority 

Electronic Money Directive (2009/110/EC) 

European Markets Infrastructure Regulation (648/2012/EU) 

European Supervisory Authorities (EBA, EIOPA, ESMA) 

European Securities Market Authority 

European Union 

Financial Action Task Force 

Financial Collateral Directive (2002/47/EC) 

Financial Stability Board  

Initial Coin Offering 

Initial Public Offering 

International Securities Identification Number 

Legal Entity Identifier  

Market Abuse Regulation (596/2014/EU) 

Markets in Financial Instruments Directive II (2014/65/EU) 

Markets in Financial Instruments Regulation (600/2014/EU) 

Multilateral Trading Facility  

National Competent Authority 

Over the Counter 

Organised Trading Facility 

67 

 
 
 
PR 

PSD2 

RM 

SFD 

SME 

SSR 

STO 

UCITS 

Prospectus Regulation (2017/1129/EU) 

Payment Services Directive 2 (2015/2366/EU) 

Regulated Market 

Settlement Finality Directive (98/26/EC) 

Small Medium Enterprise  

Short Selling Regulation (236/2012/EU) 

Security Token Offering 

Undertaking  for  Collective  Investment 
(2009/65/EC) 

in  Transferable  Securities  Directive 

VASP 

Virtual Asset Service Provider (as defined by the FATF)  

* 

Definitions 

Blockchain: A form of distributed ledger in which details of transactions are held in the 
ledger in the form of blocks of information. A block of new information is attached into 
the  chain  of  pre-existing  blocks  via  a  computerised  process  by  which  transactions  are 
validated. 

Crypto-asset: For the purpose of the consultation, a crypto-asset is defined as a type of 
digital asset that depends primarily on cryptography and distributed ledger technology.  

Crypto-asset  broker/dealers  (or  exchanges):  Entities  that  offer  exchange  services  for 
crypto-assets, usually against payment of a certain fee (i.e. a commission). By providing 
broker/dealer services, they allow users to sell their crypto-assets for fiat currency or buy 
new crypto-assets with fiat currency 

Crypto-asset  issuer  or  sponsor:  The  organisation  that  has  typically  developed  the 
technical specifications of a crypto-asset and set its features. 

Crypto-asset trading platforms: a marketplace bringing together different crypto-asset 
users that are either looking to buy or sell crypto-assets. Trading platforms match buyers 
and sellers directly or through an intermediary. 

Cryptography:  The  conversion  of  data  into  private  code  using  encryption  algorithms, 
typically for transmission over a public network. 

Distributed  Ledger  Technology  (DLT):  a  means  of  saving  information  through  a 
distributed  ledger,  i.e.,  a  repeated  digital  copy  of  data  available  at  multiple  locations. 
DLT  is  built  upon  public-key  cryptography,  a  cryptographic  system  that  uses  pairs  of 
keys: public keys, which are publicly known and essential for identification, and private 
keys, which are kept secret and are used for authentication and encryption. 

Financial instrument: those instruments specified in Section C of Annex I in MiFID II 

68 

 
 
 
Electronic  money  (e-money):  ‘electronic  money’  means  electronically,  including 
magnetically,  stored  monetary  value  as  represented  by  a  claim  on  the  issuer  which  is 
issued on receipt of funds for the purpose of making payment transactions as defined in 
point 5 of Article 4 of Directive 2007/64/EC, and which is accepted by a natural or legal 
person other than the electronic money issuer; 

Global  stablecoins:  For the purpose of the impact  assessment, a  “global  stablecoin” is 
considered  as  a  “stablecoin”  that  is  backed  by  a  reserve  of  real  assets  and  that  can  be 
accepted by large networks of customers and merchants and hence reach global scale.  

Initial  coin  offering  (ICO):  an  operation  through  which  companies,  entrepreneurs, 
developers  or  other  promoters  raise  capital  for  their  projects  in  exchange  for  crypto-
assets (often referred to as ‘digital tokens’ or ‘coins’), that they create. 

Investment tokens: For the purpose of the consultation, investment tokens are a type of 
crypto-assets with profit-rights attached to it.  

Mining: a means to  create new crypto-assets,  often through a mathematical  process  by 
which transactions are verified and added to the distributed ledger. 

Payment tokens: For the purpose of the impact assessment, payment tokens are a type of 
crypto-assets that may serve as a means of payment or exchange.  

Permission-based  DLT:  a  DLT  network  in  which  only  those  parties  that  meet  certain 
requirements are entitled to participate to the validation and consensus process. 

Permissionless  DLT:  a  DLT  network  in  which  virtually  anyone  can  become  a 
participant in the validation and consensus process.    

Utility tokens: Utility tokens have two main functions. Some of them enable access to a 
specific current or prospective service or good (similar to a voucher). Some are issued to 
reward operators for maintaining the DLT, for validating and recording transactions. 

Security tokens: For the purpose of the impact assessment, security tokens are a type of 
crypto-assets that qualify as a financial instrument under MiFID II.  

Security  token  offering:  an  operation  through  which  companies,  entrepreneurs, 
developers  or  other  promoters  raise  capital  for  their  projects  in  exchange  for  ‘security 
tokens’ that they create. 

Stablecoins: For the purpose of the impact assessment, “stablecoins” are considered as a 
form  of  payment  tokens  whose  price  is  meant  to  remain  stable  through  time.  Those 
“stablecoins” are typically asset-backed by real assets or funds or by other crypto-assets. 
They can also take the form of algorithmic “stablecoins” (with algorithms being used as a 
way to stabilise volatility in the value of the coin). 

Trading venue: Under MiFID Article 4(1)(24), trading venue means a regulated market, 
a multilateral trading facility, or an organised trading facility (OTF’).  

Virtual  Currencies:  Under  AMLD5,  virtual  currency  means  ‘digital  representation  of 
value  that  is  not  issued  or  guaranteed  by  a  central  bank  or  a  public  authority,  is  not 
necessarily attached to a legally established currency and does not possess a legal status 

69 

 
 
 
of  currency  or  money,  but  is  accepted  by  natural  or  legal  persons  as  a  means  of 
exchange and which can be transferred, stored and traded electronically’.  

Wallet provider: a firm that offers storage services to users of crypto-assets. 

70 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Annex 1: Procedural information 

1.  Lead  Directorate  General,  Decide  Planning,  Commission  Work  Plan 

references 

The  Impact  Assessment  was  prepared  by  Directorate  B  ‘Horizontal  policies’  of 
Directorate-General  for  Financial  Stability,  Financial  Services  and  Capital  Markets 
Union"  (DG  FISMA).  The  Decide  Planning  reference  of  the  file  entitled  ‘European 
Framework for Markets  in  Crypto-assets’ is  PLAN/2019/6125.  The legislative proposal 
has also been announced in a Commission’s communication on “an EU Digital Finance 
Strategy” (to be published in September 2020).  

2.  Organisation and timing 

Several services of the Commission with an interest in the assessment of this initiative (in 
particular DG CNECT) have been associated in the development of this analysis. 

One  ISSG  (Inter-Service  Steering  Group)  meeting  was  held  on  the  specific  issue  of 
‘stablecoins’ on 17 October 2019  with  representatives of DG FISMA, DG COMP, DG 
JUST,  DG  TAXUD,  DG  ECFIN,  DG  HOME,  the  Legal  Service  and  the  Secretariat 
general.  Another  ISSG  meeting  was  also  held  on  crypto-assets  more  generally  on  27 
November  2019,  involving  representatives  of  DG  FISMA,  DG  CNECT,  DG  TAXUD, 
DG HOME, DG GROW, DG JUST, DG COMP, DG ECFIN, JRC, the Legal Service and 
the Secretariat General.   

On  18  December  2019,  different  services  (DG  GROW,  DG  CNECT,  DG  RTD,  DG 
JUST,  DG  COMP,  DG  HOME,  DG  ECFIN,  DG  TAXUD,  the  Legal  Service  and  the 
Secretariat General) were also consulted on the public consultation document on an “EU 
framework for crypto-assets”.  

Three ISSG were dedicated to the impact assessment. A first ISSG was held on 4 March 
2020,  with  representatives  of  DG  FISMA,  DG  CNECT,  DG  COMP,  DG  JUST,  DG 
TAXUD, DG  ECFIN,  DG HOME, DG NEAR, DG DEVCO, the legal  Service and the 
Secretariat General. A second ISSG was held on 2 April 2020 with representatives of DG 
FISMA, DG CNECT, DG COMP, DG GROW, DG JUST, DG TAXUD, DG HOME, the 
Legal  Service  and  the  Secretariat  General.  Finally,  a  third  ISSG  on  this  impact 
assessment was held on 22 April 2020 with representatives of DG FISMA, DG GROW, 
DG CNECT, DG JUST, DG TAXUD, DG HOME, DG NEAR, DG RTD, JRC, the Legal 
Service and the Secretariat General.   

3.  Consultation of the Regulatory Scrutiny Board 

A draft of the impact assessment was submitted to the Regulatory Scrutiny Board (RSB) 
on  30  April  2020  and  presented  during  a  dedicated  meeting  on  27  May  2020.  The 
Regulatory  Scrutiny  Board  delivered  a  positive  opinion  with  reservations  on  the  draft 

71 

 
 
 
 
 
 
 
 
 
 
 
impact  assessment  on  29  May  2020.  The  comments  formulated  by  the  Board  were 
addressed and integrated in the final version of the impact assessment. 

