Europe possesses one of the most robust markets for digital assets. Multiple countries have established bespoke rules to facilitate, or at least regulate, digital asset offerings. These may be securities or utilities or both. Gibraltar, Malta, Switzerland were quick out of the gate with rules. France recently passed legislation enabling utility token offerings. The UK provided clarity on their approach to “crypto-assets” just last month.
But while outsiders may view the European Union as a single market, beholden to an aspiring capital markets union, that is not really the case. Financial regulations are different in different member countries. Not to mention Switzerland which is outside the EU. The European Commission, as well as the Parliament, has discussed further harmonization but it remains a work in progress.
Bitton recently forwarded a comment on the market clarifying the regulatory challenges.
“If we look at exchanges operating, for instance, on an Estonian license, it’s a common misconception that said license allows them to engage with the wider European market,” said Bitton. “There is a great deal of confusion around this on the part of practitioners advising banks, but the fact is that they may be in breach of regulations.”
Bitton noted that there is no specific European legislation that deals with cryptocurrency, but there is a financial service framework.
“In the vast majority of cases, crypto businesses will require a financial license to operate legally. For those that do not necessarily wish to acquire one, however, there are ways to legally circumvent the need for a license by careful restructuring,” he explained.
Crowdfund Insider asked Bitton to confirm that a digital asset exchange must receive a license in each European country in which it intends to operate. Bitton said that there are some nation-specific rules in which cryptocurrency businesses must acquire to operate in these regions.
“In jurisdictions where these do not exist, the challenge is for businesses to determine whether they’re violating already established financial laws – if the operations do not fall into the scope of the legislation, they can proceed in an unregulated fashion,” stated Bitton. “As for e-money licenses, there is some deviation from the regulations that govern exchanges dealing in fiat and cryptocurrency, but recent changes to European law now also require strict AML compliance. In many cases, even crypto-only businesses require some form of license to begin operating in a new jurisdiction.”
Asked as to why there have been so few, if any, enforcement actions against exchanges that operate transnationally in Europe. Bitton had this to say:
“I believe the answer lies in the question – regulation is not yet in lockstep across nations. The fast pace of the cryptocurrency space leaves government bodies playing catch up, so it’s difficult for an EU body to take action as of yet. That said, it seems that the pieces are slowly coming together to create a standard for EU nations to converge upon, so it’s possible that we see some form of action in the coming years.”
France, an EU member country that has approved legislation to enable cryptocurrency issuers to operate in a regulated and compliant manner may guide the rest of Europe, said Bitton.
“I think the key takeaway from the Loi Pacte where blockchain businesses are concerned is the fact that it makes access to banking easier for these entities. In that regard, additional bridges between cryptocurrency and the incumbent financial system do require a more comprehensive regulatory framework to manage, which will undoubtedly influence other governments’ actions in following suit.”
CI asked Bitton about the UK Financial Conduct Authority guidance that was recently provided for “crypto-assets.”
“The classification of utility tokens has been at the forefront of regulatory discussions for some time now. The FCA’s guidance stands at odds with that of the SEC, and exempts many projects from the requirement to adhere to securities regulations,” Bitton noted. “Reactions to the classification have been contentious.”
Bitton said that he personally sees the UK guidance as a step in the right direction.
“… they have clearly distinguished between exchange tokens (Bitcoin, Litecoin, Ethereum), utility tokens and security tokens. I have no doubt that the loose taxonomy proposed at the moment will change over time, but as it stands, they’ve laid the foundations for a more educated legal approach to blockchain-issued tokens.”
So what does Bitton’s counsel for aspiring digital asset issuers or entities seeking to operate a digital asset exchange?
“As a lawyer, I’ve dealt with a wide range of companies in this industry. My advice would be to seek out expert counsel on these matters – there’s no ‘one-size-fits-all’ approach to solving a businesses’ challenges, particularly in such an unregulated space. A professional having extensive experience in the arena will be able to advise on regulations and the most effective solutions to overcoming obstacles.”