|European Union Electricity Market Glossary|
Blockchain’s potential impact on energy company operations and business models can’t be overestimated.
Many say that traditional roles of energy utility companies will soon be disrupted, unless major actors adapt to changing environment and apply new technology to the variety of processes.
To identify the key regulatory requirements applicable in this field, it is necessary, firstly, to settle some fundamental terminology.
Blockchain is both a code, i.e. a communication protocol, and a public register, in which all transactions between network participants are recorded one after the other, with a high degree of transparency and in a way that cannot be altered” (Blockchain and the social economy, Blockchain and distributed ledger technology as an ideal infrastructure for the social economy, Opinion of the he European Economic and Social Committee, 9 July 2019, INT/880, point 3.2).
The said Opinion of the European Economic and Social Committee of 9 July 2019 further refers to the following features of a blockchain:
- it represents the order of records, which comprises a set of "blocks" (parts of code) that are linked together cryptographically, making each part of the block that forms the chain traceable and unchangeable;
- these "chain-linked blocks" are simultaneously recorded on each of the devices through which the blockchain participants connect (each participant is a link in the chain, helping to validate and store the data that is being exchanged);
- in this way, the transactions take place horizontally and are validated by a number of participants, making it impossible for a single operator to alter or destroy the records.
DLT (distributed ledger technology)
The term ‘blockchain’ is sometimes used interchangeably with a ‘DLT’ (distributed ledger technology), but, as observed in the Final Report of October 2018 of the U.K. HM Treasury, Financial Conduct Authority and the Bank of England (Cryptoassets Taskforce), blockchain refers rather to a specific way of structuring data on a DLT platform.
DLT is in this context understood as “a type of technology that enables the sharing and updating of records in a distributed and decentralised way. Participants can securely propose, validate, and record updates to a synchronised ledger (a form of database), that is distributed across the participants”.
In turn, a cryptoasset is a “cryptographically secured digital representation of value or contractual rights that uses some type of DLT and can be transferred, stored or traded electronically”.
Cryptoassets are also sometimes referred to as ‘tokens’.
The European Central Bank (ECB) does not regard virtual currencies, such as Bitcoin, as full forms of money as defined in economic literature, virtual currency is also not money or currency from a legal perspective (Virtual currency schemes – a further analysis, ECB, February 2015).
The ECB defines virtual currency as “a digital representation of value, not issued by a central bank, credit institution or e-money institution, which in some circumstances can be used as an alternative to money”.
The World Bank has classified cryptocurrencies as a subset of digital currencies, which it defines as digital representations of value that are denominated in their own unit of account, distinct from e-money, which is simply a digital payment mechanism, representing and denominated in fiat money (Distributed Ledger Technology (DLT) and Blockchain, World Bank, 2017).
Initial coin offering (ICO)
In the ESMA’s Advice of 9 January 2019 (Initial Coin Offerings and Crypto-Assets, ESMA50-157-139) ESMA defined an initial coin offering (ICO) as “an operation through which companies, entrepreneurs, developers or other promoters raise capital for their projects in exchange for crypto-assets (often referred to as ‘digital tokens’ or ‘coins’), that they create”.
Regulatory approach to the use of blochchain’s technology in the energy market
In the context of energy market a utility tokens can play a particular role, as they can be redeemed for access to a specific product or service that is provided using a DLT platform.
In the public warning of 13 November 2017 (ESMA alerts firms involved in Initial Coin Offerings (ICOs) to the need to meet relevant regulatory requirements, ESMA50-157-82) ESMA underlined:
“Firms involved in ICOs must give careful consideration as to whether their activities constitute regulated activities. If their activities constitute a regulated activity, firms have to comply with the relevant legislation and any failure to comply with the applicable rules would constitute a breach.
Also ESMA’s Crypto Asset Advice of 12 July 2019 (ESMA’s Report, Licensing of FinTech business models, ESMA50-164-243, p. 3) is that “certain tokens are financial instruments and subject to the full attendant regulation, while those tokens that are not deemed financial instruments should be subject to some minimal level of regulation”.
A precise case-by-case assessment of the specific design of the particular token is required to determine the token’s legal classification, particularly whether it qualifies as a financial instrument within the meaning of Section C of Annex I to MiFID II.
Depending on its features in the individual case a token may be classified as:
- a security (Article 4(1)(44) of MiFID II),
In addition, a token can serve as the underlying asset for a derivative contract (point (4) and points (9) to (10) of Section C of Annex I to MiFID II).
In cases where a token is the underlying asset for a derivative contract, the derivative contract is to be classified as a financial instrument (see BaFin Advisory letter 20 February 2018 (Supervisory classification of tokens or cryptocurrencies underlying “initial coin offerings” (ICOs) as financial instruments in the field of securities supervision, Ref. no.: WA 11-QB 4100-2017/0010).
