This issue takes a look at developments in crypto over the last month, but we can’t ignore the election in the US last week. This returns Trump to the presidency, and put (another) rocket into the crypto market. There are high expectations with regard to changes to personnel at the SEC as well as other developments in terms of cryptoasset regulation, and while the industry is optimistic, we will need to see when and whether these changes materialise.
The UK has also had some political developments, with the Autumn Budget taking place at the end of October. It looks like the UK is pushing forward with cryptoasset regulation updates, introducing developments in the tokenisation space, and consulting on new reporting rules – we look at these further below. Elsewhere, we have also seen similar moves in tax reporting in the Netherlands, we also take a look at developments with SWIFT, the messaging service is starting trials relating to digital assets, and last but not least, as we tick down to the grand entrance of the rest of MiCA, ESMA and EBA are serving up some pre-launch treats with their latest guidance.
Project Guardian’s first industry report on tokenisation
Project Guardian is a joint effort by policymakers, including the UK’s Financial Conduct Authority (FCA) and the Monetary Authority of Singapore (MAS), and the financial sector to improve market liquidity and efficiency via asset tokenisation. On 4 November 2024, Project Guardian published a report that emphasises the importance of tokenisation in enhancing value and efficiency within the financial ecosystem, highlighting it as a key step in improving investor outcomes and broadening financial improvements.
The report advocates for composability and standardisation of tokens, aiming to increase flexibility, interoperability, and innovation in the investment sector. In particular, it highlights a three-step evolution for DLT in asset management.
1. Tokenised Funds: Transforming traditional investment funds and assets into digital tokens to simplify adoption without material change from current norms.
2. Tokenised Assets: Directly investing in assets that have been converted into digital tokens to reduce costs and give investors more control of their sources of growth and risk.
3. Tokenised Flows: Creating digital tokens that represent rights or entitlements to financial assets and products, allowing for flexible and customised financial solutions.
It looks as though the FCA will be collaborating more with the MAS in 2025 to look further at regulatory considerations for tokenisation in the asset and wealth management sector. Fund tokenisation in particular is certainly a growing area of focus in the industry, and we at Simmons can see a lot potential in these developments.
Tokenisation impact on financial stability
Continuing the theme, the Financial Stability Board (FSB) published a report assessing the impact of recent developments in Distributed Ledger Technology (DLT)-based tokenisation on financial stability, including the potential uses of tokenised assets and their interaction with the traditional financial system. In particular, the report focuses on the tokenisation of financial assets, such as tokenised money that may potentially be used as a settlement asset for payments and other financial assets. Although the so far low level of adoption of these tokenisation initiatives means there is currently no material risk to financial stability, the FSB identifies several vulnerabilities to consider as adoption increases. These relate to: liquidity and maturity mismatch between tokens and underlying assets; leverage, asset price and quality (for instance price divergence), interconnectedness (including concentration risk and automatic executions) and operational fragilities. A more general concern is that increased complexity and opacity of tokenisation projects could lead to unpredictable outcomes in times of stress, particularly where permissionless platforms are used. Unsurprisingly, the FSB considers that the solution to these concerns is through oversight, regulation, supervision, and enforcement.
As a final point on the subject of tokenisation, my colleague Oliver Ward published this very helpful briefing on fund tokenisation last month. It explores existing implementations, as well as how tokenisation structures may evolve in the future, and some of the legal and regulatory hurdles that would need to be overcome. Feel free to reach out to Oliver directly if you would like to discuss this more.
Cryptoasset reporting framework
Following the announcement of the UK’s Autumn Budget 2024, the UK government has published a summary of the feedback received from the consultation on the implementation of the Organisation for Economic Co-operation and Development (OECD)’s Crypto-Asset Reporting Framework (CARF). The government has released draft regulations titled "The Cryptoasset Service Providers (Due Diligence and Reporting Requirements) Regulations 2025" (the UK CARF Regulations) and is seeking feedback on enacting these new regulations and other suggestions.
