Crypto View - December 2024

Well, it’s been a hell of a year (for amusement only – not necessarily representative of our views!), and despite it coming to a close, it doesn’t feel like things have slowed – so we thought we would squeeze in one final Crypto View before we take a break for Christmas. This month has seen a whole host of developments across the UK and EU, the former setting out how it plans to develop legislation, while the latter has been finalising MiCA, which is due to come fully into force in a few days. We also have more stablecoin developments – the EBA has published a paper on tokenised deposits, while Hong Kong has new legislation coming out, and the UAE has approved an “AE Coin”. The focus below is on the discussion paper published by the FCA on disclosures and market abuse.

FCA publishes a Crypto Roadmap to…

The end of November saw the FCA publish a ‘Roadmap’, outlining its plans for a program of discussion papers, consultations and policy statements over the next 12 months, ahead of a planned introduction of a new regulatory regime for cryptoassets in mid to late 2026. The publication coincided with some interesting research that the FCA carried out in conjunction with Yougov. It shows that 12% of UK adults now own crypto, up from 10% two years ago, and 4% four years ago. While Bitcoin was the most commonly owned asset, with 52% of holders saying that they owned some, this is down from 64% in 2021. And perhaps surprisingly, the third highest owned asset is Dogecoin, at 21%...

Another interesting point is that just over a quarter (27%) of holders say they have participated in cryptoasset staking within the last 12 months compared to 9% among the same group who say they participated in lending/borrowing within the last 12 months. Helpfully for these holders (as well as for the broader industry), Tulip Siddiq, the City Minister, announced that legislation will be introduced to remove the legal uncertainty around staking and whether it constitutes a Collective Investment Scheme (CIS). This will likely take the form of an amendment to the CIS Order, introducing an exemption covering staking, though the devil will be in the detail. We expect that the exemption will be limited to proof-of-stake staking, rather than broader staking activities. This will also leave uncertainty around staking activities that do not fall within the exemption – though no doubt the FCA will be emboldened to assume that all staking that isn’t squarely in the exemption would be deemed to be a CIS.

It sounded as though there would be legislation published imminently, though there is a discussion paper due in Q1 next year on staking, which we expect will be more focussed on what will be a regulated activity in the new regime.

The Roadmap suggests that there is a lot coming down the track, with three discussion papers, four consultations and a final policy statement due to be published. The first of these to be published was on an Admissions & Disclosures (A&D) regime, and the Market Abuse Regime for cryptoassets (MARC).

Admissions & Disclosures

The approach the FCA intends to take is in line with much of the reformed prospectus regime, which is currently under consultation in CP24/12 and CP24/13. It is proposed that legislation will cover making a public offer, admitting (or requesting the admission of) a cryptoasset to trading, communicating an advertisement relating to a public offer, and disclosing information relating to a public offer of cryptoassets (that doesn’t amount to advertising). Such acts would be prohibited unless an exemption applied.

Where an offer is made to the public, or an asset is admitted to trading, above a certain threshold, the trading platform would need to perform due diligence on the asset, platforms would need to have processes for rejecting assets, disclosure documents would need to be published, and the publisher of the documents or trading platform would be liable for the accuracy of the information. This builds on the quasi-listing regime that the FCA has been imposing on firms via the financial promotion regime.

There are some interesting points made in the DP 24/4 though – firstly, the FCA acknowledges that overwhelming consumers with excessive information may obscure the most critical details, hindering their ability to make well informed decisions. Disclosures should focus on what is truly important, allowing consumers to assess the risks and benefits effectively. This pragmatism is very much welcomed.

Further, with regard to liability, it is suggested that the burden of proof could rest with the consumer to establish an issuer or offeror knew (or was reckless to the fact) that a statement was untrue or misleading. This would hopefully avoid the chilling effect that could occur if preparers of admission documents choose to avoid providing additional and decision-useful information for fear of liability.

One point that did catch our attention was the statement that the FCA is “considering a requirement for [trading platforms] to reject admission of cryptoassets if they consider that there is a significant risk this may result in consumer detriment”, which seems like a route for the FCA to make firms liable for customer losses. However, it is suggested that risks of consumer detriment could include “material flaws in the design of the cryptoasset or its underlying technology, which might lead to a significant decrease in the value of the cryptoasset.” We would be hoping that the risks are limited to these sorts of flaws.

Market Abuse

As was expected, the FCA are proposing to base MARC on the existing UK Market Abuse Regulation (UK MAR) that currently applies to financial services, though with some tailoring to the specifics of the cryptoasset industry. For those used to UK MAR, there is not much in MARC that will be alarming, just as those who were familiar with EU MAR were not surprised by the market abuse regime in MiCA. But applying these regimes to the crypto market is not straightforward, and we have seen a lot of dismay from crypto businesses trying to implement the requirements in MiCA when they realise the breadth of the requirements.

