The EU brings crypto-assets, crypto-assets issuers and crypto-asset service providers under a regulatory framework. Setting an EU level legal framework for this sector for the first time, the Council adopted a regulation on markets in crypto-assets (MiCA). The rules impose a number of requirements on crypto platforms, token issuers and traders around transparency, disclosure, authorization, and supervision of transactions.
Ass we all know MiCA does not apply to security tokens which would quality as financial instruments for the purposes of MiFID2, deposits, securitisation positions, insurance or pension products. This means that firms engaging in cryptoasset activities will still need to consider whether they will fall under the MiCA definition of “cryptoassets” or whether they are subject to another regulation.
MiCA also addresses environmental concerns surrounding crypto, with firms forced to disclose their energy consumption as well as the impact of digital assets on the environment.
MiCA is part of the broader digital finance package, which aims to develop a European approach that promotes technological development and ensures financial stability and consumer protection. In addition to the MiCA proposal, the package contains:
- a strategy for digital finance, a Digital Operational Resilience Act (DORA), which also covers crypto-asset service providers, and
- a proposed pilot scheme on Distributed Ledger Technology (DLT) for wholesale uses.
The package fills a gap in existing European legislation by ensuring that the current legal framework does not pose obstacles to the use of new digital financial instruments and, at the same time, by ensuring that these new technologies and products fall within the scope of financial regulation and operational risk management agreements of companies active in the EU. The package thus aims to support innovation and the adoption of new financial technologies, while ensuring an adequate level of consumer and investor protection.
What about UK?
The shape of the UK framework is still under consultation, although the UK is under some pressure to provide clarity on the scope of the new regime quickly, to give businesses the certainty they need, and the details of both regimes are still to be worked out by the regulators from later this year.
The UK, however, has opted for a phased approach, with Phase 1 covering fiat-backed stablecoins used for payment and Phase 2 covering other cryptoassets.
The UK’s current approach to regulating cryptoassets is articulated in the Final Guidance on Cryptoassets, published by the FCA in July 2019. This approach requires a case-by- case analysis of the relevant cryptoasset’s substantive characteristics to determine whether or not it falls within the perimeter of the existing regulatory framework.
For the types of cryptoassets that fall within the regulatory perimeter, different sets of regulatory rules may apply depending on whether the cryptoasset is characterised as a transferable security, a deposit, an e-money or another type of regulated financial instrument.
Unregulated tokens include all other types of cryptoassets that are not treated as regulated financial instruments or products. In general, this means that firms that engage in activities related to unregulated tokens do not fall within the UK regulatory perimeter. In practice, many ‘cryptocurrencies’ marketed to consumers currently fall into the category of unregulated tokens.
A similar approach is taken in the context of existing EU regulation, to determine whether cryptoassets meet the existing definitions of regulated financial instruments under the EU Markets in Financial Instruments Directive (MiFID2) or qualify as e-money under the EMD.
On 1 February 2023, the HMT published its long-awaited consultation on a comprehensive regulatory regime for cryptoassets other than stable fiat currencies.
In its latest consultation, the HMT indicates that it intends to create several new regulated activities related to cryptoassets. This means that firms will need to be authorised (or exempt) under the Financial Services and Markets Act 2000 (FSMA) in order to carry out such activities in (or into) the UK. Many of these proposed activities mirror, or closely resemble, the activities regulated under the current FSMA regime, but some new activities relating to crypto-assets have also been proposed.
HMT also indicates that it may use the new Designated Activities Regime (DAR) to be introduced under the FMSB to regulate certain crypto-asset activities where it is not necessarily appropriate to impose licensing requirements. Similar to the MiCA, the HMT proposals include a regime for the issuance, offering and admission to trading of in-scope cryptoassets and a regime for market abuse on cryptoassets, where certain rules can be introduced using the DAR.
The definition of ‘cryptoasset’ for this purpose comes from the FSMB and is extremely broad. The HMT indicates that it may introduce some exclusions from the definition for the purposes of the new regulatory regime, but has not yet provided details of these exclusions.
Therefore, the intended scope of the new UK regulatory regime for cryptoassets remains nebulous.
Once the FSMB obtains Royal Assent (expected in Q2 2023), HMT will be in a position to issue secondary legislation covering the details of the regime. The Financial Conduct Authority (FCA) will then need to consult and issue the wide range of relevant rules to operationalise the regulatory regime.
How closely will the UK framework align with the EU’s?
According to Linklaters there are ten areas of potential difference between MICA and the proposed UK regime:
- Single comprehensive framework versus phased approach
- Integration with the existing regulatory landscape
- Definition of cryptoasset
- Categories of cryptoassets
- Scope of regulated activities
- Issuance of cryptoassets
- Overseas issuers and service providers
- Defi
- Market abuse
- Financial promotions
Here the link to go deeper on the points above.
