The European Securities and Markets Authority (ESMA) and National Competent Authorities (NCAs) have recently emphasized the need for clear labeling of cryptocurrencies as unregulated when offered to investors. This announcement comes as many firms are marketing cryptocurrencies as alternative investment options to regulated financial instruments under the MiFID II framework. The MiFID II, or Second Markets in Financial Instruments Directive, was instituted by the European Union in 2014 and implemented in 2018 to regulate financial markets.
Although Europe’s highly-anticipated Markets in Crypto Assets (MiCA) legislation is nearing adoption, cryptocurrencies are expected to remain unregulated in numerous jurisdictions until this framework becomes effective in 2025. Consequently, ESMA has raised concerns about potential investor protection and prudential risks associated with cryptocurrencies, including the misleading of investors concerning their protection level, confusion around available products, and the risk of mis-selling through the use of false information.
Activities related to unregulated financial instruments could pose a considerable risk to investment firms’ sound management and ultimately compromise their compliance with regulated business obligations. Thus, ESMA underscores the importance of acting fairly, professionally, and providing transparent and unambiguous communication.
To ensure clients are well-informed, firms should clearly communicate the regulatory status of the products and services offered. They must also disclose instances in which regulatory protections do not apply. ESMA further discourages the use of firms’ regulatory status as a promotional tool and insists on the clear distinction between regulated and unregulated activities on company websites.
This latest communiqué from ESMA adds more clarity to a rapidly evolving regulatory environment. The forthcoming MiCA legislation, voted on by European deputies in April, aims to establish a framework for crypto companies at the European level. It intends to enforce stricter rules on stablecoins, demand additional disclosure obligations for crypto businesses, and ensure the implementation of anti-money laundering (AML) and data security procedures.
Although the MiCA legislation is scheduled to come into force in July 2023, its implementation will only take effect 18 months later, in January 2025. Until then, both investors and companies must exercise caution and follow ESMA’s recommendations to ensure the cryptocurrency industry avoids undue risk and remains prepared for the impending regulatory changes.
Source: Decrypt
