The European Securities and Markets Authority (ESMA) has issued some Guidelines that aim to establish clear criteria for assessing whether a crypto-asset qualifies as a financial instrument, promoting a harmonised interpretation across the European Union. They also provide important clarifications on the treatment of utility tokens, non-fungible tokens (NFTs), and hybrid tokens under existing EU financial services legislation.
Purpose and Objectives
Article 2(4)(a) of the Markets in Crypto-Assets Regulation (MiCA) excludes certain categories of crypto-assets from its scope, notably those that qualify as financial instruments under Directive 2014/65/EU (MiFID II). In practical terms, this means that where a crypto-asset meets the definition of a financial instrument, it falls outside MiCA and is instead governed by the MiFID II framework. However, while MiFID II provides an EU-wide definition of "financial instruments," its interpretation and application has historically shown some variation among national competent authorities. This has generated some uncertainty in application which is at odds with MiCA’s goal of full harmonisation.
To address this ambiguity, the ESMA Guidelines aim to establish a consistent, EU-wide framework for assessing whether a crypto-asset qualifies as a financial instrument. They adopt a substance-over-form approach, ensuring that instruments with comparable economic functions are regulated in the same way, regardless of their technological form or label.
Classification of Crypto-Assets as Financial Instruments
General Principles
ESMA emphasises that the technological format or underlying infrastructure of a crypto-asset should not determine its regulatory classification. Crypto-assets that represent traditional financial instruments, even when issued on distributed ledger technology (DLT), remain subject to the MiFID II regime. Regulatory authorities are instructed to apply a technology-neutral perspective, ensuring equivalent treatment for functionally similar assets.
Transferable Securities
A transferable security is a type of financial instrument that can be traded freely on the capital markets. Under Article 4(1)(44) of MiFID II, transferable securities are defined as those classes of securities which are negotiable on the capital market, excluding instruments of payment. These include: (a) shares in companies and other securities equivalent to shares, (b) bonds or other forms of securitised debt, and(c) other securities that give the right to acquire or sell such transferable securities or that give rise to a cash settlement determined by reference to financial instruments, currencies, commodities, or indices.
ESMA outlines a three-part test for determining whether a crypto-asset qualifies as a transferable security:
- Exclusion of Instruments of Payment: The asset must not function primarily as a medium of exchange. Crypto-assets used for payments (such as stablecoins) are excluded unless they also confer rights akin to those of securities.
- Classes of Securities: The asset should belong to a class of securities – that is, it must be interchangeable with other assets in the same issuance and confer identical rights (such as dividend or voting rights).
- Negotiability on Capital Markets: The asset must be capable of being transferred or traded in a capital market context, which includes not only regulated markets but also trading platforms and decentralized exchanges, provided there is effective transferability.
For instance, a token issued by a DAO that confers voting rights and a share in profits would likely satisfy this test and be classified as a transferable security, thereby falling under MiFID II rather than MiCA.
Other Types of Financial Instruments
The Guidelines also address crypto-assets that may fall within other categories of financial instruments under MiFID II:
- Money Market Instruments: Crypto-assets that function as short-term debt instruments (such as certificates of deposit or treasury bills), provided they are transferable, of short maturity, and offer a return, may qualify as money market instruments. They must not function as payment instruments.
- Collective Investment Undertakings (CIUs): Where a token represents a pooled investment vehicle — involving capital raised from multiple investors, managed according to a defined investment policy, and aimed at generating returns for those investors — it may qualify as a CIU. This classification is not dependent on whether the contributions are in fiat, cash equivalents, or crypto-assets.
- Derivatives: The Guidelines provide a robust framework for assessing whether a crypto-asset functions as a derivative. This includes:
- Whether the asset involves a future commitment to buy or sell an asset;
- Whether its value is derived from an underlying asset, index, or benchmark;
- Whether it follows the settlement modalities set out in Annex I Section C (4)-(10) of MiFID II.
Examples include tokenised futures, perpetual futures (which lack an expiration date), and synthetic tokens that track the performance of an index or basket of other assets. The assessment must be conducted on a case-by-case basis and focus on economic substance over form.
- Emission Allowances: To qualify as an emission allowance, a crypto-asset must represent a right to emit greenhouse gases and be recognised within the EU Emissions Trading Scheme under Directive 2003/87/EC. Only tokens recognised for compliance are eligible, distinguishing them from voluntary carbon credits.
Special Considerations
Non-Fungible Tokens (NFTs)
Non-Fungible Tokens (NFTs), which are typically used to represent unique digital or physical assets such as digital art, collectibles, or intellectual property, are generally excluded from the scope of MiCA — provided they are genuinely unique and non-fungible. However, the ESMA Guidelines caution against relying solely on technical standards or token labels to determine regulatory treatment.A key concern arises with Fractionalized NFTs (F-NFTs) — tokens that divide ownership of a single NFT into multiple parts, which are then individually tradable. While the original NFT may represent a unique asset, F-NFTs are often issued in large quantities, confer identical rights, and are traded actively on secondary markets, making them fungible in practice. This fungibility significantly alters their regulatory profile.
ESMA emphasises that the classification of F-NFTs should be based not on their origin from a unique NFT, but on their actual economic function and market behaviour. Where F-NFTs are interchangeable, grant equivalent financial rights, or can be re-aggregated to reconstruct the original NFT, they may lose their non-fungible character and fall within the scope of MiCA — or even qualify as financial instruments under MiFID II if they exhibit features such as investment returns, voting rights, or cash-settlement mechanisms.
Importantly, ESMA promotes a case-by-case assessment to determine whether a given NFT or F-NFT should be regulated. This approach is intended to prevent regulatory arbitrage, where issuers structure tokens to appear as exempt NFTs while conferring rights akin to traditional financial instruments. Factors such as market standardisation, rights conferred, and trading patterns all play a role in this evaluation.
Hybrid Tokens
Hybrid tokens combine features of financial instruments (such as dividend rights) with those of utility tokens (such as access to a platform or service). Where a token displays features of both, the financial instrument classification takes precedence.For example, a token that provides voting rights in a protocol’s governance alongside a share in future profits is likely to be treated as a financial instrument. The label given by the issuer is not determinative; what matters is the actual function and rights the token confers.
In conclusion, the ESMA Guidelines represent a significant advancement in the regulation of crypto-assets across the EU. By clarifying the boundary between MiCA and MiFID II, and promoting a consistent, technology-neutral, and function-based approach, ESMA provides essential guidance for market participants and national regulators.
Stakeholders should undertake a detailed, case-by-case analysis of their crypto-assets, considering not just the technical design but also the rights and expectations they confer. Legal and compliance teams will be central to navigating this evolving landscape and ensuring alignment with the Guidelines.
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