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Digital Assets: Is it a revolution for investors’ protection and do current regulations protect appropriately or not?

All the relevant EU pieces of legislation (MIFID II, MAR, Prospectus Directive, UCITS, AIFMD, AML) target the investors’ protection and the integrity of the financial market as the cornerstone of the EU single market.

financial services have a significant impact on investors. It is important that investors make informed decisions and feel confident they are adequately protected if something goes wrong

ESMA

Nowadays, there is a huge debate around the nature, the utility and the risks associated with digital assets, such as coins, tokens, smart contracts or, more in general, the use of the Blockchain associated with the Distributed Ledger technology in the financial industry.

Legal uncertainty is usually paired with a wrong perception of the new technologies as such; we should point out that, besides the conceivable frauds, the Blockchain technology associated with the Distributed Ledger technology could enhance the quality and safety of the services provided.

In this new scenario, investors’ protection could be better assured via an operation performed using different nodes provided by an indefinite number of users (miners). This open architecture makes the transaction (almost) irreversible and identifiable in terms of date and time.

In this context, we should try to clarify why current market operators and regulators are so worried about the use of digital assets and if the available legal toolbox is sufficient to protect both the investors and the market.

This new business model is based on the disintermediation of the offer, allowing direct, usually less costly, investments through the issue of coins or tokens; the role of such process is still developing and some major “traditional” financial players (banks, insurances, services providers and even central banks) are trying to better understand the market to be part of it.

This new business model is based on the disintermediation of the offer

Therefore, legislators around the globe are taking initiatives, both to foster and encourage the development of these new technologies in the financial sector, or to prevent the use of these technologies, while waiting for other countries to take a full position on the matter.

In Luxembourg, the CSSF is still analyzing the different pros and cons of the implementation of these new technologies in the financial sector and since now, to the best of our knowledge, it merely issued a press release on February 14, 2014 on virtual currencies.

We do believe a normalization in the use of this FinTechs will be inevitable in the next years and that the advantages linked to these instruments, once the technologies will be stable, could lead to a better environment for the financial industry as such in terms of transparency, reduction of costs and investors’ participation.

Lastly, current regulations are potentially applicable to several aspects of these new technologies and we do believe, at least in the European Union, that we already possess an existing legal toolbox to cope with most of the challenges of the implementation of ICOs, issuance of virtual currencies and/or exchange platforms linked to tokens or coins.

Indeed,

what is important to bear in mind is the nature of the operation and not the instrument through which the operation is carried out.

Indeed, these new operations could fall under the scope of some existing package or not; what is important to bear in mind is the nature of the operation and not the instrument through which the operation is carried out.

For example, the risk associated with an ICO, depending on the structure of the token and the rights attached, could be equal or lower than the risk associated with a bond issuance or a listing of some standard company.

Beyond the qualification and the necessary development to standardize FinTech operations, we do believe that these new opportunities are boundless and could incentivize a capital release to the advantage of both SMEs/start-up companies and market players able to shape their businesses towards the new digital era. It will always be vital to impose transparency to allow investors to make their choices.