4.  Evidence, sources and quality 

For  the  purpose  of  this  impact  assessment,  Commission  services  collected  data  from 
some  NCAs  (including  on  the  number  of  entities  authorised  or  applying  under  the 
national regimes or on the supervisory costs). The impact assessment is also based on the 
extensive qualitative and quantitative evidence from the public consultation on “An EU 
framework  for  crypto-assets”  which  was  organised  by  the  Commission  from  19 
December  to  19  march  2020  (see  Annex  2  of  the  impact  assessment  for  more 
information).  

In  January  2019,  the  Commission  also  received  advice  from  ESMA  and  EBA  that 
assessed  the  applicability  and  the  suitability  of  the  existing  current  EU  framework  for 
financial services to crypto-assets. That advice provides qualitative evidence to support a 
common approach at EU level on crypto-assets.  The Commission also built its analysis 
on  the  ESMA  report  on  ‘the  Distributed  Ledger  Technology  Applied  to  Securities 
Markets’  (2017)  that  analysed  in-depth  the  key  benefits  and  risks  of  DLT,  the  ESMA 
Report  on  the  licensing  of  FinTech  Business  model  (2020)  and  the  EBA  Opinion  on 
‘virtual currencies’ (2014).  

To carry out this impact assessment, the Commission also relied on the Report from the 
Regulatory  Obstacles  to  Financial  Innovation  Expert  Group  (ROFIEG)  set  up  by  the 
Commission in Spring 2018. The ROFIEG reviewed the application and suitability of the 
European  regulatory  framework  to  FinTech  from  the  perspective  of  identifying  issues 
impeding the scaling-up of FinTech in the EU. The impact assessment is also based on a 
study  requested  by  Commission  services  on  “Blockchains:  legal,  governance  and 
interoperability  aspects”  (2020).  The  impact  assessment  also  built  on  the  work  carried 
out  in  the  context  of  the  EU  Blockchain  Observatory  and  Forum,  and  in  particular  the 
outcomes of the two workshops organised respectively in May and September 2019 on 
digital assets and blockchain use cases in the financial sector.    

Other  sources  used  include  reports  from  other  European  institutions,  such  as  the 
European  Parliament’s  reports  (e.g.  ‘Cryptocurrencies  and  blockchain’,  2018;  ‘Virtual 
Currencies  and  Central  Banks  Monetary  Policies:  Challenges  ahead’,  2018,  ‘Crypto-
assets, key developments, regulatory concerns and responses’, 2020) and the occasional 
papers from the European Central  Bank  (e.g. ‘Virtual Currencies Schemes  – A Further 
Analysis’, 2015; ‘Distributed Ledger Technologies in securities post-trading’, 2016; ‘In 
search  for  stability  in  crypto-assets:    are  stablecoins  the  solution?’,  2019;  “Crypto-
Assets:  Implications  for  financial  stability,  monetary  policy,  and  payments  and  market 
infrastructures”, 2019).  

The  impact  assessment  also  relied  on  reports  on  DLT  and  crypto-assets  from 
international  organisations  and  standard-setting  bodies,  such  as  the  Financial  Stability 
Board  (e.g.  “Decentralised  financial  technologies:  Report  in  financial  stability, 
regulatory  and  governance  implications’;  ‘Crypto-assets:  Work  underway,  regulatory 
approaches  and  potential  gaps”;  ‘Crypto-asset  markets:  Potential  channels  for  future 

72 

 
 
 
 
 
 
 
 
implications’…), 

financial  stability 
the  International  Organisation  of  Securities 
Commissions  (IOSCO)  (‘Issues,  Risks,  Regulatory  Considerations  Relating  to  Crypto-
Asset  Trading  Platforms’,  May  2019)  and  the  Organisation  for  Economic  Co-operation 
and  Development  (OECD)  (“Initial  Coin  Offerings  for  SME  Financing”,  2019;  ‘The 
Tokenisation  of  assets  and  Potential  Implications  for  Financial  Markets’,  2020).  This 
also  includes  specific  works  on  ‘stablecoins’  (the  report  from  the  G7  group  on 
‘investigating the impact of global stablecoins’, October 2019; the ongoing work of the 
G20/Financial  Stability  Board  ‘Regulatory  Issues  of  Stablecoins’  Working  group;  the 
IOSCO ‘study of emerging global stablecoins proposals’, November 2019).     

The  Commission  also  collected  evidence  through  several  sources,  including  warnings 
and  guidelines  issued  by  NCAs  and  third  countries,  academic  literature  and  research, 
industry associations.   

73 

 
 
 
 
 
 
Annex 2: Stakeholder consultation 

1.  Introduction 

As set out in the Commission’s current mandate, a Europe fit the for the digital age is a 
top priority, and specifically on crypto-assets, there is the ambition to adopt a common 
approach to ensure that Europe can make the most of the opportunities while mitigating 
the risks.     

This  approach  and  ambition  very  much  builds  on  the  work  done  under  the  previous 
mandate,  where  markets  in  crypto-assets  were  already  closely  monitored.  With  the 
publication of the FinTech action plan in March 2018, specific mandates were given to 
the  EBA  and  ESMA  to  provide  reports  with  advice  to  the  Commission  on  the 
applicability  and  suitability  of  the  existing  EU  financial  services  regulatory  framework 
on  crypto-assets.  Furthermore,  the  Commission  continued  to  assess  and  monitor 
internally as well as actively participate in international fora where the topic was – and 
continues to be – discussed, for example BCBS, G7, G20, FATF and the FSB. Following 
advice from the EBA and ESMA in January 2019, the Commission undertook an internal 
cost  benefit  analysis  starting  in  April  2019  on  the  appropriate  way  forward  as  regards 
crypto-assets within the scope of the existing EU financial services regulatory framework 
and those outside. In addition, the Commission has hosted ongoing technical workshops 
on the use of blockchain, including in the financial sector, from early 2018 and ongoing, 
through  for  example  the  EU  Blockchain  Observatory  and  Forum,  which  was  also 
launched as part of the 2018 FinTech action plan. 

On  19  December  2019,  the  Commission  launched  a  public  consultation  on  markets  in 
crypto-assets. It focused on three main areas: 1) on whether and how to classify crypto-
assets;  2)  on  crypto-assets  currently  outside  the  scope  of  the  EU  financial  services 
legislation; 3) on crypto-assets currently within the scope of EU legislation, specifically 
MiFID II and EMD2.  

The  Commission  received  a  total  of  198  responses  via  the  Have  Your  Say  portal,  and 
several  confidential  responses  submitted  directly  via  email.  The  feedback  from  the 
confidential  responses  was  aggregated  and  anonymised  to  a  level  that  prevents 
identification  of  individual  entities/authorities.  The  confidential  responses  are  not 
reflected in the statistics below. 

2.  Overview  of  type  and  origin  of  respondents  to  the  public  consultation  on 

crypto-assets 

Considering  the  total  of  198  respondents,  the  breakdown  per  type  of  stakeholder,  their 
field of activity and their country of origin is as follows:  

Type of respondent 

Number 

of 

74 

 
 
   
 
 
 
 
 
 
 
 
 
 
of 

of 

Academic/research institution  
Business association 
Company/business organisation 
EU citizen 
Non-EU citizen 
Non-governmental 
(NGO)  
Public authority 
Other 

organisation 

respondents 
10 
33 
72 
39 
3 
9 

21 
11 

Field of activity or sector 

Number 
respondents 
25 
Asset management  
42 
Banking 
23 
Crypto-asset exchange 
21 
Crypto-asset trading platforms  
34 
Crypto-asset users 
10 
Electronic money issuer  
49 
FinTech 
23 
Investment Firm 
19 
Issuer of crypto-assets 
23 
Market infrastructure  
Other crypto-asset service providers   26 
17 
Payment service provider  
44 
Technology expert  
19 
Wallet provider  
61 
Other 
19 
Not applicable 

Country  

Austria 
Belgium 
Bulgaria 
Croatia 
Czech Republic 
Denmark 
Estonia 
Finland 
France  
Germany 
Gibraltar  
Greece  
Hungary  
Ireland  

Number 
respondents 
4 
26 
2 
1 
5 
2 
6 
4 
14 
22 
3 
2 
4 
2 

75 

 
 
 
  
 
Italy  
Latvia  
Liechtenstein  
Lithuania  
Luxembourg  
Malta 
Netherlands  
Portugal  
Slovakia  
Spain  
Sweden  
Switzerland  
United Kingdom  
United States  

17 
4 
3 
4 
5 
4 
8 
5 
2 
8  
7 
6 
21 
7 

3.  2019 public consultation on an EU framework for markets in crypto-assets 

3.1.Questions on the classification of crypto-assets  

The vast majority of respondents were in favour of a classification of crypto-assets at EU 
level.  In  general,  there  was  strong  support  for  the  proposed  distinction  between 
‘payment’,  ‘investment’  and  ‘utility’  tokens,  which  is  also  the  distinction  most 
commonly used in other jurisdictions Stakeholders argued that this classification would 
rightly  be  based  on  the  economic  function  and  purpose  of  an  asset,  stressing  the 
importance  of  the  ‘substance  over  form’  principle.  However,  the  opinions  on  ‘hybrid 
tokens’ were less uniform. Some stated that such a category would be useful as a token 
might  combine  characteristics  of  ‘payment’,  ‘investment’  and/or  ‘utility’  tokens  and/or 
change  its  characteristics  over  time,  whereas  others  opposed  this  view  by  expressing 
concerns  of  lost  clarity.  Similarly,  no  consensus  was  established  on  the  question  if  a 
further subdivision of the mentioned categories is needed.  

