On the 29th of January 2024, the European Securities and Markets Authority (‘ESMA’) published a third consultation paper on the conditions and criteria for the qualification of crypto-assets as financial instruments. ESMA seeks to provide more clarity to National Competent Authorities (‘NCAs’) and market participants regarding the delineation between the respective scopes of application of MiCA (‘Markets in Crypto-Assets Regulation’) and MiFID II (‘Markets in Financial Instruments Directive’). 

The draft guidelines strike a balance between providing guidance to determine how a crypto-asset should be qualified as a financial instrument and avoiding one-size-fits-all guidelines on financial instruments and the definition of crypto-assets. Emphasis is placed on a ‘substance over form’ approach in determining what constitutes a financial instrument, implying that the legal qualification of the product should not be determined by its technological features. 

ESMA starts off by emphasising, in Guideline I, that NCAs should not view the technological structure of said assets as a key factor, meaning that financial instruments issued by means of DLT should not alter the fundamental nature of said assets. Per ESMA, tokenised financial instruments should continue to be recognised as financial instruments in all regulatory contexts.  

Guideline II goes on to state that a crypto-asset might be recognised as a transferable security if it grants rights similar to shares, bonds or other securities. For a crypto-asset to be recognised as a transferable security under MiFID II, it must be negotiable, transferable and encapsulate rights attached to securities. Furthermore, crypto-assets comparable to investment certificates, given their inherent characteristics and functions, should be treated as transferable securities, subject to case-by-case examination by NCAs.  

Guideline III refers to the definition of financial instruments under MiFID II which includes money-market instruments such as treasury bills. For a crypto-asset to be identified as a money-market instrument it should exhibit characteristics akin to traditional money-market tools, including a legal and residual maturity per the Money Market Funds Regulation; exhibiting a stable value and aligning returns with short-term interest rates. A crypto-asset that would function as a representation of a short-term debt commitment issued and endorsed by a government, should also be classified as a money market instrument. This should also apply to a crypto-asset that represents a short-term negotiable debt obligation issued by either a bank or a corporation within the international money market to garner funds.  

Guideline IV refers to units in collective investment undertakings as financial instruments. Primarily, the crypto-asset should encapsulate capital raised from a number of investors for the purpose of investment with a view to generating a pooled return for the benefit of those investors. Investors should not possess direct, day-to-day control or discretion over the operational matters relating to the daily management of the undertakings’ assets, as such day-to-day control should be left to the discretion of the undertaking’s manager acting in accordance with a defined investment policy. One should also note that the purpose of a crypto-asset project should not be general, commercial or industrial.  

Under Guideline V, ESMA recognises that crypto-assets may be treated as eligible underlying instruments in derivatives. ESMA states that, for a crypto-asset to be possibly qualified as a financial derivative under MiFID II, it should be the "digital representation" of a contract. A derivative crypto-asset should have an underlying reference, which determines its value. This reference could an asset, a rate, an index, an instrument or a commodity. Moreover, an agreement between involved parties, detailing the terms and other conditions should be seen as an indicator. 

Under Guideline VI, ESMA covers conditions and criteria for the classification as emission allowances. To be recognised as such,  a crypto-asset ought to represent a right to emit a specific volume of greenhouse gases and comply with the EU Emissions Trading Scheme or an equivalent framework. Furthermore, crypto-assets should grant an explicit emission right and be tradable. However, most crypto-assets differ from emission allowances as they typically symbolise value, project stakes, or service access. It is also provided that crypto-assets should grant an explicit emission right and be tradeable.  

Under Guideline VII, ESMA commences by stating that the guidelines focus only on utility tokens, not Asset Referenced Tokens or E-Money Tokens. Per this guideline, a utility token should not give financial rights that would be related to a company’s profits, capital or liquidation surpluses. Furthermore, ESMA denies the classification of an asset as a utility token if its sole objective is to participate in the performance of one or several underlying assets without directly investing in these assets.  

Guideline VIII caters for non-fungible tokens (‘NFTs’), which do not fall under the scope of MiCA. In assessing the uniqueness and non-fungibility of a crypto-asset, such crypto-asset may be considered such if its characteristics distinguish it from the other tokens issued by the same (or any other) issuer. It is important to distinguish truly unique crypto-assets from those which appear so due to some technological feature. NFTs that are part of a series or a collection should fall under the scope of MiCA if they are deemed interchangeable. The utility function of NFT can also play a role where it grants similar utility rights. Furthermore, fractional parts of an NFT should not be considered unique (for instance, dividing an NFT into several other crypto-assets).  

Additional issues may arise when crypto-assets are likely to fall under more than one legal classification. What should matter are rights and functions associated with the crypto-assets. As part of these guidelines, first, a rigorous assessment should be adopted to determine whether the asset fits the description of a financial instrument, following which NCAs and market participants should consider that, if a financial instrument exists for hybrid types of crypto-assets, this ought to prevail.  

Therefore, as reiterated by ESMA in its consultation paper, NCAs ought to adopt a substance over form approach. By doing so, the classification of a crypto-asset will be guided by its actual features rather than a reliance on the label given by the issuer/offeror.  

Disclaimer This article is not intended to impart legal advice and readers are asked to seek verification of statements made before acting on them.
Skip to content