1/ Today, Paradigm submitted a comment letter on ESMA’s consultation on financial instruments

1/ Today, Paradigm submitted a comment letter on ESMA’s consultation on financial instruments 

https://policy.paradigm.xyz/actions/ESMA-consultation

3/ This consultation is big because it outlines the gating criteria that will determine whether an asset falls under the tradfi regime for financial instruments (MiFID II) or if it falls under the crypto-specific regime of MiCA 

Our letter makes two main points…

4/ The first point: 

As drafted, the proposed guidelines are likely to result in an overclassification of crypto-assets as financial instruments, which goes against the original intent of MiCA

5/ This would be really bad for crypto companies, especially startups, because they would have to get additional (costly!) licenses

Not to mention, there would HUGE inconsistencies in implementation across EU member states

6/ Imagine the scenario where an asset is deemed a security in France and a crypto token in Germany… 

…but to serve customers in the EU any company that touched it need to be registered under MiCA *and* MiFID (+ a bunch of other conflicting requirements)

😬

7/ The second point: 

NFTs are out of scope of MiCA by design, but the proposed guidance from ESMA could bring most NFTs under MiCA’s regulatory purview by moving the goalposts on the definition of fungibility

8/ This feels a bit like ESMA trying to redraw the lines by redefining fungibility using criteria that we found to be logically hard to follow

9/ Nits aside, it’s worth flagging that this is a dramatically different process from what we see in the US right now

ESMA may ultimately reject a lot of industry feedback, but there’s some semblance of a public process for soliciting input

10/ Much like GDPR, the EU is going to force/influence a lot of other jurisdictions to take a similar approach solely by virtue of being the first mover 

The more the US sits back, the more it will inherit the EU rules 

Sounds fun 🤮

11/ As always, reach out with questions/comments/hot takes

2/ Some background: 

The EU is in the process of implementing MiCA, which means 30+ consultations and draft rule proposals 

Some more important than others in our view