Paradigm Files Comment Letter on ESMA’s Financial Instruments Consultation

April 29, 2024 | Brendan Malone

Paradigm has filed a comment letter in response to a consultation by the European Securities and Markets Authority (ESMA) on the conditions and criteria for the qualification of crypto-assets as financial instruments. This guidance is intended to delineate whether a crypto-asset falls under the EU’s new crypto framework (Markets in Crypto Assets, known as MiCA) or under the EU’s regulatory framework for tradfi (Markets in Financial Instruments Directive, known as MiFID II). A copy of our comment letter can be found here.

Paradigm appreciates the EU for its approach to soliciting feedback early in the rulemaking process. Although we may not agree with the details of every proposal, we support the technical and thoughtful manner with which the EU is engaging industry and the broader public. This is much different from the dynamic we currently experience in the US where politicization too often derails forward progress.

The EU now has substantial gravitational pull in financial policy standards setting. As a first-mover in crypto regulation, the EU’s approach to regulating the space will have spillover effects beyond the jurisdictional confines of the EU member states. One of the most critical issues to get right is establishing clear guidelines for determining where/when builders are subject to a regulatory framework tailored to the unique characteristics of the crypto industry—else they be swept into a regulatory perimeter that includes institutions with much different risk profiles and cost structures, like global systemically important banks (G-SIBs).

In our comment letter, we make two main points:

  1. The proposed guidelines are likely to result in an overclassification of crypto-assets as financial instruments, which goes against the original intent of MiCA.
  2. 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.

As always, we welcome the chance to provide this level of technical feedback to any policymakers around the world, including those in the US.