Proponents  of  a  more  granular  approach  argued  that  the  classification  into  ‘payment’, 
‘investment’,  ‘utility’  and  ‘hybrid’  tokens  is  too  broad  and  does  not  sufficiently  clarify 
the  circumstances  under  which  a  crypto-asset  may  fall  under  existing  regulation  (e.g. 
whether a ‘payment token’ fulfils the definition of  e-money or not, which subsequently 
determines  if  it  falls  under  EMD2).  On  the  other  hand,  stakeholders  put  forward  the 
concern  that  a  too  detailed  classification  may  not  be  flexible  enough  to  accommodate 
future developments of asset classes and would therefore impede innovation and growth. 

Respondents also provided insights into how different Member States deal with crypto-
asset  classification,  with  many  Member  States  not  having  acted  in  this  respect  at  all. 
Consequently, stakeholders stressed the importance of an EU-wide classification and of a 
coordination  with  international  standard-setters  for  a  holistic  approach  in  classifying 
crypto-assets.  As  to  how  such  an  EU-wide  classification  could  be  implemented,  some 
respondents  advocated  for  a  non-legislative  approach  mentioning  its  flexibility  to 
incorporate  newly  emerging  categories  in  the  future  and  pointing  to  the  role  the  ESAs 
play  in  this  context.  However,  most  stakeholders  seemed  to  favour  a  regulatory 

76 

 
 
 
 
 
 
 
 
classification  as  it  provides  the  highest  degree  of  legal  certainty  and  prevents  potential 
regulatory arbitrage. This in turn ensures a level playing field for market participants and 
fosters economic progress as it assists in the creation of a single market for crypto-assets. 
Some  respondents  could  imagine  a  combination  of  legislative  and  non-legislative 
classification. 

3.2.Questions on crypto-assets currently not covered by EU legislation  

The majority  of stakeholders believes that a bespoke regime  for crypto-assets  currently 
not  covered  by  the  EU  financial  services  regulatory  framework,  would  establish  a 
sustainable crypto-asset ecosystem in the EU, citing primarily the need for legal certainty 
and harmonisation across EU national legislations. Many stakeholders believe that legal 
certainty through proper regulation will help the sector obtain credibility and gain access 
to the financial system and its business partners in general. Among the stakeholders who 
do  not  see  the  need  for  a  bespoke  regime,  around  half  of  them  believe  that  all  crypto-
assets are already covered by existing EU and national rules and where they differ, they 
should be captured by way of similarity to existing asset classes.  

Several  other  respondents  answered  in  favour  of  a  risk-based  approach  to  regulation, 
based on the level of risks associated with the specific category of crypto-assets. Around 
half  of  the  respondents  believe  that  harmonisation  of  national  civil  laws  should  be 
considered  to  provide  clarity  on  the  legal  validity  of  transfers  of  crypto-assets  and  the 
tokenisation of material assets (i.e. proof of ownership recorded on a blockchain). Almost 
the entirety of the negative responses to this question cite the difficulty of achieving this 
as the reason for their answer.  

Several  stakeholders  provided  input  on  the  existing  national  regimes  among  different 
Members States, referring primarily to the German and French regimes that are in place. 
Specifically,  respondents  state  that  the  German  regulatory  framework  which  aims  at 
regulating  financial  instruments  in  a  technologically  neutral  way  is  widely  accepted 
among  market  participants  as  well  as  the  French  provisions  for  ICOs  and  digital  asset 
service  providers  (the  PACTE  law  –  an  action  plan  for  business  growth  and 
transformation)  could  be  a  model  for  an  EU-wide  framework  due  to  its  flexible  opt-in 
licence design.  

On the issue of “stablecoins” or “global stablecoins”, the majority of respondents are in 
favour of imposing several  requirements  on the issuers and/or managers of the reserve. 
The  most  strongly  supported  requirements  are  the  containment  of  the  creation  of 
“stablecoins”, periodic auditing and the provision of transparent information to users on 
the stability mechanism of the “stablecoin”, on the potential claim and on the nature of 
the  underlying  assets  in  the  reserve.  A  majority  of  respondents  also  believe  that  the 
regulatory treatment of “stablecoins” offered to retail investors should be different than 
those  limited  to  financial  institutions  or  select  clients  thereof,  so-called  wholesale 
“stablecoins”. 

Digital  wallet  providers  are  also  highlighted  by  many  as  key  actors  in  the  crypto-asset 
ecosystem. Several stakeholders believe that custody service providers should be held to 
high operational resilience standards due to the several instances of hacking and theft that 

77 

 
 
 
 
 
 
 
 
has taken place in this area. Additionally, several respondents point to the importance of 
proper AML/CFT procedures for custody services but also for other actors in the crypto-
asset ecosystem. In this context, a majority of stakeholders was in favour of revisiting the 
definition of virtual currency under AMLD.  

3.3.Questions on crypto-assets currently covered by EU legislation  

The majority of respondents consider that the absence of a common approach on when a 
crypto-asset  constitutes  a  financial  instrument  is  an  impediment  to  the  effective 
development  of  security  tokens.  Respondents  underline  mainly  the  risk  of  fragmented 
approaches  leading  to  regulatory  arbitrage  and  difficulties  in  developing  a  European 
market for security tokens. Different approaches in the qualification of a security token 
as  a  financial  instrument  creates  legal  uncertainty  to  issuers  and  investors  and  is  an 
impediment to the effective cross-border issuance of security tokens. Currently, the lack 
of legal clarity and gaps in the EU regulation has forced many Member States to adopt 
their own legislation (e.g. Malta; Germany; France; Luxembourg).  

For  many  respondents,  in  case  a  crypto-asset  qualification  as  a  financial  instrument, 
investment services related to these security tokens will fall within the scope of MiFID II, 
in  particular  licence  and  investor  protection  requirements.  Legal  clarity  is  therefore 
essential  for  businesses  because  it  provides  for  a  reliable  basis  of  the  regulatory  costs 
attached to any new initiatives. Issuers of security tokens are also unlikely to operate in 
certain jurisdictions if the applicable framework is unclear. The lack of clarity can also be 
problematic  for  investors,  who  may  not  receive  the  appropriate  information  about  the 
security  token  issuance  due  to  a  different  legal  classification  of  a  security  token  in 
another  jurisdiction.  Discrepancies  on  the  understanding  and  definition  of  a  security 
token as a financial instrument could also lead to taxation issues.  

A  minority  of  respondents  express  very  different  views.  A  few  respondents  first 
underline  that  this  issue  is  not  specific  to  crypto-assets  as  there  is  already  a  regulatory 
fragmentation  and  different  interpretations  among  Member  States  on  what  a  financial 
instruments is. A few others note that security tokens will develop independently of any 
possible  EU  legislation.    They  consider  that  the  technology  is  global,  and  that  ‘local’ 
regulation will have a limited impact. According to one respondent, no action is needed 
since it is already obvious when a security token constitutes a financial instrument. 

Almost  all  respondents  consider  that  ‘harmonising  the  definition  of  certain  types  of 
financial  instruments  in  the  EU’  and  ‘providing  a  definition  of  a  security  token  at  EU 
level’  would  be  very  relevant  and  appropriate.  Most  respondents  also  consider  that 
providing guidance at EU level on the main criteria to be taken into consideration when 
qualifying a crypto-asset as security token would be useful. 

For  most  respondents,  the  absence  of  EU  definitions  for  the  categories  of  ‘financial 
instruments’  is  an  issue  of  legal  inconsistency  and  uncertainty  not  specific  to  crypto-
assets,  but  it  may  prevent  the  uptake  of  financial  innovation.  Respondents  would 
welcome a common EU regulatory framework with harmonised definitions, particularly a 
common notion of ‘transferable securities’ (a few respondents also stress the need for a 
common definition of the term ‘securities’).  

78 

 
 
 
 
 
 
 
 
For a few respondents the existing EU framework on financial instruments has proven to 
be satisfactory as it is and should not change. They consider that EU harmonisation of the 
definition of financial instruments would be a far too complex and unlikely process as it 
would  imply  changes  in  the  private  law  of  Member  States.  Respondents  would  rather 
encourage the adoption of a binding definition of a security token (they would also call 
for a definition of ‘token’) to create a basic level playing field and prevent that security 
tokens could fall outside the regulatory perimeter. A few respondents also stress the need 
to set up clear rules on the fiscal treatment of a security token.  

The majority of stakeholders believe that DLT will lead to efficiencies or other benefits 
as  regards  trading,  post-trade  and  asset  management.  For  example,  according  to  most 
respondents, DLT could help improve settlement timeframes, and reduce the number of 
intermediaries  involved  in  capital  markets  transactions,  with  the  greatest  potential  for 
efficiencies within central counterparty clearing, custodianship, CSDs.  

They explain how they believe post-trade processes are partly redundant, based on legacy 
technology like fax machines, spreadsheets, and phone confirmations and require heavy 
reconciliation  processes.  DLT  could  accelerate,  decentralise,  automate  and  standardise 
data-driven processes and therefore improve the way in which assets are transferred and 
records are kept. 

A few respondents, took a more neutral stance on this question. While acknowledging the 
benefits DLT could bring to capital markets, they underlined that this technology is still 
at an early stage, and they have yet to see yet huge-scale use cases. It is therefore difficult 
to get a clear assessment of its benefits.   

