FSMA’s consultation on the legal qualification of crypto-assets and new supervisory powers regarding the commercialisation of virtual currencies
More and more attention has been given to crypto-asset regulation in Belgium since the beginning of the year. Following the introduction of a specific regulatory framework dedicated to the provision of certain crypto-asset services in Belgium earlier this year (read our alert prepared on the topic here), the Financial Services and Markets Authority (FSMA), one of the two supervisory authorities of the Belgian financial sector, has drawn up a Communication on the classification of crypto-assets as securities, investment instruments or financial instruments. In addition, a legislative act of July 2022 also granted new supervisory powers to the FSMA regarding the commercialisation of virtual currencies.
FSMA consults on the legal qualification of crypto-assets
Due to an increased interest in crypto-assets in Belgium, the FSMA has been frequently questioned about the legal qualification of crypto-assets and services related to crypto-assets.
Granting the appropriate legal qualification to crypto-assets while not easy, is essential in order to identify which regulatory framework may be applicable to ensure compliance with regulatory requirements. Some crypto-assets may already qualify as transferable securities under Directive 2014/651 (MiFID II) or electronic money/e-money under Directive 2009/1102 (EMD II). At EU level, Regulation (EU) 2022/8583 (the DLT Pilot Regime) adopted in June 2022 also clarifies that financial instruments under MiFID II may be issued by means of distributed ledger technology (such as blockchain), which means that security tokens qualify as MiFID II financial instruments.
However, even where crypto-assets can fall within the scope of EU legislation, effectively applying it to these assets is not always straightforward. Additionally, most crypto-assets currently fall outside of the scope of EU legislation on financial services. These would however, in the future, be subject to the Markets in Crypto-assets Regulation, currently under adoption at EU level.
In the meantime, and until European regulatory harmonization is achieved, questions remain on the legal qualification of crypto-assets and the objective of the FSMA Communication is to provide explanations on the most common cases where crypto-assets may fall within the scope of application of financial regulations.
Possible legal qualifications of crypto-assets
By focusing on the questions and situations which it has encountered most frequently, the FSMA has drawn up a stepwise plan (accessible here) setting out the most common situations and offering a series of schematically presented guidelines for the exercise of classifying crypto-assets under three possible legal qualifications:
- securities within the meaning of Regulation 2017/11294 (Prospectus Regulation);
- investment instruments within the meaning of the law of 11 July 2018 on public offers of investment instruments5 (Prospectus Law); and
- financial instruments within the meaning of the law of 2 August 20026.
In case of issuance of crypto-assets incorporated into instruments, the following qualifications are possible:
- Qualification of crypto-assets as securities: if crypto-assets are transferable instruments and represent a right to share in the profits or losses of a project and potentially a voting right, or a right to payment of a sum of money or an equivalent, these crypto-assets are, as a rule, considered to qualify as securities within the meaning of the Prospectus Regulation. So the requirement to publish a prospectus or an information note under the Prospectus Law might be of application.
- Qualification of crypto-assets as financial instruments: if crypto-assets are transferable instruments and represent a right to share in the profits or losses of a project and potentially a voting right, or a right to payment of a sum of money or an equivalent, these crypto-assets also qualify as financial instruments, so that MiFID rules of conduct would apply.
- Qualification of crypto-assets as investment instruments: if crypto-assets are non-transferable instruments and represent a right to share in the profits or losses of a project and potentially a voting right, or a right to payment of a sum of money or an equivalent, these crypto-assets are classified in principle as investment instruments under the Prospectus Law. In addition, if the crypto-assets represent a right to the delivery of a service or a product by the issuer and have an investment objective, the instruments are classified, as a rule, as investment instruments within the meaning of the Prospectus Law. Either case may trigger the requirement to draw up an information note or a prospectus. The Communication provides for several aspects to consider whether the instruments have an investment objective, such as their transferability to other persons that the issuer or the fact that the issuer intends to trade them on a market and has an expectation to profit.
Possible application of additional financial regulations
Where crypto-assets qualify as securities, investment instruments or a financial instrument, then in addition to compliance with applicable requirements of the Prospectus Regulation, the Prospectus Law or MiFID rules (as the case may be), there is the potential impact to be considered of additional legislation that may apply, such as the rules governing market abuses or crowdfunding.
In cases where instruments are not issued by an issuer but are created by an informatic code that does not give rise to a legal relationship between two persons (such as bitcoin or ether), then in principle the Prospectus Regulation, Prospectus Law and the MiFID rules of conduct will not be applicable.
Nevertheless, even if a thorough analysis leads to the conclusion that given crypto-assets do not legally qualify as securities, investment instruments or financial instruments, this does not preclude the possible application of additional specific regulations. For example, if the instruments have a payment or exchange function, the rules applicable to virtual assets services providers may still be applicable. In addition, the prohibition of marketing financial products whose return depends directly or indirectly from a virtual currency to retail investors may also apply.
The FSMA itself acknowledges that the stepwise plan does not address all potential legal classifications and cannot replace a full legal analysis based on all characteristics and features of crypto-assets and the project. It advises against reliance solely on the name of a crypto-asset when legally qualifying it, since the label does not necessarily match the content.
