[Newsletter n. 12]

On 19 October 2018, the Securities and Markets Stakeholder Group (SMSG) – the group of experts with the task to facilitate consultation between ESMA, its Board of Supervisors and stakeholders and to provide technical advice on policy development of ESMA – sent a Report on Initial Coin Offerings and Crypto-Assets to ESMA to suggest possible steps that the European authority may take to tackle risks arising from the growing use of crypto-assets.

This Report is an important step towards an efficient regulatory framework, which is considered key for the orderly growth of block-chain based innovation and the creation of a well-functioning market. In this respect, one of the first (and major) obstacle to overcome is legal clarity when it comes to classify the new phenomenon. To this end, the Report focuses on the definition and classification of crypto assets.

Crypto asset is used as a generic term to include virtual currencies, cryptocurrencies, virtual assets and digital tokens:

– virtual currency is defined as a “digital representation of value neither issued by central bank nor public authority, rarely attached to a fiat currency”. Nevertheless, those assets are accepted by a large number of natural or legal persons as a means of payment and can be transferred, stored or traded electronically;

– cryptocurrency is defined as “a virtual currency secured using cryptography” (generally recorded on Distributed Ledger Technology database);

– token is a broad term that encompasses many virtual assets. While an account-based system relies on the ability to verify the identity of the owner, a token-based system relies on the ability to verify the validity of the token itself. Tokens are secured by cryptographic keys and are bearer assets.


In the absence of a universal classification of crypto assets, the SMSG defines tokens by their economic function, following the approach used by FINMA (the Swiss Financial Market Supervisory Authority). As a result they can be  divided in:

a)  payment tokens, which are virtual currencies used as means of payment for purchases, pursuant to which the holder has no claim on issuer (the most prominent example is Bitcoin);

b) utility tokens, which entitle the holder to a specific service or application but are not accepted as means of payment outside such applications;

c) asset tokens,which represent a claim (debt or equity) on the issuer, for instance a share on the earnings or capital flows.
In practice, it is also possible to see hybrid tokens (which have features of different types) and donation-based tokens (which do not represent any entitlement).


On the basis of such classification and taking into account the uncertainty about the exact scope of the above concepts, the SMSG addresses the question on whether and how asset tokens and initial coin offerings (ICO) should be regulated. Accordingly, the Report attempts to determine whether asset tokens are financial instruments for the purposes of MiFID II and Market Abuse Regulation (MAR), and if they are transferable securities for the purposes of the Prospectus Regulation (PD).

While payment and utility tokens seemed to remain out of scope of the financial regulation, except when they are treated and traded as investment objects, the most ambiguous crypto assets are “asset tokens” which therefore require to be classified at various levels.
The first distinction concerns the entitlement, whether financial or in kind. Secondly, the classification depends on the transferability of the tokens.

(1)    If they give right to a financial entitlement, according to the SMSG they may have the features of bonds (if the entitlement is a predetermined cash flow) or shares (if the entitlement is a share of profit). If those tokens are transferable, they have certain characteristics of transferable securities under MiFID and PD. In order to clarify this point, which leads to significant consequences also in terms of secondary markets that should be treated as MTF or OTF, the SMSG urges ESMA to provide clarity as to whether the organization of a secondary market for such asset tokens can be considered as a “MTF” or “OTF”.

(2)    If they give right to an entitlement in kind, an additional distinction is necessary as regards any decision power granted to the holder.

2.1 Tokens with decision power can be assimilated to shares, in particular if they are also transferable thus being potentially subject to MiFID II and PD.

2.2 Tokens without decision power:

2.2.1    if they are not transferable, they can be seen as prepaid asset and do not fall under the financial regulation.

2.2.2   if they are transferable and:

a) they are structured as assed-linked notes, they should be subject to MiFID II and PD;

b) they are structured as derivatives :

(i) if the underlining asset is not a commodity, they cannot be related to any category of Annex I C of MIFID II,

(ii) if the underlining asset  is a commodity, they can be considered as financial instruments (Annex I, Section C, 5) if they are settled in cash, or as derivative products (Annex I, Section C, 6) if they are physically settled and tradable on a regulated market,  MTF or OTF.

In light of the above analysis, the SMSG is of the view that ESMA should provide level 3 guidelines on:

– the interpretation of the MiFID definition of “transferable securities” and clarify whether transferable asset tokens in certain situations are subject to MiFID II and the Prospectus Regulation;

– the interpretation of the MiFID definition of “commodities”, since this concept is crucial to determine whether an asset token is a MiFID financial instrument or not;

– the interpretation of the MTF and OTF concepts, clarifying whether the organization of a secondary market in asset tokens in certain situations is indeed an MTF or an OTF;

– whether asset tokens are MiFID financial instruments if the issuers organize a secondary market;

– the fact that when issuers of asset tokens are to be considered to organize an MTF or an OTF in accordance with the above, the MAR applies to such MTFs and OTFs;

– the fact that in all situations in which an asset token is to be considered a MiFID financial instrument, persons giving investment advice on those asset tokens or executing orders in those asset tokens, are to be considered investment firms, which should have a licence as such, unless they qualify for an exemption under MiFID II.

Finally, the Report provides some details about the current regulatory scenario in EU and draws a map of the initiatives adopted to date at international level by 36 jurisdictions to regulate initial coin offerings (ICO) and cryptocurrencies. It emerges from the survey that not all countries have taken the same approach towards cryptocurrencies, most of all have taken a nuanced approach or not expressed a definite approach. In any case no jurisdiction appears to have imposed severe limitations or outright bans for ICOs and crypto assets even if all securities authorities published warnings to the public about the risks that concern the ICO and crypto assets.

The most proactive countries turned out to be Malta, Switzerland, Lithuania, Gibraltar, Jersey and Isle of Man, while other 15 countries – among which Germany, Ireland, Luxembourg, Netherlands, UK, Guernsey – adopted a measured approach consisting in analyzing proposal case by case on the top of existing regulation of their territory and of Europe. The remaining countries, including Italy, do not provide clear information about crypto assets.


Please do not hesitate to contact us should you need any clarification on these and other FinTech related matter.


Vito Vittore

Elena Pagnoni

Roberta Talone