The  overwhelming  majority  of  respondents  believe  that  DLT  will  have  a  significant 
impact on the current financial market infrastructures (FMIs), but that it will largely be 
determined  by  the  applicable  regulatory  framework,  since  it  is  the  regulation  that 
mandates  roles  and  operational  standards.  DLT  does  not  change  the  requirement  for 
entities  to  become  authorised  and  regulated  to  carry  out  regulated  FMI  activities.  The 
majority of respondents believe that the current rules applying to FMIs should also apply 
to any DLT platforms performing similar roles. However, it is possible that a number of 
provisions are no longer relevant for DLT-driven processing. 

The  majority  of  respondents  believe  the  EU  should  foster  innovation,  and  that  any 
potential  new  regulation  has  to  provide  for  efficient  and  reliable  trade  and  post-trade 
services, regulating roles and specific functions rather than business models.  

The majority of respondents considered that a gradual regulatory approach in the areas of 
trading,  post-trade  or  asset  management  could  be  relevant  in  the  current  context. 
According to them, this technology is still at an early stage and market developments are 
moving  quickly.  In  that  context,  it  is  impossible  to  propose  a  comprehensive  approach 
for  crypto-assets.  Some  consider,  that  a  gradual  regulatory  approach,  understood  as 
trying  to  first  provide  legal  clarity  to  market  participants  as  regards  permissioned 
networks  and  centralised  platforms  before  considering  changes  in  the  regulatory 
framework to accommodate permissionless networks and decentralised platforms, would 

79 

 
 
 
 
 
 
 
 
 
be reasonable.  

On questions on CSDR and additional specific issues with applying the CSDR definition 
in a DLT environment, about half of the limited number of stakeholders who responded, 
are of the opinion that DLT solutions could exclude the use of CSDs by replacing CSDs 
by  the  distributed  ledger  as  a  decentralised  version  of  such  depositories.  They  also 
therefore consider the definitions in the CSDR as not fitting with the DLT  environment 
requiring a new approach. 

Asked  about  other  potential  issues  on  trading  and  post-trading  than  the  specific 
provisions  mentioned  in  the  public  consultation,  the  majority  of  the  stakeholders  who 
responded  (only  a  bit  more  than  50)  did  not  identify  any  other  provisions  that  would 
prevent  effectively  applying  EU  financial  services  legislation  to  crypto-assets  or  limit 
their  use.  Among  the  respondents  that  did  identify  issues,  some  of  them cite  the  cross-
border  nature  of  crypto-assets,  and  subsequent  potential  problems  of  conflicts  of  law. 
Another  respondent  pointed  out  issues  with  the  immutability  of  a  blockchain  and  the 
interplay with the General Data Protection Regulation, highlighting the need for clarity as 
to  what  would  be  considered  in  compliance  with  the  regulation  where  these  systems 
would be dealing with personal data.  

On questions relating to EMD and PSD2 as regards crypto-assets that would qualify as e-
money  (e-money  tokens),  only  a  limited  number  of  stakeholders  responded.  Among 
those responding, the split is around 50/50 between respondents finding impediments in 
EMD and PSD2 to the issuance of e-money tokens. However, most respondents believe 
that  legal  amendments  or  supervisory  guidance  may  be  needed  to  ensure  the  effective 
functioning and use of e-money tokens, highlighting for example a lack of clarity of the 
definition  of  e-money  and  how  the  strong  customer  authentication  requirements  from 
EMD2 can apply to payment transactions with e-money tokens.  

Regarding questions on whether requirements under EMD and PSD2 are appropriate for 
“global stablecoins”, again, only a limited number of stakeholders responded, with most 
considering  that  requirements  from  EMD  could  be  applied  to  “global  stablecoins”.  On 
PSD2,  responses  are  split  between  some  respondents  finding  PSD2  fit  and  others 
highlighting  that  PSD2  is  not  fit  for  DLT  and  that  there  is  not  enough  experience  to 
regulate. 

4.  Reports and advice on crypto-assets from EBA and ESMA  

On 9 January 2019, the EBA and ESMA published reports with advice to the European 
Commission  on  the  applicability  and  suitability  of  the  EU  financial  services  regulatory 
framework  on  crypto-assets.  These  reports  were  based  on  the  mandate  given  to  them 
under the Commission’s FinTech action plan, published in March 2018.  

Both the EBA and ESMA come to the overall conclusion that while some crypto-assets 
may  fit  the  definition  of  a  financial  instrument  under  MiFID  or  e-money,  respectively, 
most of them, do not. In addition, they highlight that most of the crypto-assets outside the 
EU  financial  services  regulatory  framework,  present  very  much  the  same  risks  to 
consumers and investors as the ones within.   

80 

 
 
 
 
 
 
 
 
 
ESMA  further  highlights  that  crypto-assets  may  qualify  as  financial  instruments  under 
MiFID, or as alternative investment funds. Whether they qualify as financial instruments 
depends  on  the  precise  facts  and  circumstances  of  the  crypto-asset  (its  nature,  rights 
attached to it, negotiable on the capital market, etc.) and national law. The definitions in 
EU law rely on notions in national law to define what constitutes a financial instrument. 
Member  State  legislation  varies  on  this.  If  a  crypto-asset  qualifies  as  a  financial 
instrument,  then  in  principle,  the  corresponding  EU  legislation  applies  (MiFID,  MAR, 
Prospectus...). Applying this legislation in practice to assets recorded, held and transacted 
on distributed ledgers and blockchains, presents a number of complex legal and practical 
questions as to how the legislation can actually be applied to them. This is largely due to 
the  fact  that  distributed  ledger  implementation  were  not  considered  at  the  time  the 
relevant legislation was adopted by the co-legislators. 

The EBA details how crypto-assets do not meet the definition of funds under PSD2 and 
therefore  PSD2  does  not  directly  apply  to  payment  services  based  on  crypto-assets.  A 
small  number  of  crypto-assets  may  be  covered  by  EMD2,  provided  they  meet  the 
definition  set  out  in  the  directive.  Where  crypto  assets  meet  the  definition  of  EMD2, 
placing them on the market in the EU requires an e-money license. Such license allows 
the  service  provider  to  passport  e-money  services  throughout  the  European  Economic 
Area. Where crypto-assets qualify as e-money, payment services provided in relation to 
them would also be covered by PSD2. Whereas crypto-assets are mainly not repayable at 
par  value  and  therefore  unlikely  to  meet  the  definition  of  a  deposit  pursuant  to  the 
Deposit  Guarantee  Scheme  Directive,  further  analysis  of  the  DGS  treatment  of  client 
funds  safeguarded  by  (non-bank)  financial  institutions  on  bank  accounts  would  be 
required. 

In their conclusions, both the EBA and ESMA advises that the Commission should carry 
out a cost benefit analysis on a holistic basis to determine whether a bespoke EU regime 
is appropriate for crypto-assets outside the scope of the EU financial services regulatory 
framework. 

5.  Monitoring through the EU Blockchain Observatory and Forum 

The EU Blockchain Observatory and Forum was launched in February 2018 and is one 
the  actions  presented  in  the  FinTech  action  plan  of  March  2018.  It  monitors  and 
highlights  key  developments  of  blockchain  technology  and  promotes  European  actors 
and  reinforce  European  engagement  with  multiple  stakeholders  involved  in  blockchain 
activities.  

The  Commission  has 
identified  blockchain  as  a  potentially  foundational  and 
transformative technology, including in the financial sector. The Blockhain Observatory 
and  Forum  presents  an  opportunity  to  monitor  the  latest  developments  and  inform  the 
Commission’s policy making in this area.  

It  gathers  stakeholders  from  the  blockchain  space  and  provides  an  opportunity  to  hold 
targeted workshops  together with  the regulatory  community. The work is  cross-cutting, 

81 

 
 
 
 
 
 
 
 
 
covering both privacy aspects of blockchain development as well as legal and regulatory 
frameworks for blockchains and smart contracts.   

Annex 3: Who is affected and how? 

1.  PRACTICAL IMPLICATIONS OF THE INITIATIVE 

The  initiative  envisages  the  creation  of  a  regulatory  framework  for  crypto  assets  that 
currently do not fall within the scope of the existing regulatory acquis. This will ensure 
that European-based crypto-asset service providers are supervised and meet the foreseen 
obligations in terms of investor protection. Crypto-asset issuers will equally be required 
to  meet  certain  transparency  requirements. The framework will also  mandate minimum 
standards  in  terms  of  market  integrity  and  respective  monitoring  thus  creating  a  safer 
market environment.   

Furthermore,  the  initiative  endeavours  to  enable  the  creation  of  STOs  by  clarifying  the 
application of existing market regulation and the launch of a pilot framework. This will 
allow  supervisors  to  gather  experience  in  the  supervision  of  these  new  assets  while 
facilitating  innovation  and  competition.  Certain  key  regulatory  hurdles  may  also  be 
addressed via changes to existing primary legislation. 

Lastly,  it  will  tackle  issues  regarding  financial  stability  and  market  integrity  risks  in 
relation to ‘stablecoins’. It will impose obligations on stablecoin issuers that will address 
such risks and subject them to firm supervision. 

