Cryptoassets pose a new set of risks to investors, according to European securities regulators. The rules for traditional assets should apply to certain assets, they say, while other assets exist outside the regulatory perimeter.

Following an analysis of the evolving markets for initial coin offerings (ICOs) and other cryptoassets, the European Securities and Markets Authority (ESMA) issued its advice to European Union (EU) policymakers today. It identifies several concerns with the existing regulatory framework for cryptoassets.

The ESMA found that there are gaps in oversight because there are cryptoassets that do not qualify as financial instruments under the existing rules, which “leaves investors exposed” to significant risks. Assets that do qualify as financial instruments under the existing rules, on the other hand, need the existing requirements to be interpreted or re-considered to ensure those rules are applied effectively to cryptoassets.

“Some cryptoassets may qualify as MiFID financial instruments in which case the full set of EU financial rules would apply,” said Steven Maijoor, chairman of the ESMA, in a release. “However, because the existing rules were not designed with these instruments in mind, [regulators] face challenges in interpreting the existing requirements and certain requirements are not adapted to the specific characteristics of crypto-assets.

“Meanwhile,” Maijoor added, “a number of cryptoassets fall outside the current financial regulatory framework. This poses substantial risks to investors who have limited or no protection when investing in those cryptoassets.”

The ESMA says that, at a minimum, the existing anti-money laundering (AML) requirements should apply to all cryptoassets and activities involving cryptoassets. It also says that there should be appropriate disclosure required, “so that consumers can be made aware of the potential risks prior to committing funds to cryptoassets.”

The ESMA notes that its work on cryptoassets has highlighted several issues that are beyond its jurisdiction. It calls on European policy-makers to take up these issues, and says that it will continue to monitor the market’s evolution, while also cooperating with other global regulators.

“In order to have a level playing field and to ensure adequate investor protection across the EU,” Maijoor said, “we consider that the gaps and issues identified would best be addressed at the European level.”