Quick Take – more than just licensing questions

The European Securities and Markets Authority (ESMA) published a report on the licensing of FinTech business models on July 12, 2019 (the ESMA Report). Its sister European Supervisory Authority, the European Banking Authority (EBA) followed suit with its own publication1 on July 18, 2019 (the EBA Report).

Despite their names, the ESMA and EBA Reports do not only deal with licensing matters, but also consider whether existing financial markets regulation should be modified or supplemented by special rules designed for innovative financial technology. This is the most definitive indication of the direction the EBA and ESMA may take non-legislative rulemaking in the form of guidelines to further reduce regulatory fragmentation between the supervisory approaches taken by national competent authorities (NCAs) or how they might extend the regulatory perimeter where deemed necessary. Therefore, the ESMA and EBA Reports offer a valuable outlook on potential future financial market regulation and this Client Alert is likely to be of interest to market participants regardless of the degree of FinTech in their business models or those of various service providers.


The existing legal frameworks such as MiFID22, MiFIR3, PSD24, CSDR5, the Prospectus Regulation6, the E-Money Directive, the Mortgage Credit Directive7, CRD IV8/CRR9 and other legislative acts (together, the EU Financial Markets Regulations) do not explicitly refer to FinTech services and products such as crypto-assets and distributed ledger technology (DLT). In addition, the EU co-legislators did not have such technologies in mind when drafting the EU Financial Markets Regulations. This leads to the question whether the existing EU Financial Markets Regulations provide an adequate regulatory framework for FinTechs. For example, do the EU Financial Markets Regulations apply to products such as crypto-assets at all? If they do not apply, should the European co-legislators introduce new rules to close any gaps that may exist in the current EU Financial Markets Regulations? If they do apply, are the current rules proportionate or do they impose an undue burden on the development of innovative technologies? In order to receive answers to these and other questions, ESMA conducted two surveys in January 2018 and in January 2019 that questioned the NCAs of the member states of the EU (Member States).

Crypto-assets as financial instruments?

According to the NCAs, the qualification of crypto-assets as financial instruments10 (and as transferable securities11) under MiFID II is one of the most pressing questions with respect to the regulation of FinTechs. This is because the application of many regulatory requirements to a FinTech's business model depends on such a classification, including, for example, the application of license requirements under MiFID II, prospectus requirements under the Prospectus Directive, prohibitions of insider dealing and market abuse under the MAR and safekeeping requirements under the CSDR.

ESMA refers to its previous advice published in January 2019 on initial coin offerings and crypto-assets (Crypto-Assets Advice)12 in which ESMA concluded that the majority of NCAs view investment-type crypto-assets (i.e. crypto-assets with profit rights attached) and hybrid types including investment-type crypto-assets as financial instruments. Pure payment-type crypto assets (crypto currencies) and utility-type crypto-assets (i.e. crypto-assets that can be used to access or buy specific services or products) were not regarded as financial instruments or transferable securities. This assessment cements ESMA and the other European Supervisory Authorities' approaches on how crypto-assets ought to be categorized from a supervisory perspective.

Exchanges for crypto assets

ESMA argues that marketplaces, on which crypto-assets that do qualify as financial instruments are traded, qualify as multilateral trading facilities (MTFs) under MiFID II. However, ESMA acknowledges that the MiFID II requirements for MTFs − such as licensing requirements, compliance requirements and capital requirements − may not be adequate with respect to marketplaces for crypto-assets. As a result, ESMA suggests that bespoke rules applicable to marketplaces for crypto-assets be introduced. Such new type of marketplaces may also take into account the financing need of smaller and medium sized enterprises. Existing as well as new operators of crypto-asset marketplaces may want to re-evaluate how they organize themselves and the types of crypto-assets they are active in so as to ensure they can optimize their regulatory treatment.

Prospectus requirements

ESMA also suggests that the existing prospectus requirements under the Prospectus Directive may not be adequate for the offering of crypto-assets. It therefore proposes to consider the introduction of a new type of prospectus.

Central securities depositories

ESMA also questions whether the current rules on central security depositories (CSDs) are suitable for crypto-currencies. It suggests that the application of authorization and post-trading rules to block-chain based CSD should be considered.