The tailoring will be the most important factor, and the UK has the benefit of seeing how the MiCA regime plays out to try to avoid mistakes that may be made there (drafters of the market abuse section under MiCA, as with elsewhere, seem to have relied a lot on ctrl+c and ctrl+v). Promisingly, the FCA notes that “there are practical limitations that prevent simply transferring the existing market abuse regime to cryptoasset markets,” highlighting the highly fragmented nature of the markets - the cross-border element of cryptoassets – which might involve trading platforms in a jurisdiction that does not impose equivalent cryptoasset regulations but can nevertheless directly or indirectly affect price formation on UK platforms. Further, in many cases there is a lack of a clearly identifiable issuer (for example, Bitcoin) to take on the same disclosure obligations that issuers do under traditional financial regulations, as well as higher direct participation from retail consumers, which complicates the surveillance process.

The fundamentals will remain the same though, with legislation expected to prohibit insider dealing in relation to cryptoassets traded on a regulated trading platform, requiring the disclosure of inside information relating to cryptoassets traded on a regulated trading platform, and prohibiting market manipulation in relation to those cryptoassets.

The DP also proposes to bring across the concept of Safe Harbours from UK MAR, something which doesn’t seem to have been considered for MiCA. The FCA gives one example of backing asset shortfalls in regulated stablecoins and delaying disclosure of this shortfall – likening it to the delayed disclosure of inside information about liquidity issues at a credit or financial institution, where disclosure would pose financial stability risks. This is promising, and suggests that the FCA is intending to look at the specifics of the industry to ensure that the rules governing it apply sensibly, something that can’t always be said about MiCA.

We will be helping a number of clients with their responses to this, and we would urge any industry participants to do the same – the deadline for responses is 14 March 2025. Please do get in touch with me, George Morris or Alex Ainley, if you would like to discuss further.

The FCA publishes expectations on cryptoasset financial promotions and fiat-to-crypto on/off ramp services

On 26 November 2024, the FCA published its expectations on registered and regulated firms partnering with unregistered cryptoasset firms and financial promotion of cryptoassets and highlighted the importance of compliance and risk mitigation for both regulated firms working with unregistered entities and for unregistered cryptoasset firms. This comes after we have seen the FCA approach a number of self-hosted wallets and on-ramp providers with concerns over the past few months.

The FCA identified three business models at risk of benefiting from illegal financial promotions:

• MLR registered firms providing on/off ramp services (exchange between crypto and fiat currencies) to unregistered firms via APIs or widgets on the unregistered firm’s platforms;
• authorised or registered payment services and e-money firms offering payment solutions to unregistered cryptoasset firms, including facilitating transfers to cryptoasset exchanges; and
• FSMA authorised firms, such as banks, offering services to unregistered firms, like providing payment accounts.

The FCA is clearly leaning on firms over which it has responsibility through the registration or authorisation regimes, as it has far less control over offshore firms not subject to its jurisdiction. Such registered and authorised firms do need to carefully consider their relationships with unregistered cryptoasset firms, and how they can carry out business. While the FCA seems to suggest that all on-ramps will entail a financial promotion, this is clearly not the case, and we would be happy to discuss how firms can operate within the law. Please reach out to me, George Morris, or Douglas Robinson if you have any concerns in this area.

PRA issues data request on firms’ exposures to tokenised assets, stablecoins and other cryptoassets

On 12 December 2024, the Prudential Regulation Authority (PRA) issued a request for data on firms' involvement with tokenised assets, stablecoins, and other cryptoassets, as well as their application of the Basel framework for cryptoassets.

This effort is designed to enhance the PRA and the Bank of England's approach to the prudential treatment of cryptoassets, assess policy options, and improve the understanding of firms' cryptoasset activities for financial stability monitoring.

Firms should report this information at the highest UK group level if it applies to them and should only fill out the parts of the request that apply to them. The submission deadline is 24 March 2025. If you would like to discuss your approach to this, please do get in touch.

EBA looks at tokenised deposits

The EBA has published a report on tokenised deposits, offering initial insights into their potential benefits and challenges. Given the limited market presence and lack of evidence, the EBA does not see an immediate necessity to modify existing regulatory and supervisory frameworks. Nevertheless, the Authority emphasises the importance of a unified approach towards the classification of crypto-assets, ongoing surveillance of tokenised deposit initiatives within the EU, and additional focused studies on the regulatory implications for deposits facilitated by Distributed Ledger Technology (DLT).

In terms of next steps, the EBA advises regulatory bodies to engage in continual market surveillance and share insights on tokenisation of deposits within their jurisdiction by using a standardised template questionnaire developed by the EBA.

This is an interesting area of development, we are seeing a lot of EMIs looking to issue electronic money tokens, and we have seen private tokenised deposits from banks to facilitate settlement internally, but a broad-based, retail focussed tokenised deposit is yet to get much traction. There is a lot of potential for such a product, and we’re keeping an eye on the market to see what happens.