Impacts on the individual stakeholders groups:  

Crypto-asset  service  providers  –  As  European  service  providers  have  been  largely 
operating in a non-regulated space to date the initiative will give rise to new compliance 
costs. Apart from authorisation and on-going supervisory costs, intermediaries in crypto-
assets will need to implement a range of operational changes. The individual costs arising 
from  this  will  largely  depend  on  the  extent  to  which  respective  service  providers  have 
already  implemented  measures,  either  on  a  voluntary  basis  or  in  order  to  comply  with 
regulation at national level. An EU regulatory framework, however, will harmonise the 
applicable requirements and avoid the proliferation of nationally fragmented regimes. It 
will  thus  provide  service  providers  with  the  opportunity  to  offer  services  cross-border 
throughout  the EU  without  incurring additional  compliance  costs. As the initiative pre-
empts the creation of national regimes in many Member States, there can be a significant 
indirect  cost  saving  in  this  regard  for  cross-border  operations192.  As  concerns  service 
providers’  commercial  operations,  the  initiative  aims  to  facilitate  competition  on  a  fair 
basis  by  creating  a  regulatory  level  playing  field.  In  combination  with  the  incurred 
compliance  costs,  this  is  likely  to  decrease  profit  margins  in  the  sector.  However,  the 
initiative  will  also  help  to  strengthen  consumer  and  investor  trust  and  should  thereby 

192 At the current stage, there are only three national regimes in place. Many Member States however 
indicated that they would pursue the creation of national regimes in the absence of a European framework.  

82 

 
 
 
 
  
 
 
                                                           
generate  additional  revenue  for  service  providers.  Over  time,  this  should  outweigh  the 
initial impact on margins.  

Similar  to  other  service  providers,  crypto-trading  platforms  will  face  new  compliance 
costs if they want to continue to offer services in the EU. Apart from authorisation and 
supervisory costs, there will be a range of one-off and on-going cost in order to meet the 
new  regulatory  requirement.  This  concerns  in  particular  systems  to  monitor  orders  and 
transactions  for  market  abuse  infractions  and  possible  changes  to  listings  and  trading 
protocols.  While  certain  requirements  may  be  met  already,  it  is  expected  that  many 
requirements  will  go  beyond  current  measures  taken  on  a  voluntary  basis.  Given  that 
some crypto investors seek in particular anonymity in their trading, it is also foreseeable 
that some exchanges will decide to exit the market and cease their European operations 
and offerings. While this  may initially  affect  market  competition,  the established level-
playing  field  should  ensure  that  a  high  degree  of  competition  in  maintained  between 
remaining  exchanges  and  possible  new  entrants.  Especially  existing  market  operators 
may see an incentive to expand their operations to crypto trading given that they will be 
able to rely on a firmly established regulatory approach. Likewise, existing crypto-asset 
trading platforms may see opportunities to list STOs enabled by the pilot regime on DLT 
market  infrastructure  thus  increasing  competitive  pressure  in  these  markets.  While 
increased competition  will  negatively affect  profit margins,  lower investor costs should 
increase  trading  flows  and  generate  additional  revenue.  Moreover,  it  will  help  to  drive 
innovation  which  should  increase  the  international  competitiveness  of  crypto-asset 
trading platforms (especially in view of regulatory frameworks that will likely be adopted 
in third countries).   

Issuers – Issuers of crypto assets will face compliance costs in particular in the form of 
mandatory transparency requirements. The envisaged white paper will give rise to direct 
costs  as  well  as  indirect  costs  to  cover  aspects  such  as  legal  and/or  other  consultative 
support.  Issuing  whitepapers  (or  other  information  document)  however  is  a  prevalent 
practice  in  the  market  already  today  and  may  be  required  by  existing  national 
frameworks. As such, the additional costs compared to a baseline scenario are relatively 
low.  

From  a  regulatory  perspective,  the  issuance  of  crypto-assets  without  such  information 
provision would inflict more damage to European markets (fraudulent activities e.g.) than 
it would create value in  terms  of financing. The  increased trust  in  the issuance process 
and  market  overall  should  in  fact  help  genuine  crypto-asset  issuers  to  raise  higher 
amounts of funding. Especially institutional and other professional investors, previously 
scared  off  by  high  risks  given  the  unregulated  market  environment,  may  be  won  as 
investing  parties.  In  addition,  the  pilot  regime  will  enable  STOs  as  a  new  form  of 
financing.  This  vehicle  may  present  itself  as  a  cheaper  or  more  opportune  financing 
option compared to traditional share or bond issuance.     

‘Stablecoin’ issuers will face higher compliance costs compared to other issuers as well 
as  certain  restrictions  to  operational  designs.  Their  potentially  systemic  nature  imply 
significant risks for the wider financial system, thus calling for supervision that is more 
stringent  and  a  ruleset  that  effectively  minimises  these  risks.  Issuers  will  however  also 

83 

 
 
 
 
 
 
benefit from operating in a regulated  environment  in  terms  of user trust. This  aspect  is 
likely to outweigh the implied costs over time.      

Investors  –  Investors  and  consumers  of  crypto-asset  services  will  benefit  from  an 
increased  level  of  investor  protection  and  higher  market  integrity.  The  mandatory 
transparency requirements and enforcement of market abuse rules will enable investors to 
make more informed investment decisions in a safer market environment. They will be 
better protected from fraudulent activities and resulting losses. In addition, liquidity risks 
are  expected  to  be  lower  given  an  inflow  of  new  investors  and  more  interconnected 
exchanges. In sum, investors will carry lower risks, including regulatory ones given the 
harmonised European regulatory approach.  In result, this may lead to  higher valuations 
of crypto-assets that meet the regulatory requirements.       

A fraction of compliance costs may be passed on to investors and customers of service 
providers in the form of higher costs. However, given relatively low barriers to entry and 
the upstart, innovative nature of the market, it is expected that competitive pressures will 
prevent strong price increases. In the medium to long run, investors may in fact benefit 
from lower costs given increased economies of scale and scope as the market continues 
to grow and mature. The regulatory level playing field should also promote innovation, 
which will equally lead to lower cost and an improved quality of services.   

Supervisors  –  Supervisors  will  face  a  range  of  new  tasks  and  supervisory  obligations 
stemming  from  the  framework.  This  holds  cost  implications,  both  as  concerns  one-off 
investments and ongoing operational costs. Supervisors will need to invest in particular 
in  new monitoring systems  to  capture market  abuse and fraudulent activities in  crypto-
asset  markets  and  ensure  a  firm  enforcement  of  regulatory  provisions.  They  will  also 
need to train staff to ensure sufficient knowledge of these newly regulated markets and 
employ additional employees to stem the additional work. The costs for individual NCAs 
will  crucially  depend  on  (i)  the  amount  of  service  providers  and  crypto  activities 
monitored,  and  (ii)  the  extent  to  which  innovative  market  abuse  and  other  monitoring 
systems  are  already  in  place.  While  it  may  be  possible  to  use  similar  monitoring 
techniques to traditional financial markets the pseudo-anonymous nature of trading many 
crypto-assets will require alterations and new systems to efficiently analyse and combine 
Know  Your  Customer  and  trading  data.  These  systems  will  need  new  input  layers  and 
need  to  be  regularly  updated  and  maintained.  The  cross-border  nature  of  many  crypto 
transactions will furthermore require supervisors to cooperate closely and share relevant 
data.  Costs  will  originate  especially  in  the  supervision  of  currently  unregulated  crypto-
assets,  including  ‘stablecoins’.  The  creation  of  a  pilot  regime  for  STOs  will  equally 
require  some  operational  changes,  however,  given  that  these  tokens  take  the  form  of 
traditional  financial  assets  such  as  shares  or  bonds,  the  already  existing  supervisory 
approaches  should  be  able  to  meet  many  obligations.  As  such,  costs  should  remain 
relatively low in this area and concern mainly new issuances and the ongoing monitoring 
of the markets.  

Incumbent  operators  of  market  infrastructures  –  Incumbent  operators  of  market 
infrastructure  will  not  face  any  direct  impacts  stemming  from  the  initiative.  The  pilot 
regime  on  DLT  market  infrastructure  however  will  enable  them  to  engage  in  this  new 
market  and  list  potential  crypto-assets  that  qualify  as  MiFID  II  financial  instruments. 

84 

 
 
 
 
 
 
Given  that  some  of  the operators  already  comply  with  more  stringent  market  rules  and 
regulatory  requirements,  the  overall  compliance  costs  arising  from  this  should  be 
relatively low. Costs will mainly be incurred by new entrants for the commercial setup of 
new  trading  systems  and  necessary  IT  operations.  In  addition,  they  may  also  want  to 
engage  in  providing  services  in  other  crypto-assets  where  the  unregulated  environment 
and resulting high risks previously deterred market entry. 

Provided  that  security  tokens  meet  the  envisaged  efficiency  gains  and  overcome 
outstanding technological and legal hurdles, they may slowly supplant traditional listings. 
This process would hold important implications for many market infrastructure operators, 
especially  CCPs  and  CSDs.  The  business  model  of  these  stakeholders  would  need  to 
change radically193, with some operations potentially becoming outdated altogether. This 
would  however  require  further  changes  to  primary  legislation.  In  addition,  the  market 
would transform slowly and allow companies to adapt accordingly.  

Other market participants – The initiative will benefit in particular asset managers and 
institutional  investors  in  the  form  of  a  new  regulated  asset  class194  and  via  potential 
efficiency  gains  in  trading,  clearing  and  settlement  processes.  Intermediaries  such  as 
banks and payment providers may attract additional revenue as the entry and exit points 
for fiat currency given increased crypto investment and trading flows. They will benefit 
especially from the established legal certainty concerning crypto assets, which will allow 
them  to  market  offers  without  regulatory  risks.  Investment  banks  could  furthermore 
engage in STO underwritings and consultative services supporting the issuance process. 
Some  banks  may  equally  find  the  issuance  of  stablecoins  commercially  attractive,  for 
example to increase the efficiency of transfers of payments195.  

