Digital assets - Q4 2023

In the UK, regulatory bodies have continued to zero in on a range of aspects covered by the proposed future financial services regime for cryptoassets. Meanwhile, in Europe, a complex consultation process around the Markets in Crypto-Assets Regulation (MiCAR) is well underway ahead of fast-approaching implementation deadlines.

In December, UK Finance published a piece centred on the need for future iterations of crypto technologies to place a greater emphasis on a ‘humanised’ end-user experience. Presently, blockchain interactions can have high technical barriers to entry and understanding, while the anonymised nature of crypto transactions can invite risk, intimidate prospective customers, and reduce perceived accountability. The article convincingly argues that by leveraging existing ‘Mobile Identity’ technology, crypto products could be humanised, increasing adoption. As the industry considers matters of consumer engagement, regulators in the UK and across Europe continue to outline the terms upon which firms engaging with Decentralised Finance (DeFi) can operate.

His Majesty’s Treasury (HMT)

We previously provided a detailed breakdown of HMT’s consultation into a ‘Future financial services regulatory regime for cryptoassets’ in the Q1 edition of our newsletter. This consultation closed in April, and on 30 October 2023, HMT provided a detailed response to the consultation. In the first chapter, HMT provides a high-level summary of the 131 responses, drawing out key themes and points of clarification which are then addressed sequentially in the following nine chapters.

The final three chapters of the response are calls for further evidence relating to three topics:

• Decentralised Finance (DeFi) – the regulator has some additional questions relating to themes including the potential challenges of DeFi regulation, risk, and size indicators within DeFi, and industry best practice.
• Other cryptoasset activities – investment advice, portfolio management, mining, and cryptoasset staking are all activities which HMT believes further industry input would be useful.
• Sustainability – the determination and disclosure of sustainability indicators is an area in which the regulator feels it received insufficient information during the consultation process.

In November, HMT published a joint statement with several other governments regarding the Organisation for Economic Co-operation and Development’s (OECD) Crypto-Asset Reporting Framework (CARF). The commitment of OECD members to this international tax transparency standard demonstrates a collective desire to implement the Common Reporting Standard to ensure that digital assets do not become a cross-jurisdiction vehicle for tax evasion.

The Financial Conduct Authority (FCA)

In the Q2 2023 edition of our newsletter, we provided a summary of CP22/2 ‘Strengthening our financial promotion rules for high-risk investments, including cryptoassets’. Further to this, in our Q3 edition, we discussed PS23/6, which featured the regulator’s assessment of responses, outlined minor changes and clarifications, and set a final implementation date for firms of 8 January 2024. Ahead of this, the FCA published its ‘Finalised non-handbook guidance on cryptoasset financial promotions’ (FG23/3) on 2 November 2023. This guidance provides a more practical analysis of the regulations to aid firms in adapting policy, procedure, and governance arrangements to enable compliant promotions.

On 6 November 2023, the FCA published DP23/4 ‘Regulating cryptoassets Phase 1: Stablecoins’. This discussion paper intends to provide stakeholders with context on how the FCA intends to support The Treasury in developing a regime of fiat-backed stablecoins in the UK. Additionally, the paper describes how the proposed legislative change will shape the UK’s financial services regulatory regime for cryptoassets. The deadline for firms to provide feedback on these matters is 6 February 2024.

The European Securities and Markets Authority (ESMA) and The European Banking Authority (EBA)

In June 2023, MiCAR was passed into law by the European Union. This wide-ranging piece of legislation is subject to two implementation deadlines depending on the nature of a cryptoasset firm’s operation:

• 30 June 2024 – Firms who issue, offer, or trade the stablecoins recognised under MiCAR: asset-referenced tokens (ARTs), and e-money tokens (EMTs).
• 30 December 2024 – Firms that issue, offer, or trade digital assets within or to EU-based customers that do not qualify as ARTs or EMTs.

Before these implementation deadlines, three ‘Consultation Packages’ are being published by European regulators to ensure that relevant stakeholders can provide input on draft MiCAR Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS).

On 5 October 2023, the ESMA outlined seven areas of focus for the second consultation package:

• Sustainability indicators (RTS) – setting standards on the methodologies used to determine indicators and their presentation.
• Crypto Asset Service Provider (CASP) performance (RTS) – defining checks and balances to ensure the ‘continuity and regularity’ in service provision.
• Trade transparency (RTS) – setting a minimum level of transparency to ensure that investors and stakeholders can make informed decisions when interacting with digital assets.
• Order book records (RTS) – pushing CASPs to comply with ISO 20022 data standards to enable effective and efficient access for relevant authorities.
• CASP record-keeping (RTS) – ensuring that proportionate and appropriate records are kept by different types of CASPs.
• White papers (RTS and ITS) – standardising the format and process behind cryptoasset white papers.
• Public disclosures (ITS) – providing investors with a greater level of information about the CASPs that they do business with to prevent mis-selling and insider dealing.

The deadline for responses to the second package was 14 December 2023. The ESMA has suggested that it will publish a third consultation package covering at some point in Q1 2024. The third and final package will focus on themes associated with the December 2024 implementation deadline, including market abuse and investor protection.