UAE's newest stablecoin gets nod from Central Bank

On 10 December 2024, a new stablecoin pegged to the UAE Dirham, known as "AE Coin", received regulatory approval from the Central Bank of the UAE, marking it as the first regulated digital currency in the country. Ramez Rafeek, the General Manager of AE Coin made the announcement on LinkedIn. The stablecoin is fully backed by reserves held within the UAE, ensuring consistent value (1 AE Coin equalling 1 Dirham). Earlier this year, the UAE introduced a new payment token services regulation, which exclusively allows businesses in the country to accept Dirham-backed stablecoins for transactions involving goods and services. AE Coin is actively working towards integrating stablecoins into the mainstream crypto economy in the UAE, with future plans to build partnerships with banks, payment gateways and tech firms.

If you would like to discuss this further, or other developments in the UAE, please get in touch with my colleagues Jas Shoker and Adam Wolstenholme.

Hong Kong’s Stablecoins Bill

On 6 December 2024, the Hong Kong government unveiled the draft Stablecoins Bill, which aims at establishing a regulatory framework for fiat-referenced stablecoins (FRS) issuers. The bill defines FRS as stablecoins that seek to maintain a stable value by referencing one or more official currencies, units of account, or stores of economic value, either individually or in combination, or as a form of digital value designated by the Hong Kong Monetary Authority (HKMA). This definition extends beyond stablecoins solely linked to the Hong Kong dollar.

The bill introduces a licensing regime requiring entities carrying out the following activities to secure a license from the HKMA:

• issuing FRS within Hong Kong as part of their business operations;
• issuing FRS designed to maintain a stable value against the Hong Kong dollar as part of their business operations; and
• actively promoting their FRS issuance to the public.

Existing FRS issuers, to continue their operations under the new licensing regime, must submit a license application, along with the necessary documentation, to the HKMA and obtain an acknowledgment receipt within three months of the commencement of the regime.

Please get in touch with my colleague Kenneth Hui if you would like to discuss this further.

This month in MiCA

If you didn’t know, MiCA will be fully in force in 10 days. That’s not long, yet we still don’t have all the secondary legislation we were promised. Helpfully, this month ESMA published a list of grandfathering periods decided by Member States under Article 143 of MiCA, letting firms know how long they will be able to continue to operate prior to obtaining a licence. The fact that they are all different, and there are still some countries with “TBA” listed will, I’m sure, be fine. If you are operating cross-border from one EU jurisdiction to another, we would definitely recommend you reviewing what you can and cannot do in terms of provision of services and marketing. It will not necessarily be the same as pre-MiCA. Please get in touch if you would like to discuss. Linked to this, my colleague Koen and I managed to find some time to record a podcast discussing the difficult bits of MiCA that still seem to be without a solution.

We have also seen the following published:

• Final Report: Guidelines for reverse solicitation
  Following the Draft Guidelines, many (including us) noted that the proposed reverse solicitation regime under MiCA seemed a lot stricter than that under MiFID II. ESMA has confirmed that these guidelines focus exclusively on MICA, and that MiFID reverse solicitation is to be viewed separately. It also reiterates that non-EU execution venues on which EU-authorised brokers seek liquidity may be in breach of MiCA if they are providing crypto-asset services in the Union and do not fall in scope of the exemption under Article 61 of MiCA. It refers to its Opinion that it published in July to emphasise this. Firms need to consider this carefully.

  ESMA has also carefully narrowed the scope of solicitation from the draft guidelines. Originally it seemed to suggest that passive marketing could amount to solicitation. While the Final Guidelines do say that “any solicitation, promotion or advertising in the Union should be captured”, it goes on to confirm that “the purpose of the guidelines is not to capture solicitations, promotions or advertisements that were never intended or meant to reach clients located or established in the EU.” The Final Guidelines also include an annex with some examples of where third-country firms are likely to be considered soliciting clients. These practical examples are quite helpful.

  Generally, however, it does seem that the reverse solicitation exemption under MiCA is intended to be construed narrowly. We will see how this operates in practice.

• Final Report: Guidelines specifying certain requirements on Investor Protection
  ESMA will continue to approach investor protection under MiCA in much the same way as it does under MiFID. Interestingly, ESMA noted that the point that seemed to raise the most comments and objections was that the draft guidelines in the CP took the view that there are no safe crypto-assets. ESMA has amended the final guidance to remove this statement, understanding that ARTs and EMTs should, generally, be safer than other crypto-assets.

• Final Report: Draft Technical Standards on the Detection and Prevention of Market Abuse
  There are no significant changes to the draft technical standards originally published.

• Final Report: Guidelines on the conditions and criteria for the qualification of crypto-assets as financial instruments
  Readers will be aware that MiCA “does not apply to crypto-assets that qualify as […] financial instruments” – with such assets falling under MiFID. These Guidelines provide the basis on which to determine whether a crypto-asset falls within scope of MiCA or MiFID. Helpfully, ESMA acknowledges the necessity for greater clarity and examples to illustrate the application of the guidelines. There is a lot of detail here, and we welcome this greater clarity, though don’t worry – there is still a reasonable amount of grey left.

We hope you manage to have a great break over the festive period. See you in 2025!