Cyber security and cloud outsourcing

ESMA further highlights that NCAs view cyber security and cloud outsourcing as a further issue to be addressed. In this context, ESMA refers to two advices13 provided by the ESAs on this matter.

Prioritizing proportionality and flexibility in the current EU Financial Market Regulations

The EBA Report provides an update on how NCAs apply proportionality and a risk-based approach when supervising smaller payment institutions and granting permitted exemptions in PSD 2 to providers of account information services offering solely that activity. The EBA Report does note that practices amongst NCAs to attaching conditions, limitations and/or restrictions to license authorizations vary widely and indicates that it may undertake further work to ensure a "fully level playing field" in this area, including amending Guidelines on the common methodologies for license applications. The EBA Report rightly points out that EU Financial Markets Regulations provide no express provisions or guidance on how and when NCAs, or the ECB-SSM in the Banking Union, should attach such powers to authorizations (unless EU law explicitly excludes it). Rather the rules that exist on the use of such powers stem from diverging national provisions, as supplemented by the EBA's common methodology on license applications, and, in the Banking Union, by guidelines from the ECB-SSM. The EBA notes that it may revise those EU-wide applicable guidelines further, thus prompting the ECB-SSM to do the same for general and FinTech credit institution license applications. It remains to be seen whether ESMA would take similar steps in relation to MiFID2/MiFIR and other activities within its regulatory mandate.

Harmonizing crowdfunding

The EBA Report states that regulatory arbitrage will be minimized by the adoption of a harmonized EU regime on crowdfunding service operators that lays down mandatory authorization requirements and rules of conduct for crowdfunding service providers operating cross-border.14 While the current proposal addresses only cross-border service providers, the EBA Report suggests that a harmonized EU regime applicable to all crowdfunding operators, cross-border and domestic alike, would ensure uniform rules on consumer protection and on financial crime and money laundering prevention.


1 The "Report on Fintech Regulatory Perimeter, Regulatory Status and Authorisation Approaches In Relation To Fintech Activities" available here.

2 Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments, OJ L 173, 12.6.2014, p. 349-496.

3 Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012, OJ L 173, 12.6.2014, p. 84–148.

4 Directive (EU) 2015/2366 of the European Parliament and of the Council on payment services in the internal market, of 25 November 2015, OJ L 337, p. 35-127.

5 Regulation (EU) No 909/2014 of the European Parliament and of the Council of 23 July 2014 on improving securities settlement in the European Union and on central securities depositories and amending Directives 98/26/EC and 2014/65/EU and Regulation (EU) No 236/2012, OJ L 257, 28.8.2014, p. 1–72.

6 Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, OJ L 168, 30.6.2017.

7 Directive 2014/17/EU of the European Parliament and of the Council of 4 February 2014 on credit agreements for consumers relating to residential immovable property and amending Directives 2008/48/EC and 2013/36/EU and Regulation (EU) No 1093/2010 (Text with EEA relevance)

8 Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (Text with EEA relevance), as amended.

9 Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (Text with EEA relevance), as amended.

10 According to Art. 4 para. 1 no. 15 of MiFID II, the instruments set out in Section C of Annex I of MiFID II qualify as financial instruments (transferable securities, money market instruments, units in collective investment undertakings and certain types of derivatives).

11 According to Art. 4 para. 1 no. 44 of MiFID II, transferable securities are shares, bonds and securitised derivatives.

12 See our coverage on ESMA and the EBA's supervisory policy statements available here.

13 ESA, Joint Advice of the European Supervisory Authorities, To the European Commission on the need for legislative improvements relating to ICT risk management requirements in the EU financial sector (JC 2019 26), dated April 10, 2019; ESA, Joint Advice of the European Supervisory Authorities, To the European Commission on the costs and benefits of developing a coherent cyber resilience testing framework for significant market participants and infrastructures within the whole EU financial sector (JC 2019 25), dated April 10, 2019.

14 European Commission, Proposal for a regulation of the European Parliament and of the Council on European crowdfunding service providers (ECSP) for business (COM(2018) 113 final).

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