The UK CARF Regulations set out the due diligence, record keeping and reporting obligations of a “UK reporting crypto-asset service provider”, covering generally any person or entity that, as a business, operates as a crypto exchange. The UK CARF Regulations will come into force on 1 January 2026 and the first reports to HMRC covering the 2026 calendar year will be due by 31 May 2027. If you would like to discuss this further, please get in touch with my colleague James Cherry.
Similar developments are taking place in the Netherlands, where the government is seeking feedback on its crypto tax reporting bill. This will mandate crypto service providers to disclose user data to tax authorities, aiming to enhance transparency and combat tax avoidance and evasion. This initiative aligns with the European directive DAC8, which obligates EU crypto service providers to collect and report user information for tax purposes, facilitating data exchange among member states.
If you would like to discuss this consultation further, or if you have questions on taxation of crypto in the Netherlands more generally, please reach out to my colleagues Robert Jean Kloprogge, Roelie van Seggern, and Koen van Leeuwen.
FCA publishes Q3 Financial promotions data
The FCA’s latest quarterly data underscores its focus on enforcing the financial promotion restriction in the UK. This covers all financial promotion interactions the FCA has had, not just in relation to cryptoassets. There is no breakdown of crypto-specific promotions for the last quarter, but the FCA does confirm that it has issued 1,702 consumer alerts about illegal crypto promotions since the regime came into force, with its actions resulting in the take down of over 900 scam crypto websites and the removal of 56 apps from UK apps stores.
It also gives one example of its intervention in relation to a cryptoasset firm – a failure to fully comply with FCA rules on the appropriateness assessment and client categorisation under COBS. The FCA was of the view that the firm did not include sufficient questions to properly assess the knowledge and experience of potential clients looking to invest in cryptoassets, and did not include the prescribed client categorisation declaration wording to categorise clients appropriately. This follows a review that the FCA undertook in relation to a number of firms earlier this year.
If you have any questions in relation to the implementation of the FinProm regime in relation to crypto, please do get in touch.
Cryptoasset registrations: building strong foundations
In the last issue of Crypto View we noted that the FCA hadn’t registered a crypto firm since February of this year. In October, we saw Val Smith, the Head of Payments and Digital Assets at the FCA, defend the agency's stringent cryptoasset registration standards as essential for fostering a secure, competitive crypto sector in the UK. Despite concerns that these high standards might hinder innovation or the UK's financial leadership, Ms Smith emphasises the importance of preventing money laundering and associated crimes like terrorism and human trafficking. She suggests that the aim is for the FCA to build the crypto sector on solid foundations, ensuring safety, security, and sustainable growth – and states that the FCA remains committed to supporting firms that meet these standards while filtering out those that pose risks, thereby safeguarding the future of the UK's crypto sector. While we doubt that all of the 241 firms who have voluntarily withdrawn their applications since January 2020 were hotbeds of terrorist financing, and indeed we have seen some notable firms not manage to be registered in the UK, but be able to be registered in jurisdictions like France and Switzerland – places that surely don’t have vastly different standards to the UK with regard to AML/CTF - we understand the need to keep high standards in the UK. We hope that the FCA does indeed support more firms to registration, as the rate of approval does seem incredibly low.
SWIFT to test live digital currency transactions in next year's trial
SWIFT, the global bank messaging network, has announced plans to conduct live trials of tokenised assets and digital currencies next year, aiming to integrate these assets into the financial system more effectively. The initiative seeks to make trading of traditional assets like bonds, represented by blockchain-based tokens, faster, cheaper, and more efficient by eliminating intermediaries. Despite ongoing exploration by banks and asset managers, such tokenised assets have yet to see widespread adoption in the market, so it will be interesting to see if a successful trial here changes things in the market.
The trial will also involve central bank digital currencies (CBDCs), with SWIFT previously revealing a platform to connect CBDCs to the existing financial infrastructure. This move towards live transactions represents a significant step forward, and suggests real progress on the institutional side of digital assets.
