Almost everyone has heard of Bitcoin: a cryptocurrency that has existed since 2009. In addition to Bitcoin, there are also various other cryptocurrencies that, for example, specifically target certain markets (such as meals, gambling with sports) or certain countries. However, cryptocurrencies are often unregulated and their value is difficult to determine. Last September, the European Commission published a proposal for a regulation on cryptocurrencies. This 180-page proposal is a good first step towards greater clarity.
Regulators have repeatedly warned about the risks of cryptocurrencies. These digital ‘coins’ are often still in a legal gray area. As a result, there are many risks that private investors are not aware of. However, the EU Commission is trying to change that. It is good to reflect on the European Commission’s thoughts on this point.
Field of application
The regulation applies to issuers (a company that issues crypto) of cryptocurrencies and to individuals who provide crypto services. The latter could include, for example, platforms that convert cryptocurrencies into ‘real’ money and vice versa. However, not all cryptocurrencies fall under this new regulation. Certain cryptocurrencies already regulated by other legislation fall in principle outside the scope of the new regulation. This includes currencies that are indistinguishable from stocks.
After the regulation comes into force, issuers of cryptocurrencies must be licensed. Issuers of cryptos do not need to be licensed if there is a small supply of cryptocurrencies or if they are only offered to professional investors. Its publisher must also prepare a white paper. A white paper can be compared to a prospectus. This document contains information about the publisher and what is offered. The purpose of this prospectus is to give investors more insight into where they are putting their money.
While issuers of small amounts of cryptocurrencies do not need a license, we see that providers of large cryptos, so-called significant tokens, need to take additional conditions into account. A significant token exists if it meets a number of criteria. For example, the additional conditions for significant tokens translate to holding additional buffers. The significant tokens are subject to a stricter regime because, due to their large scale, they pose a greater risk to financial stability.
Provision of cryptocurrency services
In addition to offering cryptos, the cryptocurrency service providers are also regulated under the new regulation. Cryptocurrency services include, for example, consulting or exchanging cryptocurrencies for fiat money. An entity can only offer these services if it is licensed as a crypto service provider. These providers are obliged to act in the interests of their customers. In addition, they are supposed to warn their customers about the risks associated with cryptocurrencies.
Cryptocurrency issuers should disclose inside information directly related to them as soon as possible
The EU Commission is also thinking about market abuse. The provisions of the Regulation on this matter relate to actions taken by persons with respect to cryptocurrencies listed on a licensed trading platform. Cryptocurrency issuers should disclose inside information directly related to them as soon as possible. Additionally, no one may use insider knowledge to acquire or dispose of these cryptocurrencies. It is therefore not permitted to trade with insider knowledge nor to share insider knowledge. For cryptos, it remains to be seen what exactly will fall under this. Unlike listed companies, many cryptos do not have any underlying activity (this does not apply to all cryptocurrency developers). Finally, there will also be provisions on market manipulation. For example, no one may give false or misleading signals regarding the price of a crypto coin.
Cryptocurrencies are in the eyes of (European) legislators. Given its popularity, especially among consumers, it seems obvious if there will be more concrete legislation to monitor the cryptos. Currently, it is very easy to buy and sell cryptocurrencies and the transaction costs that a consumer has to pay are relatively low. Supervision and regulation means that the providers and cryptocurrency companies have to deal with obligations – and thus costs. It seems realistic that in the future it will become less easy – and possibly more expensive – to invest in cryptocurrencies. This is independent of the question of whether it is even desirable to allow cryptocurrency trading. Several jurisdictions have already introduced bans, including China, for example. We are looking with interest at the future of cryptocurrencies and crypto trading!
Authors: Caspar van der Winden and Arnout Rodewijk, both lawyers at HVG Law LPP
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