Crypto regulatory round up

Over the past year, regulators have published various consultations on how to regulate the cryptoasset sector and are now engaging closely with stakeholders to fine-tune their proposals. At the same time, global standard setters are publishing non-binding recommendations, which they suggest are incorporated into these developing frameworks. As a result, expectations for firms are becoming clearer.

Since 1 September, the Financial Action Task Force's (FATF) Travel Rule has been live in the UK. This rule, already used in traditional finance, now brings the transparency required for crypto transfers in line with wire transfers. More specifically, it requires financial institutions to send and record information on the originator and beneficiary of a transfer, and that this information remain with the transfer throughout the payment chain. The rule does not go live in the EU until the end of December 2024. This discrepancy in implementation timeline — as well as the fact that the EU version adopts a stricter stance on un-hosted wallets — could prove difficult for firms to navigate. 

The FCA's crypto promotions rules — which will begin regulating cryptoassets as Restricted Mass Market Investments — are set to come into force on 8 October. However, in response to industry readiness (or lack thereof), the FCA recently announced that firms will be able to apply for a 3-month extension (until 8 January 2024) to implement certain changes that require `greater technical development' (e.g. the 24-hour cooling off period). The remainder of the core rules will still come into effect from October, with noncompliant individuals facing an unlimited fine and up to 2 years in prison. The FCA flagged in an accompanying Dear CEO letter, that it was particularly disappointed by the lack of engagement from overseas, unregistered crypto firms. A few weeks later, the FCA re-emphasised these concerns in a `final warning letter', while also signalling that intermediaries (including social media platforms, app stores, search engines and payments firms) can be held accountable for enabling firms to illegally promote to UK consumers. In particular, these intermediaries could be at risk of committing money laundering offences. 

HM Treasury's (HMT) consultation on stablecoins is expected shortly — where the Government will lay out details regarding how stablecoins will become regulated under amended e-money and payment services regimes. As in the EU, it is also expected that the most systemic stablecoins will be subject to additional requirements and supervision by the central bank. This regulation is still expected to be finalised and enforced as part of the Government's `Phase 1' changes — i.e. before wider cryptoasset regulation — see below. Industry interest in stablecoins has surged following the recent launch of a USD coin by a mainstream payment provider.

The response to the joint HMT/FCA consultation on an overarching regulatory regime for cryptoassets is also expected shortly. The consultation period closed on 30 April.

In July, HMT published a consultation setting out its approach to delivering a Digital Securities Sandbox (DSS). This will be the first FMI sandbox delivered under the powers granted through the Financial Services and Markets Act. The DSS will enable firms to set up and operate FMIs, performing trading and / or settlement activities, in a regulatory environment that has been temporarily modified to accommodate digital asset technology. Overall, the proposals align very closely to the EU's DLTR pilot regime — which has been live since March. Once all responses to the consultation have been considered, HMT will lay a statutory instrument before parliament later this year, which will establish the legal framework for the sandbox. And, in parallel, the Bank of England and FCA will begin publishing further guidance around the application process.

MiCA's provisions for stablecoins are set to apply from July 2024, and provisions for other service providers will apply from January 2025. In advance of this, the EBA and ESMA have been consulting on corresponding RTS, ITS and Guideline packages that must be finalised before the new regime commences. The second of these three packages is expected in October. 

Several Member States are already actively preparing for MiCA's implementation. France has begun updating aspects of its national regime, including rules for enhanced cryptoasset service provider (CASP) registration procedures. Germany has issued clarifications regarding which assets fall within scope. And both Ireland and the Netherlands have issued corresponding consultations — with the Dutch central bank emphasising its intention to take a hard-line approach.

During the June Capital Requirements Regulation (CRR)/ Capital Requirements Directives (CRD) trilogues, EU legislators also leveraged MiCA's `risk buckets' to agree a transitional regime for cryptoasset capital charges, until the final BCBS standards are adopted in legislation. 

The development of CBDCs also continues, with a recent BIS survey showing that 93% of central banks are now considering issuing one. On 18 October, ECB governors will officially decide whether to advance on to the `realisation phase' of a digital euro — which would include running external pilot tests. Following this final phase, the central bank would decide whether to progress with minting an EU CBDC.

In September, IOSCO published draft global measures to regulate the DeFi sector. These recommendations dovetail with their earlier recommendations for the wider cryptoasset market that were published in May. The most significant takeaway is IOSCO's stance that, regardless of the operating model of a DeFi arrangement, it is in fact possible to identify relevant `Responsible Persons' who can be held accountable for investor protection and market integrity. This could represent a significant shift in dialogue around the regulation of smart contracts — where assigning accountability has repeatedly been a blocker. Although the recommendations are non-binding, due to the fact that IOSCO's membership is made of up of 95% of the world's securities regulators, it's seen as highly likely that the proposals will cascade down into national frameworks.

Also in September, the FSB and IMF published a report synthesising their parallel recommendations for the cryptoasset market and describing how they interact with each other. Overall, the report emphasises that comprehensive regulatory and supervisory oversight of cryptoassets should be a baseline requirement to address risks — with some emerging markets also needing additional targeted measures. 

Finally, an IMF staff paper has also called for a tax to be levied on cryptoasset miners to address the market's vast carbon footprint.

As regulatory frameworks edge towards completion, differences are emerging between jurisdictions. Firms should carefully consider these differences, in conjunction with their specific business models, when deciding the most appropriate location to establish themselves. 

In particular, regulatory change teams should identify and capture developments at an early stage and implement an operating model to effectively manage diverging regulations. Management should factor upcoming regulatory developments into their business strategy, including potential domicile. And finally, teams responsible for the promotion and marketing of any cryptoasset products must be ready to comply with the FCA's rules in advance of the new deadline.