Adan participated in the European Commission’s consultation, launched as part of its reflections on revising the Finality Directive. On this occasion, the Commission is once again looking at the security token issue as a follow-up to its work on creating a pilot scheme (see detailed background below).

In summary, Adan confirms the need for regulatory adaptations to promote the development of these new markets and proposes an alternative methodology based on rationalising and optimising the existing regime.

More specifically, in its response :

  • Adan explains how the notion of transactions in crypto-assets is different from that prevailing in the traditional financial system.
  • This explains why the currently applicable regulatory framework cannot be appropriate. It was not designed with the specificities of security token exchanges in mind: the Purpose Directive is therefore not technologically neutral.
  • Adan regrets that the European Commission only considers the use of private blockchain networks in its reflections. The Association recalls that the traditional dichotomy between public and private blockchains is too restrictive: the degree of openness of a network calls for a wide range of possibilities.
  • Adan advocates the use of the pilot scheme to resolve the regulatory obstacles that arise. However, the European Commission’s draft does not provide for an exemption from the Finality Directive at this stage.
  • The Association insists on the need to adopt a two-pronged approach in constructing the regulatory framework applicable to crypto-asset activities. On the one hand, to remove the identified obstacles to applying the current rules, and on the other hand, to rely on the opportunities offered by blockchain technologies and crypto-assets to optimise this framework: effectiveness and efficiency of regulation go hand in hand to encourage innovation.

Thus, to prevent the growth of the European crypto-asset industry and remain in the race for international competitiveness, it is essential to initiate these regulatory clarifications and optimisations and remove the legal uncertainties of the players as soon as possible.

Context

To share and feed its ongoing reflections on the revision of the European regulation applicable to Central Securities Depositories and Securities Settlement Systems, the European Commission conducted a consultation with the industry between 8 December 2020 and 2 February 2021. Part of its questions (part 4 of the consultation document) focused on the obstacles that some of the current rules pose to developing markets for tokenised financial instruments/security tokens. Adan quickly became involved in these issues by supporting the idea of the European Digital Laboratory of the Autorité des marchés financiers (AMF) to remove the obstacles already identified within financial regulations (including CSDR) and identifying those that have not yet been anticipated. In July 2020, the Association published – jointly with the AFTI, the AMAFI and Gide255 – a survey report based on a consultation of players involved in the development of security token markets: 93% of them confirmed the existence of such obstacles and their appetite for the introduction of temporary and supervised exemptions that would encourage experimentation. This is why the Association and the industry welcomed the proposal for a pilot regime for DLT Market Infrastructures unveiled by the European Commission in September 2020. However, many areas of improvement need to be explored if this regime is to fully achieve the Commission’s stated objectives of supporting innovation and the digital finance revolution.

Thus, in responding to the Commission’s consultation, Adan wished to include and recall the issues associated with the regulatory treatment of security tokens by encouraging the coordination of work to revise this directive. 

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