2.  SUMMARY OF COSTS AND BENEFITS 

Description 

Efficiency gains  

I. Overview of Benefits (total for all provisions) – Preferred Option 

Amount 

Direct benefits 

Comments 

EUR 220 to 570 million per year196  
(in the area of remittances)  

EUR 270 to 540 million per year197 
(in the area of cash equity markets)  

Up to EUR 4 billion per year198 

The efficiency gains will only fully manifest 
themselves  after  several  years  following 
implementation.  They  can  only  be  broadly 
the  high  degree  of 
estimated  given 
technological 
concerns 
uncertainty 
developments  and  market  reaction  /  uptake. 
the 
presented 
The 

indicate 

figures 

as 

193 E.g. while a formal book-entry settlement may no longer be required a CSD could operate as an off-
chain fiduciary of settlement information.     
194 E.g. low β-market correlation of some crypto assets may make them attractive as additional portfolio 
diversification.  
195 See, for example, JPM Coin which enables the instantaneous transfer of payments between institutional 
clients.  
196 Based on stakeholder input and Commission market analysis and estimates on average crypto 
transaction costs – Savings would range between €220 – 570 million. This figure assumes a market uptake 
of 30% and does not account for potential competition effects with and within other payment channels.   
197 Goldman Sachs, Cboe Global Markets and European Commission calculations.  

85 

 
 
 
 
 
 
                                                           
(in the area of reporting) 

N/A  - In the range of several billion EUR 
(in the areas of clearing, settlement, collateral 
management and other intermediary functions)  

€15 to 19 billion per year199     
(estimate of banks’ infrastructure cost savings in 
relation to cross-border payments, securities 
trading and regulatory compliance – captures 
parts of other efficiency gains)   

20-40% lower costs than for comparably sized 
IPOs200 

Reduced costs of issuance  

Reduced fraudulent activity   Cannot be estimated with any reasonable degree 
of accuracy. One study found that global costs of 
fraud in crypto markets amounted to as much as 
USD 4.3 billion in 2019201.  

Increased market integrity  

Cannot be estimated with any reasonable degree 
of accuracy. 

Reduced financial stability 
risks  

Cannot be estimated with any reasonable degree 
of accuracy. 

magnitude of possible savings and are based 
on a range of assumptions. Actually realised 
costs  savings  may  deviate  substantially 
(both  up  and  down).  There  will  also  be 
positive impacts due to increase competition 
and innovation that are not accounted for in 
these  figures  (e.g.  smart  contracts  based  on 
DLT  systems;  they  hold  the  potential  to 
greatly  lower  legal  costs  across  various 
economic activities)     

Anecdotal evidence suggests that the current 
costs of ICOs is considerably lower than for 
comparable  IPOs.  The  estimated  figure 
reflects additional compliance costs that will 
arise  due 
regulatory 
framework.    

imposed 

the 

to 

Fraudulent activity is estimated to affect 5% 
to  25%  of  current  ICO  offerings202.  The 
imposed 
requirements  and 
supervisory  oversight  should  substantially 
reduce this figure in the European market.   

transparency 

Stakeholders  have  frequently  flagged  issues 
related  to  market  integrity.  Low  liquidity 
and concentrated holdings make many some 
crypto  assets  particularly  susceptible 
to 
manipulative  market  behaviour.  Given  that 
there is currently no supervisory oversight in 
place,  it  is  not  possible  to  estimate  the 
financial damage incurred. The enforcement 
of  market  integrity  rules  however  clearly 
results  in  direct  benefits  for  all  market 
participants.   

The  regulation  of  global  stablecoins  will 
to 
address  associated  risks 
financial  stability.  It  is  not  possible  to 
estimate  this  benefit  given  that  there  are 
currently  no  stablecoins  in  the  market  that 
would pose a potentially systemic risk.    

in  relation 

Indirect benefits 

198 Figure based on Commission Fitness Check of EU Supervisory Reporting Requirements – This figure 
represents the maximum cost saving potential assuming fully automated reporting systems throughout all 
areas of the financial system enabled by DLTs.  
199 Banco Santander, Oliver Wyman, Anthemis Group, InnoVentures, FinTech 2.0 Pap 
200 ICO costs are estimated to amount to ± 3 -5% of funds raised versus 10-15% for an IPO. The 
application of the envisaged regime however would imply additional costs. Funding costs ultimately will 
depend on various factors, including choices made by the issuing entity in terms of intermediaries, legal 
support etc.     
201 Chainanalysis - State of crypto crime 
202 Catalini, Christian and Joshua S. Gans (2018), Initial Coin Offerings and the Value of Crypto Tokens, 
MIT  Sloan  Research  Paper  No.  5347-18;  Rotman  School  of  Management  Working  Paper  No.  3137213, 
(http://dx.doi.org/10.2139/ssrn.3137213) 

86 

 
 
 
 
                                                                                                                                                                            
 
Increased innovation  

Safeguarding monetary 
sovereignty  

- 

- 

The  initiative  will  create  a  regulatory  level 
playing  field.  This  will  facilitate  innovation 
as  market  participants  are  exposed  to  direct 
EU-wide  competition.  The  foreseen  STO 
pilot regime  will furthermore enable market 
participants 
to  develop  new  products, 
services and market solutions.    

Global  stablecoins  hold  the  potential  to 
undermine  monetary  control.  This  risk 
depends crucially on the setup of respective 
tokens.  The  framework  will  ensure  that 
tokens  minimise  such  risk  and  provide 
supervisors  with  sufficient  tools  to  monitor 
and 
regulatory 
enforce 
requirements.   

respective 

Newly 
regulated 
crypto 
assets  

Security 
tokens / 
pilot 
regime  

Direct costs 

Indirect costs 

Direct costs 

II. Overview of costs – Preferred option 

Citizens/Consumers  

Businesses 

Administrations 

One-off 

Recurrent 

One-off 

Recurrent 

One-off 

Recurrent 

- 

- 

- 

Parts of the arising 
compliance costs 
may be passed on to 
consumers  

EUR 35.000 – 
75.000 per 
whitepaper203  

EUR 2.2 – 24.0 
million205 on-going 
compliance costs  

± EUR 140,000 
per NCA206 

EUR 2.8 – 16.5 
million compliance 
costs for currently 
unregulated 
entities204 

EUR 350,000 - 
500,000 per 
annum per 
NCA207 

EUR 150.000 – 
250.000 per 
regulated 
platform208  

- 

- 

- 

- 

- 

- 

Minimal 
compliance costs 
for incumbents  

New entrants will 
face one-off 
compliance costs 
similar to MTFs  

Supervisory fees for 
operators of 
exchanges with 
costs comparable to 
current MTFs.  

New input 
layers and 
training will 
imply small 
one-off costs  

EUR 150.000 – 
250.000 per 
regulated 
platform209  

(supervisory 
practices can be 
copied from 
traditional 
financial markets)    

203 Includes legal costs beyond drafting of the whitepaper.  
204 Based on stakeholder input and Commission estimates on costs and number of entities falling within the 
regime – Upper and lower bound figures vary greatly due to uncertainty as to the number and type of 
entities, market reaction and scope of the regime.     
205 Id. 
206  One  NCA  has  indicated  that  the  cost  of  supervision  (including  staff,  training,  IT  infrastructure  and 
dedicated investigative tools) is estimated at €500,000 per annum. The legislator in another Member State 
has estimated recurring costs at €347.500 per annum and non-recurring costs at €137,564.         
207 Id.  
208 European Commission estimate - figure presented assumes need for 1-2 FTE supervisors   
209 European Commission estimate - figure presented assumes need for 1-2 FTE supervisors   

87 

 
 
 
 
 
 
 
 
 
 
 
 
                                                           
Indirect costs 

- 

- 

Regulation 
of 
Stablecoins 

Direct costs 

- 

- 

- 

- 

- 

Parts of the arising 
compliance costs 
may be passed on to 
consumers 

Issuers will need to 
develop a 
whitepaper as other 
crypto-assets 
issuers 

Costs are expected 
to considerably 
exceed those faced 
by other issuers, 
given more 
stringent ruleset and 
requirements as 
concerns 
operational setup 

Costs will depend 
strongly on the 
amount and type 
of stablecoins 
supervised 

Significant 
one-off costs 
will be placed 
on supervisors 
for training and 
the setup of 
monitoring 
tools 

Regular reporting 
and operational 
requirements will 
place significant 
costs on issuers 
compared to the 
baseline  

Costs will depend 
strongly on the type 
of stablecoin  

Indirect costs 

- 

- 

- 

- 

- 

- 

88 

 
 
 
 
 
 
 
 
 
Annex 4: Problem definition 

This  annex  provides  for  more  information  on  some  problem  drivers  and  problems, 
described in section 2 of the impact assessment.   

1.  Problems drivers 

1.1. Absence of rules at EU level and diverging national rules for crypto-assets 
that would not be covered by EU  rules: additional information on national 
legislations 

The definitions used and the scope of the national  legislations differ.  The notion of 
‘digital assets” under the PACTE law210 in France covers both utility tokens and payment 
tokens. In Malta, the law introduced in 2018, the notion of virtual financial assets (VFA) 
211  excludes  utility  tokens212.  In  Germany,  the  notion  of  ‘crypto-assets’  is  rather  broad 
and includes ‘payment tokens’, ‘investment tokens’ and ‘hybrid tokens’.   

