Navigating the regulatory landscape: ESMA's Guidelines on the classification of crypto-assets as financial instruments

On 17 December 2024, the European Securities and Markets Authority (ESMA) has issued Guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments. These Guidelines, mandated under Article 2(5) of the Markets in Crypto-Assets Regulation (MiCA), aim to provide clarity to National Competent Authorities (NCAs) and financial market participants regarding the delineation between MiCA and other sectoral regulatory frameworks, notably the Markets in Financial Instruments Directive II (MiFID II).

A fundamental principle underpinning these guidelines is technological neutrality and the substance-over-form approach. ESMA emphasizes that the classification of crypto-assets should be based on their inherent characteristics and the rights they confer, rather than their technological format. Tokenisation itself does not alter the classification of an underlying financial instrument.

The guidelines elaborate on the criteria for classifying crypto-assets under various categories of financial instruments defined in MiFID II, such as, for example:

• Transferable Securities: Crypto-assets conferring equivalent rights to shares, bonds, or other non-equity securities, being part of a class of securities, and being negotiable on the capital market are to be classified as transferable securities. Importantly, the criteria are cumulative. Instruments of payment are excluded from this category.

• Money-Market Instruments: Crypto-assets exhibiting characteristics similar to treasury bills or certificates of deposit, typically traded on the money market with short maturity periods and representing a credit balance, may be classified as money-market instruments.

• Units in Collective Investment Undertakings (CIUs): Crypto-assets representing a stake in a pooled investment scheme with the objective of generating a pooled return for investors in accordance with a defined investment policy should be classified as units in CIUs. 

• Emission Allowances: Crypto-assets representing a right to emit a specific quantity of greenhouse gases, recognised for compliance with the EU Emissions Trading Scheme (ETS) and being tradeable, fall under this classification.

For hybrid tokens, ESMA adopts a hierarchical approach: if a hybrid token displays features of a financial instrument, this characteristic should take precedence in its classification. ESMA acknowledges concerns about overreach and plans to apply this approach focusing on substance over form. In consequence, only tokens with genuine financial instrument features shall be classified as such, avoiding misclassification. 

A full version of the Guidelines can be accessed here: https://www.esma.europa.eu/sites/default/files/2024-12/ESMA75453128700-1323_Final_Report_Guidelines_on_the_conditions_and_criteria_for_the_qualification_of_CAs_as_FIs.pdf