The European Securities and Markets Authority (ESMA) has indicated that it will start to examine every initial coin offering (ICO) to see whether it should be regulated. The move is part of a wider goal to put an end to regulatory ambiguity caused by a one-size-fits-all approach to regulation of cryptocurrency-related activities within the European Economic Area.
ICOs raise funds for startups by issuing tokens that are in effect promises of a future value of a product usually that does not yet exist. However, the accompanying warnings about the potential risk of investment loss may be falling on deaf ears. ICOs have become a source of worry for EU regulators, who now propose a more granular approach to examining ICOs in order to find out the best way to offer regulatory guidance.
Speaking at a sitting of the EU Parliament Economic Affairs Committee, Steven Maijoor, chair of the European Securities and Markets Authority (ESMA) stated:
Some of these ICOs are like a financial instrument. Once it is a financial instrument it comes under a whole regulatory framework,
Maijoor also said that ESMA is examining how ICOs fit into existing regulation and how they affect competition in the wider capital raising sector. According to a number of critics, ICOs are yet to display their viability or showcase what extra benefits they bring compared with traditional capital raising.
In the US, the Securities and Exchange Commission Chair Jay Clayton said in February 2018 that he believes most sales of new tokens should be considered to be securities sales. Thus far however, the SEC has refused to explicitly name which coins are securities and which coins are utilities.
This ambiguity in classification creates a loophole that absolves the crypto firms from any risk and conditions, leaving investors potentially holding the metaphorical bag. European Regulators, so far, have limited themselves to issuing warnings to retail investors about cryptoassets, but this may not be enough.
Regulating ICOs: The Way Forward
In an attempt to proffer a solution to the current situation with ICOs, Andrea Enria, chair of the European Banking Authority, told lawmakers that a solution could be to let innovations like ICOs develop without a set of specific EU rules.
Consumer warnings don’t seem to be sufficiently effective in raising awareness among consumers that there is a lack of safety net for these investments.
He also pointed out that market developments and initiatives by national regulators in what is meant to be a single EU market mean that more regulation at the European level could be warranted. It is this regulation that can act as a safety cover for investors and their investments.