Issuers of crypto-assets are not regulated in the same manner. The French provisions 
introduced  an  optional  regime  for  utility  token  issuers.  When  the  issuer  opts  in,  the 
requirements become binding and the French NCA is granted with the power to monitor 
compliance by the issuer. By contrast, Malta has implemented a mandatory regime. Any 
person wishing to offer a VFA to the public in or from Malta, or wishing to apply for the 
VFA’s admission to trading on a VFA exchange must draw up a white paper and register 
it  with  the  Maltese  NCA.  The  issuer  in  Malta  must  comply  with  various  requirements, 
which are different to those required in France. In Germany, the issuer of crypto-assets is 
not required to prepare a prospectus under the Prospectus Regulation and is not subject to 
disclosure requirements213.   

Both  the  French,  German  and  Maltese  laws  regulate  service  providers  in  relation 
with  crypto-assets.  However,  the  scope  of  covered  services  is  not  the  same.  While 
France, Malta and Germany cover services that are similar to those defined in MiFID II 
for  financial  instruments  and  regulate  custodian  wallet  providers  and  trading  platforms 
for crypto-assets, some variations exist. For instance, Malta regulates the placing of VFA 
in  general,  whilst  French  law  makes  a  distinction  among  various  forms  of  placing214. 
Malta  has  also  created  a  specific  function  of  VFA  agent215.  France  makes  a  distinction 
between trading platforms and exchanges.  

210 Action Plan for Business Growth and Transformation Law or Loi sur un Plan d’Action pour Croissance 
et la Transformation des Entreprises. 
211 Introduced in 2018 by the Virtual Financial Assets Act (the VFA Act). 
212 Chetcuti Cauchi Advocades Malta, Utility Token Offering, 2019. 
213  While ‘crypto-assets’ are classified as ‘financial instruments’ under the German Banking law, they are 
not ‘transferable securities’ within the meaning of MiFID II and are not subject to prospectus requirements. 
214 Underwriting of crypto-assets on a firm commitment basis, placing crypto-assets on a firm commitment 
basis, placing crypto-assets without a firm commitment basis. 
215 The VFA agent is responsible for representing a prospective VFA service provider before the MFSA, 
and who acts as an intermediary between the authority and the provider.  

89 

 
 
 
                                                           
Service providers are not regulated in the same way. In France, digital asset service 
providers (except custodians and crypto-to-fiat that need to be registered) can opt into the 
optional regime. By contrast, service providers must be licensed in Malta (VFA act) and 
in  Germany  (Germany  Banking  Act).  The  nature  of  the  requirements  on  service 
providers in those three countries also tend to differ.  

The  three  regimes  do  not  ensure  the  same  level  of  protection  as  regards  market 
integrity.  In  Malta,  market  integrity  of  the  markets  in  VFAs  is  ensured  by  specific 
provisions  on  market  abuse216.  In  France  and  in  Germany,  the  market  integrity  rules 
stemming from the Market Abuse Regulation do not apply. 

1.2.  Lack  of  certainty  as  to  when  and  how  existing  EU  rules  would  apply  (for 

crypto-assets that could covered by EU rules) 

ESMA  undertook  a  survey  of  NCAs217,  to  better  understand  how  Member  States  have 
transposed  the  notion  of  ‘financial  instruments’  and,  based  on  the  transposition,  the 
circumstances under which crypto-assets may qualify as a ‘financial  instrument’ and in 
particular as a ‘transferable security’ in the different Member States. It results from this 
survey that while a majority of NCAs (16) have no specific criteria under their national 
legislation to identify transferable securities in addition to those set out under MiFID II, 
other  NCAs  (12)  have  such  criteria,  which  results  in  broader  or  more  restrictive 
interpretation  of  what  constitutes  a  “transferable  security”.  The  figure  below  clearly 
shows that there were divergent views among NCAs as whether the six cases of tokens218 
presented  by  ESMA  could  qualify  as  ‘transferable  securities’  under  their  legislation. 
Those cases reflected different characteristics that ranged from investment-type (cases 1 
and 2) to utility-type (case 5) and hybrids of investment-type, utility-type and payment-
type of crypto-assets (cases 3, 4 and 6).  

216 Furthermore, VFA exchange must notably have effective systems of detecting possible market abuse 
when dealing with VFAs.  
217 All Member States, expect Poland. In addition, two EEA Member States (Liechtenstein and Norway). 
ESMA, Annex I – legal qualification of crypto-assets – survey to NCAs, January 2019 
218  Those  cases  reflected  different  characteristics  that  ranged  from  investment-type  (cases  1  and  2)  to 
utility-type (case 5) and hybrids of investment-type, utility-type and payment-type of crypto-assets (cases 
3, 4 and 6).  

90 

 
 
 
 
 
 
 
 
 
 
 
                                                           
Figure  11:  Crypto-assets  from  ESMA  survey  qualifying  as  transferrable  securities  under  MiFID  II 
(Source: ESMA)   

2.  Problems:  Financial  stability  and  monetary  policy  risks  raised  by  stablecoins 

and global stablecoins 

The ECB has estimated the potential size of the reserve of assets backing the Libra coin, 
based  on  the  2.4  billion  user  base  of  the  Facebook  ecosystem  (which  includes  other 
applications,  such  as  Instagram  and  WhatsApp)  of  which  10%  are  located  in  the  euro 
area.  The  ECB  considered  three  scenarios:  (i)  Libra  becomes  a  widespread  means  of 
payment and users have €64 on average their accounts219; (ii) Libra becomes a store of 
value  and  the  holding  per  capita  is  €254220  and  (iii)  the  extreme  scenario,  where  Libra 
becomes a store of value and the per capital holding is  €1220221.    

Table  3  shows  the  estimated  size  of  the  Libra  reserve.  The  Libra  Association’s  assets 
under management could range from €152.7 billion in the ‘means of payment’ scenario 
to about €3 trillion in the most extreme ‘store of value’ scenario. 

219 This is based on the average holding per PayPal account. 
220  Based  on  Yu’E  Bao,  the  money  market  fund  of  the  Chinese  Ant  Financial  in  the  Alibaba  Group 
ecosystem 
221  Based  on  Yu’E  Bao,  the  money  market  fund  of  the  Chinese  Ant  Financial  in  the  Alibaba  Group 
ecosystem (purchasing power parity adjusted exchanges rates to euro are used).   

91 

 
 
 
 
 
 
 
 
 
 
                                                           
Table 12: Potential global size of the Libra Association and importance for the euro area (ECB, 2020) 

As a global stablecoin of that size would become systematically important, it could raise 
the following challenges to financial stability and monetary policy transmission.  

2.1. Financial stability concerns raised by global stablecoins (GSCs) 

The  GSC’s  potential  malfunctioning  could  pose  risks  to  financial  stability  if 
consumers use a GSC increasingly as a means of payment. Vulnerabilities may result 
from  conflicts  of  interest,  fraud,  cyber  incidents,  other  operational  failures  or  liquidity 
shortages.  The  relationships  between  entities  in  a  stablecoin  arrangement  may  be 
complex  and  fragilities  may  emerge  if  the  obligations  between  those  entities  (such  as 
market-makers and issuers) are unclear. This could lead to failure to execute a transaction 
or redemption, or prevent access by users.  

There is a risk to the stablecoin value stemming from the investments constituting 
the reserve. GSCs whose assets include bank deposits can be unable to meet redemption 
requests, in  case of default or liquidity issue at  the bank level.  GSCs that  hold  a wider 
range of assets may also be exposed to the market and liquidity risk of those assets and 
the credit risk of their issuers. A fall in the value of the reserve assets triggered either by 
overall  market  conditions  or  by  an  idiosyncratic  change  in  the  value  of  the  asset  could 
reduce the value of the GSC222. 

A  run  on  a  GSC  could  also  occur  if  the  end-users  lose  confidence  in  the  issuer 
and/or its arrangement, leading to sudden selling flows out of the GSC. This could 
happen,  for  example,  if  an  adverse  event  damages  the  GSC  arrangement’s  reputation 
(cyber-attack  to  the  system,  theft  from  wallet)  or  if  end  users  realise  that  the  assets 
backing  the  coin  are  losing  value223.  A  run  would  be  more  likely  if  the  GSC  has  poor 
governance arrangement (such as non-segregated funds in  the reserve,  ambiguous legal 

222 G7 Working Group on Stablecoins, Report on ‘Investigating the impact of global stablecoins’, 2019. 
223  ECB  Occasional  paper,  A  regulatory  and  financial  perspective  on  global  stablecoins,  2020  [to  be 
published]. 

92 

 
 
 
 
                                                           
obligations of the issuer, lack of transparency on the reserve holdings, lack of credibility 
of GSC’s reporting, weak mechanism to allow users to redeem their coins…)224. 

