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The Evolution of Token Offerings and Regulation Across Europe


Tech.mt - March 17, 2021 - 0 comments

Authors: Dana Farrugia, CEO at Tech.mt; Joseph F Borg, Partner WH Partners; Tanja Dimitrijevic, Associate WH Partners. Including insights from Dr Joshua Ellul, Chairman at MDIA

Between 2016 and 2018 over $28 billion have been invested by the public in Initial Coin Offerings (ICOs).

The Evolution of Token Offerings and Regulation Across Europe by Tech.MT

Between 2016 and 2018 over $28 billion have been invested by the public in Initial Coin Offerings (ICOs). That was followed by a great sell off of crypto assets that grounded the price of most of them, including the major crypto assets such as Bitcoin and Ethereum. Later we saw an attempt to revive the market through Initial Exchange Offerings (IEOs), which didn’t impact the sector as much as expected, leaving the prices of most crypto assets lingering very far off from the all-time highs. This year the prices of crypto assets have picked up momentum and we are already seeing new all-time highs for crypto assets and many believe we’ll see more by the end of it. However, we have not seen anything close to the ICO/IEO activity compared to what we have seen in the golden years of the ICOs. Yet a new phenomenon emerged. The staking of crypto assets on decentralised finance (De-Fi) platforms.

The European Commission’s proposal for Markets in Crypto Assets Regulations (MiCA) is the most interesting legislative proposal to date.

Will we experience a comeback of crypto asset offerings? We might, but many doubt this will be due to De-Fi. We believe that the major factor for the newly revived interest in crypto assets revolves around institutional adoption. One major factor was definitely Paypal’s announced entry into the crypto assets market. However, for institutions to become interested in this market, they need it to be properly regulated. Institutional players cannot afford entering industries that lack certainty, and regulation brings certainty to the market. Once the crypto asset market is properly regulated, we will see institutional players flocking into the market and that will lead to mass adoption of crypto assets.

The European Commission’s proposal for Markets in Crypto Assets Regulations (MiCA) is the most interesting legislative proposal to date, aiming to harmonise the regulatory frameworks of the entire European Economic Area (EEA) for crypto assets as well as crypto assets service providers. It distinguishes between asset-referenced tokens, e-money tokens and utility tokens. It also distinguishes between different services such as custodians, trading platforms, exchanges, etc. Those familiar with the Malta Virtual Financial Assets (VFA) Act would immediately notice the various similarities between the MiCA and the VFA Act. MiCA is definitely softer in some areas while it is a bit tougher in others.

Hopefully, further regulatory efforts will also unleash the greatest potential of crypto assets – the adoption of asset backed tokens and security tokens. Tokenisation of assets would revolutionise industries such as P2P lending as well as stock markets. P2P lending is becoming ever so important with banks becoming more stringent on their lending and offering very little incentives for consumers to deposit funds with them, especially due to extremely low interest rates and high fees. P2P lending offers extremely interesting opportunities for both lenders and borrowers.

“Many considered the sector to be ‘the wild west’ where anyone could raise any amount of funds for any idea.”

Using crypto assets as collateral for P2P loans would resolve the single most central issue around P2P lending, that is, securing the loan with an efficient, secure and liquid collateral.

Malta has also made considerable steps forward in this respect with a consultation document issued by the Malta Financial Services Authority (MFSA) in relation to Security Token Offerings (STOs).

Following the consultation, the MFSA decided to tackle each STO proposal in its own merit but gave clear indications that it is open to approve STOs. Furthermore, it also showed extensive knowledge on the topic.

Dr Joshua Ellul, Chairman of the Malta Digital Innovation Authority, notes that “When it comes to coin and token offerings the landscape has changed drastically over the past few years. Originally many considered the sector to be ‘the wild west’ where anyone could raise any amount of funds for any idea (or even no idea at all) – however, many learnt hard lessons that no activity escapes the law. Scams and bad actors really brought to the forefront the requirement to regulate these activities, to ensure consumer and stakeholder protection – which is crucial in a sector where anyone can set up a website and request funds from individuals seeking to make profit off their investments. This saw different flavours of laws being enacted from light-tough regulation to more onerous – and this creates a problem for the European sector in that the weakest link in the chain could tarnish the reputation of other European jurisdictions. The EU is now working towards harmonising the sector through its MiCA, DORA, and DLT pilot project initiatives. It is encouraging to see emphasis on assurances being proposed within DORA.”

“A single bug in deployed code could make all other business, financial and diligence checks performed in vain.”

Dr Ellul continues to note that, “Whilst assurances come at a cost, in a sector that is handling such large sums of funds, the costs may be negligible compared to the potential losses, and when a single bug in code can potentially not be fixed (unlike traditional systems) and that bug could result in hundreds of millions of losses, such assurances are crucial. As a national digital innovation technology assurance regulator, MDIA is sending exactly this message. As a single bug in deployed code could make all other business, financial and diligence checks performed in vain.”

Interesting times are ahead in this sector. We are in the middle of a crucial evolution of crypto assets, their offerings and regulation across the EU. How this is handled will shape up the financial sector in Europe and its competitiveness for the years to come.

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