Rahman Ravelli | Syedur Rahman
Syed Rahman outlines the concerns voiced about the difficulty of putting a value on crypto.
The European Union (EU) markets regulator has been warned that there is no widely-held consensus on how to value cryptoassets.
The warning was given to the European Securities and Markets Authority (ESMA) by the European Fund and Asset Management Association (EFAMA), which is the investment managers’ trade association. It came as part of a consultation on whether cryptoassets should be accessible to retail funds.
Responding to a call for evidence from ESMA regarding the authority’s rules covering which investments are allowed for retail funds, EFAMA said: “While most cryptocurrencies have self-imposed limits on their total supply which can help to maintain value, there is no consensus as to how to value cryptocurrencies and many have experienced high price volatility.”
EFAMA added that while stablecoins are backed by a traditional currency such as the dollar, most digital assets have no inherent value based on underlying assets or potential cash flow. It said that if retail funds were to be allowed direct exposure to cryptoassets, it was important to make distinctions between different types of products.
Rules
Digital assets traded in conventional markets like shares or bonds are subject to the Markets in Financial Instruments Directive (MiFID), which is the regulation that increases transparency across the EU’s financial markets and standardises the regulatory disclosures required for firms operating there. Others, such as stablecoins, are subject to new EU rules known as the Markets in Crypto-Assets Regulation (MiCA), which came into force in June 2024.
With EU member states not fully agreed about which rules should apply in certain circumstances, EFAMA emphasised that allowing funds direct access to cryptoassets was a very broad and nuanced topic that could not be fully addressed in ESMA’s call for evidence.
There appears to be some disconnect between the relatively new MiCA regulations and the more traditional and more well-established MiFID. The EU can be commended for its efforts in effecting a substantive piece of legislation to govern the use of crypto currencies – something which cannot be said for the efforts of the UK’s government.
That being said, EFAMA’s response emphasises the need for a comprehensive directive that interplays with the current regulatory provisions. It is understandable that its concerns are now coming to light.
As noted by EFAMA, the technologies behind – and the characteristics of – cryptocurrencies are incredibly nuanced. The corresponding regulatory regime will need to be equally nuanced to adequately protect people’s interests. Given the infancy of MiCA, it is hardly surprising that the EU hasn’t achieved everything at the first attempt. This will no doubt be a continually evolving area of regulation – and one which ultimately benefits from the concerns voiced by EFAMA.
This article first appeared on Lexology. You can find the original version here.
