The key deliverables for 2023 are:

1. Enabling sustainable finance – develop remaining technical standards under the Sustainable Finance Disclosure Regulation (SFDR) and work to better understand and fight against greenwashing.

2. Facilitating technological innovation and effective use of data – develop technical standards and guidelines in order to help the market prepare for the implementation of key new regulations in the area of digital finance: the Digital Operational Resilience Act (DORA), the Regulation on Markets in Crypto-Assets (MiCA) and the DLT Pilot Regime.

3. Investors and issuers – continue to report on the impact of costs and charges for retail investors and coordinate new workstreams on mystery shopping. Coordinate a Common Supervisory Action (CSA) in the area of sustainability, covering the risk of greenwashing in the fast-growing area of sustainable investment products. ESMA also expects to be mandated to support the regulatory framework for sustainable finance, under the Corporate Sustainable Reporting Directive, the proposed regulation for EU Green Bonds and the SFDR.

4. Markets and infrastructures – develop technical standards on authorisation and registration of benchmark providers. Deliver the final technical standards and guidelines mandated under the CCP Recovery and Resolution Regulation.

5. Risk assessment – continue to monitor market developments to assess risks, in particular the impact of commodity market developments, financial market impacts of inflation and rising interest rates.

6. Supervision and convergence – continue risk-based supervision of all EU CRAs, TRs and SRs as well as certain DRSPs, benchmark administrators and third-country CCPs, and work with national authorities to promote supervisory convergence and a common understanding of where major risks lie. Prepare for the supervision of Consolidated Tape Providers (CTPs), subject to ongoing legislative proceedings on MiFIR review and for the oversight of critical ICT third-party providers (CTPPs) with the other ESAs. 

The article is in six sections:

(i) an overview of recent market developments; 

(ii) analysis of specific sources of risk; 

(iii) potential transmission channels to traditional financial markets; 

(iv) ESMA's approach to monitoring risks in the market; 

(v) a brief overview of regulatory responses; and 

(vi) concluding remarks.

'Report to the European Commission - Use of FinTech by CSDs' looks at the use of innovative financial technologies by CSDs with the objective of informing the European Commission’s thinking on this topic in the framework of the review of CSDR.

The Report is structured in six Sections and two Annexes.

Section 1 describes the background for this exercise.

Section 2 sets out the scope of the report.

Section 3 details the sources of information used for the analysis in the report.

Section 4 covers the findings related to the experience of NCAs and CSDs with relation to the use of FinTech.

Section 5 covers the findings related to the current regulatory aspects which might merit being clarified or amended in order to allow the deployment of DLT.

Section 6 presents the conclusions.

Annex I includes ESMA’s survey on FinTech and the use of new technologies by CSDs, used as the basis for the preparation of this Report. 

Annex II provides the list of respondents to ESMA’s survey and contributors to this Report. 

In its Advice to the European (EU) Institutions, ESMA noted that the legal status of cryptoassets is a key consideration for regulators, as this determines whether financial services rules apply and, if so, the level of protection for investors.

ESMA's report follows a request by the European Commission in its 2018 FinTech Action plan for all European Supervisory Authorities, of which ESMA is one, to assess the suitability of the EU regulatory framework in respect of ICOs and cryptoassets.

The European Banking Authority (EBA) recently published the results of its own assessment of the applicability and suitability of EU law to cryptoassets.

To better understand when cryptoassets qualify as financial instruments, ESMA has been working with national competent authorities (NCAs) on analysing the different business models of cryptoassets (such as investment-, utility-, hybrid- or payment-type cryptoassets) as well as the risks and potential benefits they may introduce and how they fit within the existing regulatory framework.

This exercise showed that most NCAs consider that certain cryptoassets can qualify as transferable securities or other types of MiFID II financial instruments.

However, while transposing MiFID II into national laws, many NCAs defined the term "financial instruments" differently, some using a restrictive list of examples and others broader interpretations.

"This creates challenges to both the regulation and to the supervision of cryptoassets," ESMA said.

In its report, the regulator identified a number of concerns in the current financial regulatory framework, which broadly fall into two categories.

Cryptoassets that qualify as MiFID financial instruments

For cryptoassets that qualify as transferable securities and MiFID financial instruments, many EU financial rules already apply, such as the Prospectus Directive, MiFID II, the Market Abuse Directive or the Transparency Directive.

However, ESMA said there are a number of "gaps and issues" in the existing regulatory framework when applied to cryptoassets "that leave certain risks unaddressed or that may not be adapted to [distributed ledger technology]".

ESMA believes these issues should be considered and potentially addressed by the European Commission, including:

• Greater clarity is needed around the types of services/activities that may qualify as custody/safekeeping services/activities under EU financial services rules in a DLT framework.
• Greater certainty is needed around the concepts of settlement and settlement finality applied to cryptoassets.
• Some risks specific to the underlying technology may need new/enhanced requirements.

Cryptoassets that do not qualify as MiFID financial instruments

Even though, according to ESMA, the size of the crypto market is still small and it does not currently raise financial stability issues, it still had concerns about the risks posed to investor protection and market integrity.

The report said:

"Where cryptoassets do not qualify as MiFID financial instruments and unless they qualify as electronic money, they are likely to fall outside of the existing EU financial services rules, in which case investors will not benefit from the safeguards that these rules provide."

