Belgium launches consultation on classification of cryptos as securities and investment instruments

Belgium is conducting an open consultation to determine whether it should classify certain crypto assets as securities, investment instruments or financial instruments. The Financial Services and Markets Authority (FSMA), the country’s financial regulator, said in a statement:

“… FSMA wishes to provide clarity while awaiting a harmonized European approach[1]on when crypto-assets may be considered securities, investment vehicles or financial instruments and whether they may fall within the scope of prospectus legislation and/or MiFID conduct of business rules.’

As the European Union finalizes the landmark Markets in Crypto Assets (MiCA) regulation, expected in 2024, crypto businesses need clarity on whether they fall within the scope of existing laws, the regulator said. To this end, the regulator has set out guidelines to determine which cryptocurrencies can be classified as securities or financial instruments and which laws apply to them.

The guidelines provide a step-by-step plan for determining the classification of crypto assets. The first step is to determine whether the crypto asset is “instrumented”, i.e. they are replaceable or replaceable.

The guidelines say that crypto assets that are not included in an instrument do not qualify as securities. However, if they are included in an instrument, there can be two situations.

First, the instruments may represent an interest or voting right in a project or a right to payment of a certain amount.

In such case, if the instruments are transferable, the crypto-assets qualify as securities under the Prospectus and Financial Instruments Act. The Prospectus Act requires issuers of cryptoassets to publish a prospectus for potential investors.

As financial instruments, the assets will also have to adhere to the MiFID conduct rules. The EU’s Markets in Financial Instruments Directive (MiFID) sets out regulatory obligations for investment firms to ensure investor protection.

However, if the instruments are non-transferable, then the crypto-assets qualify as investment instruments and issuers must publish a prospectus under the Prospectus Act, the guidelines state.

Second, instruments may represent a right to deliver a product or service from the issuer.

In this case, if the instruments have a primary or secondary investment purpose, then they are classified as investment instruments subject to the Prospectus Act. But if the instruments do not have an investment purpose, the crypto assets will be outside the scope of the Prospectus Act.

The guidelines set out a number of aspects that must be considered to determine whether an instrument has an investment objective. Crypto assets will be considered to have an investment purpose if:

“…instruments are transferable to persons other than the issuer; the issuer issues a limited number of instruments; the issuer plans to trade them on the market and expects a profit; the funds raised are used for the general financing of the issuer and the service or project yet to be developed: the instruments are used to pay staff; the issuer organizes several rounds of sales at different prices.”

The guidance adds that cryptocurrencies that do not have an issuer but are generated by computer code, such as Bitcoin (BTC) and Ethereum (ETH), are not subject to the Prospectus Regulation, the Prospectus Act or the MiFID conduct rules.

The consultation is open to all interested parties and investor representatives and will end on 31 July.

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