In mid-January, both the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) published reports with advice regarding crypto tokens. In doing so, the two supervisory authorities were responding to a request by the Commission of the European Union (EU) for the EBA and ESMA to review the current state of EU regulation.

Recently, the EBA and ESMA have issued various statements, some jointly, regarding the emergence of crypto tokens. At the start of 2018, the European Supervisory Authorities (ESAs), which also includes the European Insurance and Occupational Pensions Authority (EIOPA), issued a joint warning to consumers against buying payment tokens without careful consideration. In a survey in the summer of 2018, ESMA asked the national supervisory authorities, including BaFin, how they qualify crypto tokens. Other ESA investigations have looked into the various forms of initial coin offerings (ICOs) and their risks.

Risks for consumers, market integrity and competition

In its report published in mid-January, the EBA came to the conclusion that crypto tokens currently do not pose a risk to European financial stability due to the relatively low level of activity. Nonetheless, the EBA also warns of the risks crypto tokens pose for consumers.

In ESMA’s view, in particular investors operating where crypto tokens are not yet subject to any regulation are exposed to considerable risks. The authority therefore advocates establishing anti-money laundering regulations and appropriate disclosure requirements at EU level.

The EBA has similar aims: it has suggested that the EU Commission conduct a comprehensive cost/benefit analysis regarding an EU regime for crypto tokens. The EBA believes that national regulations at the level of individual member states may risk preventing fair competition on a level playing field.

Warning from BaFin and the Federal Criminal Police Office

For the past six years, BaFin’s general administrative practice has been to qualify payment tokens such as bitcoin as units of account and therefore as financial instruments in accordance with the German Banking Act (Kreditwesengesetz – KWG) for supervisory purposes. In this matter too, BaFin takes its duty to protect the collective interests of consumers very seriously. In December, it published a detailed article in BaFinJournal on illegal investment schemes (only available in German) in which it drew attention to this matter, and in a joint warning issued together with the Federal Criminal Police Office (Bundeskriminalamt – BKA), BaFin highlighted the risks of payment tokens, among other things (see December 2018 edition of BaFinJournal – only available in German).

Whilst European legislators review the proposals put forward by the EBA and ESMA, the European supervisory authorities are continuing their work in this area. The EBA intends, among other things, to complement work done at the global level as regards the prudential treatment of risks arising from crypto tokens, to develop a template for monitoring crypto tokens for national supervisory authorities and to investigate whether consumer protection is being given sufficient consideration. ESMA has stated that it intends to continue actively monitoring the market.