GSCs  can  also  increase  vulnerabilities  in  the  broader  financial  system  through 
several  channels.  First,  if  the  GSC  becomes  a  store  of  value  and  therefore  users  hold 
GSCs permanently, retail deposits at banks may decline increasing bank dependence on 
more  costly  and  volatile  sources  of  funding,  including  wholesale  funding225.  Second, 
easy availability of GSCs may exacerbate bank runs in times when confidence in one or 
more  bank  erodes.  Third,  GSCs  may  disrupt  banks’  activity,  especially  in  the  payment 
services  activity,  which  represents  on  average  between  10  to  15%  of  banks’  total 
revenues226. A decreased profitability could make it more difficult for banks to meet their 
own funds target, leading some banks to take on more risks or to contract lending to the 
real economy. Fourth, depending on levels of uptake, purchase of safe assets for the GSC 
reserve  could  cause  a  shortage  of  high-quality  liquid  assets  (HQLA)  in  some  markets, 
potentially  affecting  financial  stability227.  Large  inflows  or  outflows  from  the  GSC 
arrangement and changes in the reserve composition may also affect the prices and yields 
of such HQLA. Fifth, if a GSC were used as a store of value, then any shock to the value 
of a GSC would have a wealth effect on its users. This could have a wider effect on the 
economy  as  people  would  adjust  their  spending  accordingly.  Sixth,  banks  and  other 
financial institutions directly exposed to a GSC – for example because they hold GSCs or 
provide services related to GSCs to their customers – could suffer a loss if the value of 
the GSC decreased or be subject to a reputational risk.  

b.  Risks to monetary policy transmission and monetary sovereignty 

If  a  GSC  became  a  store  of  value  and  took  a  large  share  of  the  value  currently 
stored  in  bank  deposits,  monetary  policy  transmission  to  the  real  economy  via 
banks  (through  official  interest  rates)  could  be  undermined.  If  a  GSC  backed  by  a 
basket of several currencies pays an interest rate, such a return on GSC holdings could be 
a weighted average of interest rates on the GSC reserve currencies. This would attenuate 
the  link  between  domestic  monetary  policy  and  interest  rates  on  GSC-denominated 
deposits.  Because  domestic  savers  will  be  able  to  switch  between  domestic  currency 
deposits  and  GSC  holdings,  the  return  on  a  GSC  may  affect  the  amount  of  domestic 
currency  deposits  and  thus  deposit  and  loan  interest  rates  in  the  domestic  currency 
financial  system,  further  diluting  the  effectiveness  of  the  interest  rate  channel  of 
monetary policy.  

If a GSC were to become widely used globally, the demand for those assets included in 
the reserve is likely to increase in the longer term. This could entail capital outflows from 

224 G7 Working Group on Stablecoins, Report on ‘Investigating the impact of global stablecoins’, 2019. 
225 The ECB has estimated that in an extreme-case scenario (i.e. if Libra becomes a widely used store of 
value),  5.2%  of  euro  area  household  current  account  and  overnight  bank  deposits  would  be  transformed 
from retail deposits to wholesale deposits.  
226 S&P, The Future of Banking Regulators to Decide if the Crypto Stars Align for Libra, 2019. 
227 The ECB indicates that the outstanding amount of AAA-rated central government debt with a maturity 
of less than one year in the euro area stood at €71.4 billion in Q2 2019. In the scenario ‘Store of Value A’, 
the  Libra  Reserve  would  hold around 45% of the outstanding amounts in short-term  government papers, 
while this while this whole market segment is smaller than the amounts invested under scenario ‘Store of 
value B’.    

93 

 
 
                                                           
countries  whose  assets  are  not  included  in  the  GSC’s  reserve  and  capital  inflows  into 
countries whose assets are included. This could raise market interest rates in the former 
countries  and  lower  them  in  the  latter.  Finally,  in  time  of  stress  and  if  the  GSC  is  an 
attractive  alternative,  it  can  become  a  substitute  for  domestic  currency  and  undermine 
monetary sovereignty.  

94 

 
 
 
 
Annex 5: Discarded options 

Option  discarded  for  crypto-assets  that  qualify  as  financial  instruments  and  those 
which  currently  fall  outside:  Creating  a  new  category  ‘crypto-assets’  in  the  list  of 
“financial instruments” (Annex I C of MiFID II) 

Under this option, the difference between crypto-assets that are currently regulated (i.e. 
mostly  those  that  qualify  as  MiFID  II  financial  instruments)  and  those  that  fall  outside 
(i.e.  utility  tokens  or  payment  tokens)  would  no  longer  exist.  Annex  I.C  of  MiFID  II 
would be modified to add a new category of financial instruments, a “C12 category” for 
crypto-assets. This option has been assessed by  ESMA and NCAs in the context of the 
advice on initial coin offerings and crypto-assets228.  

This  option  would  offer  several  benefits:  it  would  provide  legal  certainty  and 
harmonisation in the EU. The NCAs that supported the creation of a new C12 category 
also  believed  that  all  the  requirements  applicable  to  financial  instruments  should  also 
apply  to  crypto-assets.  The  ESMA  Securities  and  Markets  Stakeholder  Group229  also 
considered that both payment and utility tokens should be included in the MiFID II list of 
financial  instruments.  Since  a  number  of  transferable  payment  and  utility  tokens  are 
increasingly considered as investment objects, risks arise that are similar to risks on the 
capital markets (including investor protection and market abuse concerns). This inclusion 
would  allow  secondary  markets  of  such  payment  or  utility  tokens  to  be  considered  as 
MiFID II trading venues, subject to market abuse regulation.  

However, ESMA advice on “initial coin offerings and crypto-assets” has showed limited 
support from NCAs to  create a new category of financial instruments for crypto-assets. 
Some NCAs (4) considered that applying the same rules across all crypto-assets was not 
relevant because of their variety. Other NCAs (3) insisted on the “same business, same 
risks, same rules” approach and the fact  that differences in  the underlying technologies 
do  not  suffice  to  support  a  specific  regime.  Provided  that  they  meet  the  relevant 
conditions  (e.g.  when  they  present  the  features  of  shares  or  bonds),  most  NCAs  (15) 
agreed  that  crypto-assets  should  comply  with  the  full  set  of  EU  rules  applicable  to 
financial  instruments.  The  creation  of  a  new  category  C12  would  create  confusion  and 
regulatory arbitrage between existing categories (e.g. traditional ‘transferable securities’) 
and  the  new  one  (e.g.  investment  tokens  that  present  the  same  features  as  traditional 
transferable  securities  but  issued  on  a  DLT).  Finally,  as  many  crypto-assets  (including 
utility  or  payment  tokens)  are  substantially  different  from  traditional  financial 
instruments,  applying  the  MiFID  II  would  not  be  relevant.  Finally,  if  all  crypto-assets 
ware considered as financial instruments, some cumbersome requirements under MiFID 
II could drive crypto-asset projects away from the EU.     

228 Annex 1 – Legal qualification of crypto-assets – survey to NCAs (2019), p.21-22. 
229 ESMA Securities and Markets Stakeholder Group – Advice to ESMA : Own Initiative Report on Initial 
Coin Offerings and Crypto-Assets, 2018. 

95 

 
 
 
 
                                                           
Annex 6: Option 1 for stablecoins and global stablecoins   

Risks raised by stablecoin arrangements (FSB report) and measures to address them under Option 1  

Function in the 
stablecoin 
arrangement 
and description of the 
function 
Governance of the 
stablecoin 
arrangement 

Establishing rules 
governing the 
stablecoin 
arrangements 
Issuing,  creating  and 
destroying stablecoins 

1/Issuing, creating and 
destroying stablecoins 

2/Managing reserve 
assets 

3/Providing 
custody/trust services 
for reserve assets 

Transfer of coins 

Operating the 
infrastructure and 
validating transactions 

Interaction with users 

Wallet 
provisions; 
Exchange  and  trading 
platforms 

Vulnerabilities 

Measures aimed at mitigating the risks 
under option 1 

for  users  due 

interest; 
Fraud  or  conflict  of 
Uncertainty 
to 
unclear  definition  of  role  and 
the  SC 
responsibilities  within 
arrangement; 
Inadequate 
governance framework. 

Governance arrangements; Obligation on 
the  reserve  assets;  Requirements  in  case 
insolvency/wind-down;  Continuous 
of 
contingency 
risk 
preparedness and continuity planning.    

assessments, 

1/  Inability  to  meet  redemptions; 
for  algorithmic  SC,  errors  in  the 
algorithm that impact value 

liquidity 
2/  Price  decrease  or 
issues  for  reserve  assets;  lack  of 
transparency/change 
the 
composition  of  the  reserve;  fraud 
or mismanagement of the reserve; 
investment in illiquid assets 

in 

requirements;  For 
1/Capital/liquidity 
GSC,  reserve invested in safe and liquid 
assets  and  flow  tools  to  limit  sudden 
outflows  from  the  SC  arrangement;  For 
the 
algorithmic  SCs,  disclosure  of 
algorithm.    

Capital/liquidity 

2/ 
requirements; 
periodic auditing of the assets/funds held 
in the reserve; periodic disclosure.  

failure, 

3/  Custodian 
fraud; 
liquidity  issues;  lack  of  clarity 
regarding  rights  to  reserve  assets 
in particular 

SC/GSC ledger compromised due 
to  design  flaw,  operational/cyber 
incident;  uncertainty  on 
the 
revocability of payments or due to 
failure of multiple validator nodes 
Disruption  of  a  wallet  (theft  or 
operational/cyber incident) 

Withdrawal  of  liquidity  provision 
by  or  disruption  of  a  trading 
platform 

the  reserve  assets 
3/  Obligation  on 
(segregation/custody 
requirements); 
disclosure requirements on SC issuers       

Assessment  of  how  the  technology  and 
transferring  coins  provide 
for 
rules 
finality; 
assurance 
of 
Complaints 
redress 
procedures 
Those  CASPs  would  be  regulated  in  the 
same way as described in sections 5.2.1 

settlement 
and 

handling 

SC: Stablecoin, GSC: Global Stablecoins, CASP: crypto-asset service providers 

96