Blockchain for Europe responds to the European Commission consultation on an EU framework for crypto-assets
On 19 March, Blockchain for Europe (BC4EU) submitted its response to the European Commission consultation on an EU framework on crypto-assets. BC4EU welcomes the Commission’s initiative to gather feedback on crypto-assets as a first step towards providing greater clarity for the industry and consumers. We believe that the development of policies in this area will be a critical component of European success in the coming decades. Therefore, please find below the outline of our position. We hope that the key concepts therein will be helping policymakers and other stakeholders in the global blockchain ecosystem conceptualize several of the important legal and regulatory analytical issues.
- - Blockchain is a database technology that enables a new layer of trust in the digital realm.
- - A harmonized approach at EU level will introduce legal certainty for the industry and consumers.
- - Any crypto-assets regulation should be based on the activities performed by the actors involved and be proportionate to the risks that they may create.
- - Any classification of crypto-assets should be technology neutral and based on their functions and features.
- - All stakeholders should act with integrity, transparency and in a responsible manner.
A binding EU framework
BC4EU believes that the classification of crypto-assets should be done at EU level. This will avoid a fragmented approach across the EU caused by different national regimes. Such a framework should ideally be in the form of a Regulation rather than a Directive, in order to ensure full harmonisation and prevent “gold plating” at national level. We believe that legal certainty is a success factor for businesses to innovate, scale-up and add value. An EU framework will ensure the needed legal certainty and a level playing field for both businesses operating in the EU. Otherwise, where regulatory uncertainty persists, businesses necessarily begin to look elsewhere for needed funding, talent, and support. This will also provide greater legal certainty for consumers who want to use crypto-assets.
Classification of crypto-assets
BC4EU believes that Europe will benefit from a single harmonised EU-level approach to classification of crypto-assets and the obligations arising thereafter. Such an approach should be technology neutral, future-proof and principles-based. Any classification of crypto-assets should, moreover, take into account the functions, features and rights represented by a given crypto-asset and regulate it according to the risks associated with it and the actors involved. In this regard, we welcome the classifications provided by the FCA, FINMA and ESMA’s Securities and Markets Stakeholder Group. As such, we support the sub-classification of crypto-assets into “security tokens”, “payment tokens” and “utility tokens”. Nevertheless, given the potential for tokens to change over time or capture multiple rights, we see the need for an assessment of crypto-assets on a case-by-case basis. We also support the technology neutral approach taken by Liechtenstein and its “Token Container Model”. Neither the Liechtenstein Blockchain Act nor the FCA and FINMA’s guidance turn on the fact that particular business models rely on distributed ledger technology (DLT). Rather, they all signal that tokens should be regulated based on the purpose they are used for.
We do not see the need for regulating Blockchain technology itself, in the same way as traditional database software is not regulated. Blockchain databases are widely considered superior to traditional database structures because of their transparency, tamper-resistance and auditability. These benefits apply to both centralized and decentralized implementations and allow an increased level of trust in information stored in the database by solving the so-called “double-spend” problem. In other words, digital assets (including information) recorded on a blockchain database retain their uniqueness and cannot be duplicated, which allows all participants to proceed with communications and transactions in those items without fear of improper duplication or counterfeiting.
Scope of a potential EU framework on crypto-assets
Any regulation should occur in a technology neutral fashion with appropriate regard for the specific activity of particular groups of actors. Two examples illustrate this approach. First, the General Data Protection Regulation does not differentiate between technologies with respect to its requirements. It does, however, differentiate with regard to actors. Second, financial services regulation recognizes that different activities require different regulation, even though all of the activities are in connection with the provision of financial services and transactions.
The same ideas can apply to different types of Blockchain. Centralized, permissioned Blockchains logically follow these principles because they are controlled by one or more parties and participants are permissioned by these central controllers. Decentralized, permissionless Blockchains do not have central controllers but participants still engage in a variety of activities utilizing the Blockchain. In both situations, the specific activities of different actors need to be scrutinized in order to determine appropriate regulation, both for the overall industry involved and for the particular activity.
A bespoke regime for crypto-assets not currently covered by EU financial services regulation
We are of the view that a bespoke regime would introduce more legal certainty and a level playing field across the EU for many businesses who actively deal with crypto-assets that are not currently covered by EU financial services legislation. While existing EU rules on consumer protection and e-commerce provide safeguards for consumers with regards to the information that needs to be provided by businesses in B2C situations, a bespoke regime would be able to address specific aspects related to DLT and crypto service providers. If so, a bespoke regime needs to be principles-based and introduce requirements which are proportionate to the risks that different actors generate. Finally, it is important to perform a thorough assessment of the ecosystem and take into account the fact that the ecosystem is still evolving rapidly, and thus regulatory flexibility is key for a future-proof regime. Notwithstanding the above, providing clarity by guidance is desirable over strict regimes as overprotection is likely to inhibit innovation and will be difficult to enforce.
Ensuring integrity, responsibility and transparency
We acknowledge the importance for all actors operating on Blockchain databases to behave with an appropriate level of integrity and responsibility. These principles will remain vital as we move into the purely digital world. One key way to seek to ensure integrity and responsibility is through transparency. Therefore, policy and regulation should leverage rather than inhibit Blockchain’s ability to provide transparency to all participants.
In conclusion, BC4EU supports the Commission’s recognition of Blockchain as a transformative technology and welcomes the consultation as a first step towards a common approach on crypto-assets. While designing any potential initiatives in this area, we stress the importance of technology neutrality, assessment of existing rules before creating new ones and assessing crypto-assets on a case-by-case basis in a manner which is proportionate to the risks produced by the actors and activities involved. Most importantly, we welcome a harmonised approach towards the classification of crypto-assets which takes into consideration their respective features and functions. We believe Blockchain will play a key role at many levels. Defining that role through the concepts outlined above will result in stronger, more useful policies which will place Europe in a leading position in digital innovation.