However, when referring to the legal nature of crypto-assets the said ESMA’s Report of 12 July 2019 mentions (p. 16, 17) that almost all EU National Competent Authorities (NCAs) “reported having difficulty in determining when crypto-assets are regulated and when they are not.
NCAs raised the question on the legal nature of the crypto-assets and whether they fit into the definition of MiFID financial instruments, and, more specifically, transferrable securities.
NCAs explained that where crypto-assets qualify as financial instruments, crypto-assets related activities are likely to fall within the scope of MiFID, the Prospectus Regulation, CSDR, EMIR, UCITs or AIFMD.
Where crypto-assets do not qualify as financial instruments, they would likely fall outside of the existing regulatory scope, although general consumer protection rules may still apply.
NCAs called for clarity at the EU level on whether specific rules, if any, would need to be adopted to bring them into regulated space.”
Other NCAs’ observations noted in the ESMA’s Report of 12 July 2019 are as follows:
- ICO issuers often qualify their crypto-assets as falling outside of the scope of financial regulation and define them as ‘utility tokens’, NCAs, however, consider that some of the current financial legislation is likely to be applicable, but they see practical difficulties in how to adapt regulations to these new financial instruments;
The ESMA’s Advice of 9 January 2019 (Initial Coin Offerings and Crypto-Assets, ESMA50-157-139) observes:
“Where crypto-assets qualify as transferable securities or other types of MiFID financial instruments, a full set of rules is likely to apply to them and to firms providing investment services/activities in relation to those instruments [...] The vast majority of NCAs agree with this assessment [...]” (p. 36, 37), and
“There are a wide range of crypto-assets being issued and only a fraction of them are likely to qualify as MiFID financial instruments. Where crypto-assets do not qualify as MiFID financial instruments and unless they qualify as electronic money, they are likely to fall outside of the existing EU financial services rules, in which case investors will not benefit from the safeguards that these rules provide. Meanwhile, investors may not easily distinguish between those crypto-assets that are within the scope of EU financial services rules and those that are not, especially when they are available for trading on the same venues” (p. 39, 40).
According to the European Parliament’s Study of July 2018 (Cryptocurrencies and blockchain, Legal context and implications for financial crime, money laundering and tax evasion, Policy Department for Economic, Scientific and Quality of Life Policies Authors: Prof. Dr. Robby Houben, Alexander Snyers, Directorate-General for Internal Policies, PE 619.024, July 2018), although many token’s classifications exist, the most important is the one that draws a distinction between “security” or “investment tokens” on the one hand and “utility tokens” on the other hand.
The said European Parliament’s Study of July 2018 acknowledges the fact that some tokens resemble traditional instruments such as shares or bonds and are commonly referred to as “asset tokens”, “security tokens” or “investment tokens”, while there are also tokens of different type, which grant their holders (future) access to specific products or services and are commonly referred to as “utility tokens”.
Utility tokens “can be used to acquire certain products or services, yet they do not constitute a general-purpose medium of exchange, simply because they can generally only be used on the token platform itself”.
ESMA in the aforementioned Advice of 9 January 2019 seems to refer to the said differentiation when saying that some crypto-assets “may be further away from traditional financial instruments than others and therefore not raise the same risks and issues, e.g., ‘pure’ utility-type crypto-assets, which appear to have little relation to financial markets and can only be redeemed for certain goods or services (e.g. non-tradable vouchers) and certain payment-type crypto-assets” (p. 40).
Particularly, the later ESMA’s remark seems to be of particular importance for blockchain applications in the energy markets.
Conversly, as regards investment (asset) tokens, Securities and Markets Stakeholder Group (SMSG) in its Advice to ESMA of 19 October 2018 (Own Initiative Report on Initial Coin Offerings and Crypto-Assets, ESMA22-106-1338) said:
“Since asset tokens representing a monetary claim on the issuer resemble securities, they pose much the same risk, including counterparty risk and dilution risk if there’s not issuance control, as well as custody risk. At this stage the SMSG has not identified any societal advantage from the issuance of such asset tokens relative to the issuance of traditional securities. Using the term “ICO” rather than “IPO” in these situations seems motivated by seeking regulatory loopholes and avoiding investor protection regulation in situations not differing from regulated activity.”
To distinguish between those two main groups of crypto assets (which crucially influences on the applicability of financial legislation like MiFID II, the Prospectus Regulation and the Market Abuse Directive), the SMSG proposes the test consisting of the following questions as regards the particular token:
1. Does it give the owner an entitlement against the issuer? If so, is it an entitlement in kind or a monetary entitlement? If it is a monetary entitlement, is it profit sharing, a predetermined entitlement, or an undetermined other kind of entitlement?