Further, investors will not find it easy to distinguish between those cryptoassets that are within the scope of EU financial rules and those that are not, especially if they are offered on the same platforms.

Against this background, the regulator foresees two options: implementing a bespoke regime for specific types of cryptoassets or doing nothing, with ESMA recommending the first option is followed.

The report said:

"EU policymakers could consider the opportunity to set up a bespoke regime for those cryptoassets that do not qualify as financial instruments. Such a bespoke regime… would allow tailoring the rules to the specific risks and issues posed by those cryptoassets."

ESMA also believes that anti-money laundering (AML) rules should apply to all activities involving cryptoassets, in line with the recommendations in the EBA report on cryptoassets that came out on the same day as ESMA's report.

The regulator therefore called on EU policymakers to review AML requirements, including with regard to providers of crypto-to-crypto exchange services providers and providers of financial services for ICOs.

In addition, they should also consider the need for appropriate risk disclosure requirements to be in place.

Finally, the report noted that wider regulation may have slightly unintended consequences, such as "risking legitimising cryptoassets and encouraging wider adoption".

"Therefore, at this stage, ESMA advises to focus the regime for cryptoassets that are not financial instruments on warning buyers about the risks of those cryptoassets, instead of a more elaborate regime that could legitimise cryptoassets and bring them into a similar regulatory remit as the one for cryptoassets that are financial instruments," the report said.

The SMSG focuses mainly on risks for investors, since "there are no obvious stability risks yet" in respect of ICOs and cryptoassets.

The report specifies that most cryptoassets are covered by the Unfair Commercial Practices Directive, but only to the extent that the issuer is a business and the buyer a consumer.

The report starts with a fact-finding exercise, first defining the relevant concepts, including "virtual currency" or "token", before providing a taxonomy of cryptoassets.

This is followed by a review of recent ICOs and market developments in respect of cryptoassets and of the most important existing regulations in 36 jurisdictions.

The second part of the report builds up to advice to ESMA on the questions of whether and how ICOs and/or cryptoassets should be regulated and also reviews the potential benefits and risks of payment, utility and asset tokens.

"In order to determine whether asset tokens are covered by MiFID II, the Prospectus Regulation, and the Market Abuse Regulation (MAR), the SMSG has attempted to determine whether they are financial instruments (for MiFID purposes and the MAR) and transferable securities (for purposes of the Prospectus Regulation)."

The SMSG added that this proved a challenging exercise as the exact scope of those concepts is uncertain.

Advice to ESMA

The SMSG advised ESMA to provide level 3 guidelines or to aim for supervisory convergence on the:

• interpretation of the MiFID II definition of ‘transferable securities’, and clarify whether transferable asset tokens which have features typical of transferable securities are subject to MiFID II and the Prospectus Regulation;
• interpretation of the MiFID II definition of ‘commodities’, since this is key to determine whether an asset token with features typical of a derivative is a MiFID II financial instrument;
• interpretation of the multilateral trading facility (MTF) and organised trading facility (OTF) concepts, clarifying whether the organisation of a secondary market in asset tokens which qualify as MiFID II financial instruments is indeed an MTF or an OTF;
• fact that when issuers of asset tokens are to be considered to organise an MTF or an OTF in accordance with the above, the MAR applies to such MTFs and OTFs; and
• fact that in all situations where an asset token is to be considered a MiFID II financial instrument, persons giving investment advice on those asset tokens or executing orders in those asset tokens, are to be considered investment firms, which should have a licence as such, unless they qualify for an exemption under MiFID II.

The SMSG also concluded that payment tokens are not currently covered by MiFID II, MAR or the Prospectus Regulation.

However, since some transferable payment tokens, such as bitcoin, are increasingly considered as investment products, risks arise that are similar to the risks on the capital markets (in terms of investor protection and market abuse).

The SMSG said that it should therefore be considered whether it would be useful to include payment tokens in the MiFID II list of financial instruments.

This is, however, not in ESMA's power "since it would require a change in the level 1 Text of MiFID II".

The SMSG therefore urged ESMA to consult with the European Banking Authority on this matter and take this up with the European Commission.

Finally, given the use of sandboxes and innovation hubs in the development of the ICO/cryptoasset sphere, the SMSG urged ESMA to provide guidelines with minimum criteria for national authorities that operate or want to operate a sandbox or innovation hub.

The renewal includes renewing the following:

1. Leverage limits on the opening of a position by a retail client from 30:1 to 2:1, which vary according to the volatility of the underlying:
1. 30:1 for major currency pairs;
2. 20:1 for non-major currency pairs, gold and major indices;
3. 10:1 for commodities other than gold and non-major equity indices;
4. 5:1 for individual equities and other reference values;
5. 2:1 for cryptocurrencies;
2. A margin close out rule on a per account-basis. This will standardise the percentage of margin (at 50% of minimum required margin) at which providers are required to close out one or more retail client’s open CFDs;
3. Negative balance protection on a per account basis. This will provide an overall guaranteed limit on retail client losses;
4. A restriction on the incentives offered to trade CFDs; and
5. A standardised risk warning, including the percentage of losses on a CFD provider’s retail investor accounts.