[Newsletter n. 16]
On 19 March 2019 Consob published a Call for Evidence on Initial Coin Offerings and Crypto-Assets Exchanges (click here for the Italian version or the English version) to elaborate a regulatory framework where the rapidly expanding phenomenon of initial coin offerings (ICOs) can grow without jeopardizing the interest of the investors.
Pending the establishment of a shared legal qualification of crypto-assets at European level, with particular reference to their qualification as securities, Consob’s Call for Evidence follows other initiatives taken by the regulators in other jurisdictions, such as France, UK and Malta. In light of the spreading of ICOs launched in Italy and the subsequent positions taken by the Regulator – pursuant to which crypto-assets are deemed as financial products with the consequent application of the public offering regime (see our Newsflashes No. 54 and 58 – Consob has felt the need to set up an organic regulatory framework on crypto-assets in order to protect the investors. Indeed, the proposal is marked by the principles of transparency, fairness, correctness, disclosure, diligence for the benefit of the investor.
The Call for Evidence consists broadly of the following sections:
1. Introduction
This section gives a synthetic representation of the growing phenomenon of ICOs.
The Call confirms analogies of ICOs with IPOs, such as the goal of raising capital from a potentially indeterminate number of investors, but at the same time highlights the following distinctive features:
– the use of innovative technologies as blockchain (which allows to disintermediate the typical capital markets infrastructure),
– the settlement of transactions made in crypto-currencies instead of fiat currency,
– the public promotion made through the web, thus allowing to overcome territorial constraints,
– the publication of a so called white-paper instead of a prospectus.
2. Definitions
Consob submits to the comments of the market the possibility to typify crypto-assets other than financial instruments as an independent category. Indeed, Consob considers “viable to define ‘crypto-assets’ in such a way as to focus on their nature of digital recordings representing rights related to investments in entrepreneurial projects.”
In the Regulator’s view, the identification of an ad-hoc category would limit the burden – on both the market and the Authority – of conducting case-by-case analyses to establish the presence or absence of the typical features of financial investment. Furthermore, the provision of special regulations on crypto-assets would “avoid the promoters of these schemes (issuer/offerer/proponent) to be subjected to the applicable national legislation (on prospectuses and remote marketing)”.
3. Crypto-Assets Offering Platforms – primary market
According to the Call, ICOs shall take place on a “crypto-asset offering platform”, defined as an “online platform exclusively aimed at the promotion and conduct of offerings of newly-issued crypto-assets”.
Consob recognises that the entity best placed to perform such function are crowdfunding portal managers authorised pursuant to Article 50-quinquies of the Italian Financial Act or other entities meeting the same subjective requirements. In order to carry out such activity, the eligible entity should implement information, procedural, organizational and control arrangements, inform Consob and keep it separate from that connected to crowdfunding offerings.
Although public interest is more efficiently protected thanks to the use of platforms subject to rules of conduct and organizational requirements as above, Consob is aware of the risk of crystallising the phenomenon in constant evolution into a rigid pre-determined regime. Therefore, the Regulator suggests to adopt an opt-in mechanism that allows the promoter of the initiative (issuer/offeror/proposer) to choose whether to use a “regulated” platform or not, under the condition that in the latter case it should be made clear to the investors that the offer is promoted outside a regulated facility thus deprived of the protection granted by the above requirements.
4. Crypto-assets trading system – secondary market
Further to an overview of the trading platforms, the business and operational models used in the market, Consob proposes a definition of “crypto-asset trading system” as “a set of rules and automated facilities which allow to collect and disseminate proposals for crypto-asset trading and to implement them, including via Distributed Ledger Technology”.
While on the one hand it is certainly advisable to require appropriate forms of control and regulation for such trading systems, on the other hand the Regulator points out the need not to hinder innovation of the financial industry and to attract secondary markets of crypto-assets into the regulated area. In light of the above, the proposed regulatory solution is a further opt-in mechanism leaving it to the trading platforms’ managers to choose whether to submit or not their platform to applicable regulations. Basically, this would result in a double opt-in regime (to choose a regulated or not regulated crypto-asset offering platform and to choose a regulated or not regulated crypto-asset trading platform) with an incentive to opt-in based on the increased reliability, protection and guarantees that would label a regulated environment in the eyes final investor.
Finally, an interesting point of attention for market players concerns the requirement with specific rules and procedures for participant access and identification, which brings about the exclusion of permissionless DLT as eligible technology to manage such trading.
During the period of the consultation Consob intends to hold a public hearing on date and place to be announced.
Comments to the Call for Evidence may be submitted not later than 19 May 2019.
If you wish to discuss the Call for Evidence or you are considering the possibility to submit a joint response or simply need assistance in submitting your comment to the Call, please do not hesitate to contact us.
Contacts:
Vito Vittore
Partner
Elena Pagnoni
Partner
Roberta Talone
Associate