Last but not least, the payment tokens must be differentiated - the most representative group of crypto assets, as it seems, due to Bitcoin, Ethereum, etc. visibility.
SMSG in the aforementioned document of October 2018 refers to the fact of Germany’s including such payment tokens in the MiFID II list of financial instruments.
The immediate consequence of such a qualification would be secondary markets in such payment tokens becomIng subiect to the MiFID II Multilateral Trading Facilities (MTFs) or Organised Trading Facilities (OTFs) regimes, with the subsequent application of the Market Abuse Regulation (MAR).
Given the above remarks, utility tokens may be an interesting alternative for non-financial counter-parties active in energy markets.
E&Y in the “IFRS (#) Accounting for crypto-assets” indicates the following facets of utility tokens:
- the developer sells tokens in exchange for fiat currency or crypto currency,
- he may also earn commissions on transactions involving the tokens,
- there are no voting rights and legally the developer owes nothing to token holders,
- price discovery occurs through the secondary market (in particular crypto-exchanges).
The SMSG in its aforementioned Advice to ESMA of 19 October 2018 explicitly states that the utility tokens “are currently not covered by financial regulation” and indicates the following benefits of creating such schemes:
- utility tokens representing services may facilitate trading in such services and present an alternate source of early stage funding for innovative projects, they are comparable to a voucher and to crowdfunding by coupon,
The participation in utility token’s schemes is also involved with risks, the main being that the token’s issuer may not deliver the service as expected, or may go out of business, making the token useless. In the secondary market for utility tokens there is a risk of market abuse.
When it comes to the issue of VAT taxation an important milestone is the judgment of the EU Court of Justice of 22 October 2015 (Case C‑264/14) stating that:
- the ‘bitcoin’ virtual currency “is neither a security conferring a property right nor a security of a comparable nature”;
- Article 135(1)(e) of the VAT Directive must be interpreted as meaning that the supply of services, which consist of the exchange of traditional currencies for units of the ‘bitcoin’ virtual currency and vice versa, performed in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients, are transactions exempt from VAT, within the meaning of that provision;
- Article 135(1)(d) and (f) of the VAT Directive must be interpreted as meaning that such a supply of services does not fall within the scope of application of those provisions.
Providers engaged in exchange services between virtual currencies and fiat currencies as well as custodian wallet providers, are listed among the ‘obliged entities’ within the scope of the AMLD (the AMLD5 is required to be implemented in national law by 10 January 2020).
12 July 2019
9 July 2019
9 January 2019
19 October 2018
Cryptocurrencies and blockchain, Legal context and implications for financial crime, money laundering and tax evasion, Policy Department for Economic, Scientific and Quality of Life Policies Authors: Prof. Dr. Robby HOUBEN, Alexander SNYERS Directorate-General for Internal Policies, PE 619.024, July 2018
20 February 2018
BaFin Advisory letter, Supervisory classification of tokens or cryptocurrencies underlying “initial coin offerings” (ICOs) as financial instruments in the field of securities supervision, Ref. no.: WA 11-QB 4100-2017/0010
13 November 2017
Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (Anti-Money Laundering Directive - AMLD, Article 3(18) and ((19)
Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU, Recitals 8 and 9
Cryptocurrencies and blockchain, Legal context and implications for financial crime, money laundering and tax evasion, Policy Department for Economic, Scientific and Quality of Life Policies Authors: Prof. Dr. Robby Houben, Alexander Snyers Directorate-General for Internal Policies, PE 619.024, July 2018
Blockchain and the General Data Protection Regulation, Can distributed ledgers be squared with European data protection law?, European Parliamentary Research Service, Scientific Foresight Unit (STOA), PE 634.445, July 2019,
Basic principles for regulating crypto-assets, Ousmène Jacques Mandeng, 9 January 2019,
Blockchain meets energy, Florence School of Regulation, https://fsr.eui.eu/wp-content/uploads/Blockchain_meets_Energy_-_ENG.pdf
Distributed Ledger Technology (DLT) and Blockchain, World Bank, 2017, http://documents.worldbank.org/curated/en/177911513714062215/pdf/122140-WP-PUBLIC-Distributed-Ledger-Technology-and-Blockchain-Fintech-Notes.pdf
Malta Digital Innovation Authority (MDIA) Act, http://www.justiceservices.gov.mt/DownloadDocument.aspx?app=lp&itemid=29080&l=1
Malta Innovative Technology Arrangements and Services (ITAS) Act, http://www.justiceservices.gov.mt/DownloadDocument.aspx?app=lp&itemid=29078&l=1
Malta Virtual Financial Asset (VFA) Act, http://www.justiceservices.gov.mt/DownloadDocument.aspx?app=lp&itemid=29201&l=1
IFRS (#) Accounting for crypto-assets, E&Y,
|Last Updated on Wednesday, 29 January 2020 22:44|