Where cryptocurrencies fall within EMIR and MiFID II has been an area of debate over the last few years. Specifically, with the popularity of Initial Coin Offerings (ICO) and bitcoin CFDs, crypto trading has widened significantly across retail and institutional brokers in the EU.
This has led to the FCA, AMF, CySEC and several other regulators publishing their view that derivatives on the product such as bitcoin CFDs, do fall under MiFID II’s definition of an investment product; thus falling under a firm’s corporate governance requirements.
In regards to EMIR and MiFIR reporting though, it is less clear how cryptos fit into the regulation (more on this problem). For EMIR, cryptocurrency CFDs are a derivative, and thus required to be reported. However, there is a debate over what asset class to report them as and there are no accepted ISO currency codes for bitcoin and other cryptocurrencies.
With MiFIR to be reportable, it needs to be a venue traded product or based on one. For bitcoin, the underlying cryptocurrency isn’t yet traded on an EU trading venue. However, there are derivatives that do exist on various regulated venues, but there are no underlying ISINs for bitcoin to report non-exchange traded bitcoin derivatives.
There are various workarounds that some brokers and banks are using for EMIR and MIFIR. Specifically, classifying cryptos as commodities with a fiat-based price in order to get around the ISO currency code problem. However, there is no formal regulatory guidance that these report formats are correct and won’t need to be cancelled out and rereported with proper data in the future.
ESMA seeks common crypto attributes
Despite the confusion around crypto regulation, the direction of regulators is moving toward setting standards for cryptocurrencies. Today, ESMA has published an Advice document on Initial Coin Offerings and Crypto Assets (link) .
The document includes an explanation of how crypto products could fall within current regulatory frameworks,and flags the gaps in the regulation. According to ESMA, a common EU-wide approach is needed to address the gaps and adapt existing rules to cover cryptocurrencies.
Data issues for MiFIR and EMIR
ESMA’s document includes explanations of how various cryptocurrency products fall under MiFID II. It also highlights existing gaps that need to be addressed and harmonised across the EU. [this repeats the above].
Two key gaps that affect EMIR and MiFIR are product definitions and identifiers. According to ESMA, there is a difference of opinion among national competent authorities (NCAs) over whether various crypto assets fall under the classification of equity or non-equity instruments. As such, there is no consistency among EU countries over whether MiFIR’s pre and post trade transparency rules are applicable.
Secondly, ESMA references the problem of fitting crypto products within existing Regulatory Technical Standards (RTS) that exist for MiFIR and EMIR reporting. ESMA explains that the existing ISO 6166 ISIN, ISO 4217 CFI and ISO currency codes haven’t been adapted to support crypto based products. As such, ESMA advises EU lawmakers to work together to create new standards to fit these products within the existing regulation.
Steven Maijoor, Chair of ESMA, summarises the current problem of regulation and cryptocurrencies as follows; “Our survey of NCAs highlighted that some crypto-assets may qualify as MiFID financial instruments, in which case the full set of EU financial rules would apply. However, because the existing rules were not designed with these instruments in mind, NCAs face challenges in interpreting the existing requirements and certain requirements are not adapted to the specific characteristics of crypto-assets.”
With ESMA addressing the gaps in their Advice document, EU lawmakers must now decide how they want to move forward. Specifically, how they can work together with NCAs to set new unified standards in order to apply existing financial rules to cryptocurrencies.