The FSMA held an open consultation in July 2022 on the Communication and welcomed responses from the financial services sector. Based on the input received, the FSMA may amend its stepwise plan, which is likely to evolve over time.
At EU level, the legislative process to establish a framework applicable to the provision of crypto-asset-related services is still ongoing. Provisional agreements were reached at the end of June 2022 on the proposal for a Transfer of Funds Regulation and on the proposal for a Markets in Crypto-Assets Regulation.
New supervisory powers granted to the FSMA relating to virtual currencies advertising
On 19 July 2022, the Act of 5 July 2022 containing various financial provisions (Omnibus Act) was published in the Belgian State Gazette, which includes amending certain provisions of the existing Act of 2 August 2002 on the supervision of the financial sector and financial services (Financial Supervision Act). New supervisory powers granted to the FSMA regarding the promotion of virtual currencies to non-professional investors are of special note.
In the past few years, virtual currencies (such as bitcoin) have been widely promoted to the general public through multiple channels which has generated an increasing interest from investors. Notwithstanding the many success stories that have been booked within the crypto scene, several sanctions have recently been imposed against certain personalities active on social media (so-called influencers) who promote crypto-assets to their followers on social media in disregard of the law (e.g. misleading advertising and fraudulent practices).
Lack of regulation on crypto-assets advertising
While the legislative process on the adoption of a comprehensive framework for the regulation and supervision of issuers and providers of services for crypto-assets is still ongoing at EU level, initiatives relating to crypto-assets are happening in Belgium, including a specific regulatory framework dedicated to the provision of certain crypto-asset-services.
However, until recently, a legal framework on the commercialisation (and advertising) of virtual currencies among non-professional investors was lacking. Hence, there was no guarantee for Belgian and European investors that the information provided to them was correct, clear and not misleading.
ESA warning on crypto-assets
In March 2022, after a surge in aggressive advertising promoting crypto-asset without provision of proper information, including through social media, the three EU supervisory authorities (the European Banking Authority, the European Securities and Markets Authority and European Insurance and Occupational Pensions Authority) published a joint warning to consumers on the risks of crypto-assets7. The authorities specifically alerted consumers to the risks of misleading advertisements related to investments in crypto-assets, including via social media and influencers and advise consumers to be particularly wary of promised fast or high returns.
National initiatives related to crypto-assets advertising
Following the ESA’s warning several national financial regulators moved to regulate crypto-asset advertising, with an eye on their promotion on social media. In allowing the FSMA to regulate the advertising of virtual assets to non-professional investors, Belgium is following the example of regulatory initiatives in other countries (including Spain, UK, and recently France), aimed at curbing malpractices within the sector.
New supervisory powers
To address the risks of incorrect and fraudulent advertising of virtual currencies towards non-professional investors with limited knowledge and experience, the Omnibus Act amends the Financial Supervision Act to extend the scope of competences of the FSMA relating to the commercialisation of virtual currencies.
As a result, the FSMA will be entitled to impose restrictive conditions on the commercialisation to non-professional customers of virtual currencies or certain categories of virtual currencies and to supervise compliance with those requirements.
Material scope of application
The supervisory powers of the FSMA relate to the “commercialisation of (certain categories of) virtual currencies”. Commercialisation should be understood as “the presentation of the product or currency, regardless of how it is done, in order to induce the client or potential client to purchase, subscribe to, join, accept, sign for or open the relevant product or currency”. Given the broad scope of the definition, advertising via social media would qualify as commercialisation for purposes of the Financial Supervision Act.
Personal scope of application
The concept of “client” should be understood in the broad sense and shall apply irrespective of the capacity of the person offering the products (issuer or not) and the relationship between that person and the retail client concerned (contractual or not). This means that people who act as intermediaries, commission agents or brokers, or who, like so-called influencers, limit themselves to making promotions, in exchange for some remuneration or benefit, for products that they do not themselves issue or dispose of, would also target by the legislation.
Territorial scope of application
The rules laid down by the FSMA would apply only to commercialisation attempts directed at Belgium. The Preparatory Works of the Omnibus Act clarify in this respect that the use of personalities who are “well known” in Belgium, or the use of marketing arguments specific to Belgium, would, for example, make it possible to demonstrate the existence of a link with Belgium.
Finally, it shall be noted that the new FSMA supervisory powers come on top on the existing prohibition to market financial products whose return depends directly or indirectly from a virtual currency to retail investors.
It is expected that the regulations would improve the quality of information provided to potential investors, and would allow verification that investors are well-informed about the risks associated with the purchase of virtual currencies. Following the amendment, the Financial Supervision Act will now also contain the (currently lacking) legal basis for the FSMA to penalise malicious actors who target non-professional investors, where they do not comply with the applicable regulations.
The provision of the Omnibus Act extending the supervisory powers of the FSMA for virtual currencies advertising has entered into force on 29 July 2022. It is now up to the FSMA to issue more detailed rules by way of a regulation.