It seems that the direction of travel for the regulation of cryotocurrency and crypto assets in the EU and UK are taking strongly divergent paths.
In Europe there is the markets in crypto-assets (MiCA) regulation, the financial services and markets bill is being read by the UK parliament and new UK Financial Conduct Authority rules are coming for high-risk investments.
But what does this mean for the scope of regulation, investor protection, supervision and enforcement?
The UK will start by regulating a few specific crypto assets and service providers, while the EU is pretty much going for the whole lot. Mica has a broad definition of a “crypto asset”, but the UK is dipping its toe in the water with a narrower “digital settlement asset”.
This essentially covers stablecoins used as a means of payments, but not (for now) and crypto assets as investments. This choice seems to be about facilitating innovation — and FCA caution.
The EU’s wider investment focus means that issuers of new crypto assets (with important exceptions like purely mined coins) need to publish and be liable for a prospectus-like white paper that sets out their plans.
The differences in regulation extend to service providers. The UK is likely to focus on fewer services, such as exchange and custody.
MiCA’s more expansive definition covers trading, advice, transmitting orders and more, as well as custody and crypto-to-crypto and crypto-to-fiat exchange.
The UK’s next planned step is to legislate for crypto investment risk warnings. Investors need to have a clear understanding of what protection they are (or are not) getting.
As crypto assets are not protected by deposit insurance or other compensation schemes, supervisory effectiveness is key.
MiCA and the UK will impose liability on service providers for custody losses, such as cyber attacks on digital wallets. But policing client asset segregation is hard enough in the non-crypto world. And thinly capitalised service providers might not have deep enough pockets to make good on losses.
Supervisors need to be sharp. The French Autorité des Marchés Financiers raised a few eyebrows recently when it announced it would supervise Binance, the world’s largest crypto exchange, under pre-MiCA French law.
Binance has been scolded by a number of regulators, including in July when it was fined €3 million by the Dutch, and last summer when the FCA concluded that it “is not capable of being effectively supervised”.
The AMF clearly thinks differently.
National supervisors such as AMF will still oversee service providers under MiCA, but the European Securities and Markets Authority will be able to intervene with “significant” providers and the European Banking Authority will have direct supervisory powers for the first time, for stablecoin issuers.
What about enforcement?
The US Securities and Exchange Commission has taken decisive action against crypto scams and insider dealing, arguing that many crypto assets are effectively securities subject to existing rules.
The FCA came to the same conclusion in 2019 guidance, but enforcement action has not yet followed. MiCA will grant fining powers to the EBA and national authorities, but in the mean time, big fines in the EU have been rare.
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