The European Securities and Markets Authority (ESMA) has called for the establishment of an EU-wide approach to the regulation of crypto assets and initial coin offerings (ICOs), without which it believes investors are "exposed to substantial risks".
In its advice to European lawmakers, published on Wednesday (9 January), ESMA identified gaps in the current EU financial regulatory framework preventing the effective control of new and existing crypto assets, such as Bitcoin.
Specifically, ESMA said crypto assets which currently already qualify as financial instruments under the MIFID directive require "re-consideration of specific requirements" for existing regulations to effectively apply to them.
For those that do not qualify as financial instruments, ESMA said the absence of regulation and associated risk disclosures leaves investors unaware of "the potential risks" prior to investment.
Commenting on the approach, regulatory counsel at law firm Ashurst, Lorraine Johnston said: "An EU wide approach makes sense but the difficulty will be getting a model which fits all interests, including making the EU an attractive forum for issuers and traders.
"This, however, is a positive step in the right direction."
ESMA also confirmed it had been working with national competent authorities (NCAs) such as the UK's Financial Conduct Authority (FCA) in forming its opinion.
For its part, the FCA is currently engaged with the HM Treasury-led Cryptoasset Taskforce, which in October 2018 published its own assessment of the risk associated with crypto assets and its approach to regulation.
The UK's Cryptoasset Taskforce is expected to publish a consultation by the first quarter of 2019 which will seek to impose a potential complete prohibition of the sale of crypto-referencing derivatives to retail consumers, including CFDs, futures, options and transferrable securities.
Commenting on ESMA's crypto asset advice, its chair Steven Maijoor said: "Because the existing rules were not designed with these instruments in mind, NCAs face challenges in interpreting the existing requirements and certain requirements are not adapted to the specific characteristics of crypto assets.
"Meanwhile, a number of crypto assets fall outside the current financial regulatory framework. This poses substantial risks to investors who have limited or no protection when investing in those crypto assets.
"In order to have a level playing field and to ensure adequate investor protection across the EU, we consider that the gaps and issues identified would best be addressed at the European level."
ESMA said in a statement that it will continue to actively monitor market developments around crypto assets while the European Commission considered its advice.
This article first appeared in Investment Week, a sister title of International Investment.