Bitcoin Rights Bill passed in Pennsylvania
The passage of the Bitcoin Rights Bill (House Bill 2481) in Pennsylvania signifies a major advancement in crypto regulation. It allows for self-custody of digital assets, legalises Bitcoin as a payment method, and introduces taxation rules for Bitcoin transactions. This move is part of a wider trend in the US towards establishing clear regulatory frameworks for digital assets, driven by increasing crypto adoption. As noted, there are high expectations in the US of a liberalisation of rules in relation to cryptoassets following the election of President Trump, and this move in Pennsylvania could well be replicated in other states across the country.
This month in MiCA
There are only two months left before the rest of MiCA (as provisions relating to EMT and ART issuers are already in force) is enforceable across the EU! If you need help with your MiCA application or compliance obligations, do reach out to us- you’re certainly not alone in struggling through the swathes of delegated legislation on MiCA that has been published (and is still to be finalised in many cases) over the past few months.
Market Abuse
For those looking at MiCA, you will have seen the provisions relating to market abuse and conflicts of interest, which align closely with the rules that have been in place under the Market Abuse Regulation and MiFID in relation to TradFi, but go far beyond what crypto firms will have had to deal with under the various AML regimes they have been subject to. To help with this, Simmons hosted a webinar on 13 November on the market abuse regime as it will apply to crypto and crypto firms under MICA, looking to help you understand the practical steps you and your firm must take to prepare for the change in regulation, in particular:The Scope of the Market Abuse Regime under MiCA
The prohibited activities
Controls and mitigations firms can and should put in place
If you are interested, you can listen back to the webinar on demand here.
ESMA responds to Constructive Criticism from the European Commission (EC)
On 16 October, ESMA published its response to the EC’s proposed amendments to the first package RTS under MiCA. In the Opinion, it acknowledges the EC’s point about ESMA not having a mandate under articles 60(13) and 62(5) of MiCA to impose cybersecurity audits realised by a third-party cybersecurity auditor on CASPs in the RTS. However, instead of letting the issue drop, ESMA has proposed that the EC should amend the wording in MiCA to include such an obligation, to ensure that CASPs are subject to a thorough screening process, including in relation to their ICT systems, prior to their entering into the crypto-assets market. ESMA has also recommended that wording in article 62(3)(a) of MiCA be amended to allow competent authorities to consider a broader range of criminal records and penalties when making an assessment of good repute for members of the CASP’s management body. ESMA accepted several other minor amendments proposed by the EC in relation to information to be provided by CASPs when applying for authorisation.EBA publishes Guidelines on MiCA Redemption Plans
These Guidelines, published on 9 October, set out what asset-referenced tokens (ARTs) and e-money tokens (EMTs) issuers must include in their redemption plans, which must be submitted to the competent authority within 6 months of admitting the token to trading. Redemption plans are intended to support the orderly redemption of tokens in the event that a regulator determines that the issuer is unable or unlikely to be able to fulfil its obligations, including in the case of insolvency or withdrawal of authorisation. The guidelines specify content to be covered, including the liquidation strategies of the reserve of assets, the mapping of critical activities, the content of the redemption claims, the main steps of the redemption process, and the elements that may lead to the trigger of the plan by the competent authority.EBA publishes Decision on the classification of ARTs and EMTs
The European Banking Authority (EBA) has published a Decision outlining the criteria for determining ARTs and EMTs as “significant”. This classification is crucial for companies issuing or dealing with ARTs and EMTs, as it dictates the shift of supervisory oversight from national competent authorities (NCAs) to the EBA, directly impacting how these entities are regulated at a European level.The Decision notably:
- standardises the reporting schedule for NCAs and clarifies reporting requirements for issuers of significant ARTs and EMTs;
- details the process and timeline for the EBA to communicate its initial and conclusive evaluations of significance to stakeholders; and
- provides procedural guidelines and templates for a smooth supervisory transition and stakeholder feedback, ensuring efficiency and clarity.
The EC has adopted six Delegated Regulations supplementing MiCA
On 31 October 2024, the EC adopted the following Delegated Regulations:RTS specifying the procedure for the approval of a cryptoasset white paper
RTS on continuity and regularity in the performance of cryptoasset services
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The Council of the EU and the European Parliament will now scrutinise the Delegated Regulations. If neither objects, they will be published in the Official Journal of the European Union and enter into force 20 days after their publication.
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