Yet another EU watchdog has drawn attention to potential risks in the crypto industry.

In a recent statement, the European Securities and Markets Authority (ESMA) and National Competent Authorities (NCAs) said that cryptocurrencies must be clearly labeled as unregulated should a firm offer the asset class to investors.

Notably, these offerings are being marketed as alternatives to regulated financial instruments under the MiFID II framework.

Introduced in 2014 and implemented in 2018, MiFID II stands for the Second Markets in Financial Instruments Directive, which is a legislative framework instituted by the European Union (EU) to regulate financial markets.

AD

Though Europe’s landmark Markets in Crypto Assets (MiCA) legislation, which will introduce a frame for crypto companies, is on the cusp of adoption, these assets are expected to remain unregulated in many jurisdictions until MiCA takes effect in 2025.

In the meantime, ESMA has voiced concerns regarding potential investor protection and prudential risks.

The risks include investors being misled about their level of protection, confusion around products, and “mis-selling,” or selling a product to a customer using misleading information.

The statement points out that activities related to unregulated products could pose a significant risk to the sound management of the investment firm and potentially compromise the firm's compliance with its regulated business obligations.

AD

ESMA advocates for investment firms to act in the best interests of their clients by “acting fairly, professionally, and providing clear and unambiguous communication.”

It recommends that firms ensure clients are fully informed of the regulatory status of the product or service they're receiving and clearly disclose when regulatory protections do not apply.

Finally, the statement insists on the fact that firms should be wary of using their regulatory status as a promotional tool and must distinguish regulated activities from unregulated ones on their websites.

EU makes way for crypto

The ESMA’s communiqué is yet another way to add more clarity in a rapidly evolving regulatory environment.

Voted on this April by Europan deputies, MiCA will create a frame for crypto companies at the European level.

It will introduce stricter rules on stablecoins, demand additional disclosure obligations for all crypto businesses, and ensure the implementation of anti-money laundering (AML) and data security procedures.

The text will come into force in July 2023 but will be applicable only 18 months after this date, which will be in January 2025.

Until then, as the ESMA points out, investors and companies should act carefully.

AD

Stay on top of crypto news, get daily updates in your inbox.