FMLC responds on crypto taxonomy

FMLC has responded to the European Commission’s consultation on classification of crypto assets. The detailed response notes:

• the current parallel classification of cryptoassets in the UK on the one hand and the EU on the other. The UK uses its categories of (1) exchange tokens, (2) security tokens and (3) utility tokens, to which the FCA added (4) e-money tokens. ESMA proposed using (1) payment-type, (2) investment-type and (3) utility-type cryptoassets. FMLC had already said this does not take into account assets which cannot neatly fit in any of these categories, thereby excluding them. It stresses it is important to reconsider the basis of any attempted classification;
• it is very important to precisely identify the cryptoasset so as to be able to define the regulatory perimeter – and also important to assess whether the asset is “constitutive” of rights or “evidentiary” – and notes that sometimes there will just be a claim against a permissioning or validating entity, and not a separate cryptoasset at all. FMLC says that failing to work through this can cause significant legal uncertainty, as can failure to understand how binding rules of a particular set of DLT implementation work.  It offers a set of 6 characteristics that can differentiate cryptoassets – function, means of production, means of holding and transfer, relationship with fiat money, level of digitalisation,  and relationship with issuer, and explains why basis an analysis only on function must be wrong;
• on the questions of cryptoassets that are currently covered by EU legislation, FMLC notes the clarification that “security token” means cryptoassets issued on a DLT which are MiFID 2 “transferable securities” or other financial instruments – and therefore activities relating to them would also fall within MiFID 2, the CSDR and EMIR. FMLC says it has been asked to consider the difference between legislation that regulates the markets in general (like MiFID 2 and the Prospectus Regulation) as opposed to legislation regulating infrastructure (like EMIR). Only the first type is technology neutral – the second type cannot easily be applied in a DLT context so new legislation is going to be required. Following on from this is the need to consider which properties of DLT need to be regulated from a market infrastructure perspective – which must be assessed according to the risks the technology presents;
• how an approach addressing permissioned, centralised solutions would work in practice and what the different concepts encompass;
• the dangers of the current situation where each Member State can assess whether they consider a security token to be a MiFID 2 financial instrument versus the potential knock on effects of trying to clarify the meaning and interpretation of “transferable securities”;
• the complexities that may arise in trying to apply the CSDR and Settlement Finality Directive in a cryptoasset context; and
• how the definition of e-money token must be clarified.