Crypto View - January 2025

Happy MiCA implementation/New Year!

It feels like we're only just back from Christmas, and already we've had a lot of developments. No, I'm not talking about $TRUMP - the big news is that MiCA is now fully in force, though not necessarily fully clear. We look at this more below, but it's safe to say that ESMA's latest announcement and response to a Q&A has definitely muddied the waters... Conversely, we finally have a bit more clarity in the UK - with the government publishing an SI amending the CIS Order, confirming that staking is not a collective investment scheme.

This month in MiCA

As it is probably the most important development this month so far, we're leading on the big MiCA news. On Friday, ESMA published a Public Statement on the provision of crypto-asset services in relation to non-MiCA compliant ARTs and EMTs. This followed a question posed under ESMA’s ongoing Q&A on MiCA which was responded to by the European Commission (EC). ESMA’s statement seeks to restrict firms from listing and carrying out exchange services in relation to stablecoins that are not issued by EU-authorised credit institutions or EMIs. While MiCA is clear that it is not possible to issue, offer to the public or seek admission to trading for such stablecoins without being appropriately authorised, it could (and has been) argued that listing an asset on a trading platform, or carrying out reception and transmission of orders or exchange services in relation to such assets would not amount to issuing (clearly), offering to the public, or seeking admission to trading. This statement is firmly contrary to that, and states that:

• CASPs operating a trading platform for crypto-assets are expected to stop making all crypto-assets that would qualify as ARTs and EMTs but for which the issuer is not authorised in the EU (“non-MiCA compliant ARTs and EMTs”) available for trading.
• CASPs offering the below services are also expected to cease providing the relevant crypto-asset services and activities in relation to these non-compliant ARTs or EMTs in the EU when their services constitute an offer to the public:
  • reception and transmission of orders;
  • execution of orders for crypto-assets on behalf of clients; and
  • exchange of crypto-assets for funds or other crypto-assets.

To be clear, an offer to the public under MiCA is: “a communication to persons in any form, and by any means, presenting sufficient information on the terms of the offer and the crypto-assets to be offered so as to enable prospective holders to decide whether to purchase those crypto-assets”. Recital 28 of MiCA also states that “The mere admission to trading or the publication of bid and offer prices should not, in and of itself, be regarded as an offer to the public of crypto-assets. Such admission or publication should only constitute an offer to the public of crypto-assets where it includes a communication constituting an offer to the public under this Regulation.”

ESMA is much more forthright in its statement than the EC was in its response on the Q&A, and seems to have missed the EC’s statement that whether something amounts to an offer to the public requires a case-by-case assessment, and that they could be regarded as making an offer “where they promote or advertise, as part of these services, an ART or EMT.” It is not beyond the realms of possibility that firms carrying out RTO, or exchange services could do so without promoting or advertising such non-MiCA compliant ARTs and EMTs.

Nevertheless, it seems that ESMA may be taking a very expansive view as to what constitutes an offer to the public, to fill in the gaps left by legislators drafting MiCA who did not fully appreciate how the crypto markets work. What perhaps matters more than whether ESMA is correct on a strict reading of the law though, is the inclusion of the following: “It is important that National Competent Authorities (NCAs) guide them through this process, ensuring that actions are taken consistently throughout the EU and are carried out in an orderly fashion. NCAs are encouraged to cooperate and coordinate actions in this regard.” Firms going through the authorisation process will clearly be lent on by regulators to delist, or not make available, any such assets – regardless of what MiCA actually says.

The EC signs off the Q&A with the following statement: "The answer clarifies provisions already contained in the applicable legislation. They do not extend in any way the rights and obligations deriving from such legislation nor do they introduce any additional requirements for the concerned operators and competent authorities". Indeed.

Staking in the UK

This month saw some good news in the UK. Regular readers will be familiar with the FCA’s long-standing view that staking services offered by firms could constitute a collective investment scheme, and so would be regulated in the UK, and not be able to be promoted to potential customers in the UK. This has led to a lot of exchanges of letters confirming why the position may not be as clear cut as the FCA had often suggested over the past few years. From 31 January this will no longer be required (mostly).

On 09 January, the UK government laid an amendment to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (the CIS Order). The amendment adds “Arrangements for qualifying cryptoasset staking” to the list of arrangements which do not amount to a collective investment scheme. The exemption applies to “qualifying cryptoasset staking", which it defines as the use of a qualifying cryptoasset in blockchain validation (itself defined as either validation of transactions on a blockchain, or a network that uses distributed ledger technology or other similar technology). This is pretty broadly drafted, and seems to cover the validation itself, as well as any services that could be offered by custody providers that arrange for the staking of assets. Though it wouldn’t cover certain governance activities, or other activities sometimes referred to as staking, such as DeFi lending programs. But it also potentially frees firms up to utilise other means of providing the service that they may have been avoiding due to CIS concerns – for example pooling customer assets, and taking steps to ensure the best staking returns are achieved.

One interesting point that was included in the supporting explanatory note that was released with the amendment is that the government considers that suitable consumer protection in relation to staking services is “delivered by communications on staking arrangements being provided in compliance with the requirements of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (FPO) and relevant FCA rules and guidance.” This is interesting because, in our view, staking is not generally covered by the FPO. Specifically, staking does not (normally) involve dealing in qualifying cryptoassets, arranging deals in qualifying cryptoassets, managing qualifying cryptoassets or advising on cryptoassets.

With this amendment in place, though, we expect the FCA to be looking far more closely at activities that do not fit squarely within the exemption.

More MiCA

Article 142 of MiCA required the EC to present a report on the latest developments with respect to crypto-assets, after consulting with the EBA and ESMA, in particular on matters that are not addressed in MiCA. The report was due by 30 December 2024, and while 14 days late (who’s counting?), it has now been published. The report provides a pretty comprehensive analysis of the current state and developments in the crypto-assets market, with a focus on DeFi, lending, borrowing, and staking of crypto-assets.

The report notes that 4% of the global crypto-asset market’s value is locked in DeFi protocols. The adoption of DeFi in the EU is above the global average but lags behind other developed economies, such as the US and South Korea. It also highlights a number of risks, including vulnerabilities in smart contracts and the absence of adequate AML/CTF controls, which pose money laundering and terrorism financing risks, also acknowledging that the cross-border nature of DeFi transactions exacerbates these risks. One of objectives of the report is to assess the necessity and feasibility of regulating these activities, however it does not really go into much detail on this in relation to any of the activities. It does refer out to the FATF update on the implementation of its standards which notes that some jurisdictions have been successful in identifying certain DeFi platforms that are engaging in virtual asset activity and have been required to register or have action taken against them – but this seems to beg the question somewhat – if it is possible to find an entity to register, then is it really DeFi? It still feels as though, while regulators are able to see the potential risks with DeFi, suggesting practical steps to deal with those risks remains a greater challenge.

It is more straightforward to identify the firms that are offering lending, borrowing and staking services and the report notes that these services are offered by numerous CASPs in the EU. It suggests that these services may pose a high consumer protection risk, with users often receiving insufficient information on fees, interest rates, and other conditions.

Again however, little is suggested in the way of policy options that could mitigate or solve for these risks. Though I would expect these to be top of the list for services covered in MiCA 2. Yes, it’s been 3 weeks since MiCA 1 came in and we’re already looking to the next one!