Risks and issues regulators have yet to consider
Above, we saw how security tokens may qualify as MiFID financial instruments and how the current regulatory requirements apply to these tokens.
Nevertheless, some gaps and issues remain and will have to be considered by the regulators in the future. These issues include the following three main factors:
- At present, there is no European legal framework around safekeeping and custody services and there are some differences in the legal frameworks in place within the different jurisdictions. De facto, there is a lack of clarity and different interpretations around the services that may be classed asset services, custody, and safekeeping within a DLT environment. New roles and responsibilities will also have to be defined (e.g., trustee agent for public keys) within this new framework.
- The concepts and definition of settlement as well as settlement finality must also be assessed and clarified within a new DLT environment.
- Smart contracts play an important role in the security value chain within DLT. As yet, there is no clear definition of how the security and reliability of smart contracts (and their related content) will be organized. Here also, new roles and responsibilities will have to be addressed and considered by regulators.
Obviously, and as stated by the ESMA in its advisory report on crypto- assets, crypto-assets that do not qualify as MiFID financial instruments also have risk exposure—in fact, this is all the more true for this category. Amongst these issues, ESMA highlights:
- Significant risks related to fraud, cyber-attacks, and money laundering
- On trading platforms, difficulty for investors to distinguish which crypto- assets fall within the scope of current regulations and those that are not
covered by a regulatory framework or do not qualify as MiFID financial
instruments
- Lack of a consistent regulatory framework within Europe on the way to
approach crypto-assets that do not qualify as MiFID financial instruments
Regulatory framework in a nutshell
The EU regulatory framework for crypto-assets is currently undergoing development and definition, but it is clear that the authorities intend to establish a framework that will protect investors and ensure full transparency as per the existing EU securities regulatory framework.
In the next section, we will consider the opportunities and efficiency that
can be derived from the use of investment tokens in the security value
chain.
We believe that the success and the development of the security token will also, and primarily depend on, compliance with key securities regulations. This is fundamental to winning the trust and confidence of authorities and investors and providing them with the transparency they expec
