The EU and the UK are developing significant changes to their regulatory frameworks to reflect the growing importance of the cryptoasset sector in Europe. We discuss a major EU development—the proposed Markets in Cryptoassets Regulation (MiCA)—immediately below and significant UK regulatory initiatives in the following section.
MiCA
On June 30, 2022 the Parliament and Council of the EU reached provisional political agreement in relation to MiCA. MiCA aims to introduce a harmonized legal framework for certain cryptoassets and cryptoasset market participants in the EU.
MiCA will apply in respect of cryptoassets that are not "financial instruments" under the EU Markets in Financial Instruments Directive (MiFID),1 bank deposits, structured bank deposits, or e-money under existing EU financial services legislation.
In-scope cryptoassets are divided into three sub-categories, to which proportionately more onerous obligations will apply depending on the systemic importance of the relevant sub-category:
It is anticipated that non-fungible tokens (NFTs), which are typically unique, non-divisible tokens that represent underlying digital assets (e.g., digital art, music, and videos), will not be in scope of MiCA unless they fall into a category of in-scope cryptoasset. The European Commission will consider in due course whether an NFT-specific regulatory regime is warranted.
MiCA will apply to issuers of the in-scope cryptoassets described above and to cryptoasset service providers (CASPs). CASPs are firms that provide services to third parties on a professional basis in respect of cryptoassets, including custodian wallet providers, cryptoasset exchanges, and cryptoasset trading platforms.
Summary of Requirements
MiCA will impose a broad range of obligations on issuers and CASPs, including a bespoke market abuse regime, change in control requirements for acquirers and vendors, and certain mandatory environmental disclosures. Other key points of the proposal include:
What Does This Mean for Firms?
Firms that are already authorized as credit institutions or MiFID investment firms will be permitted to operate as CASPs if they notify their home Member State regulatory authorities before providing their CASP services for the first time. Similarly, credit institutions and e-money institutions will not be required to obtain authorization as e-money token issuers. Firms should seek to understand the general compliance obligations under MiCA that they will become subject to when operating as CASPs or as issues (as applicable).
The potential impact on firms that are not so authorized may be profound, depending on the nature of the business they carry on. Firms that intend to take advantage of grandfathering and transitional provisions in MiCA should use any transitional period to prepare for authorization (including by building appropriate systems and controls).
For non-EU firms, it is important to note that MiCA does not contain a third country regime. Non-EU firms will therefore be required to establish a physical presence in an EU Member State in order to apply to become authorized under MiCA if they wish to promote their services to clients in the EU.
UK Developments
MiCA represents the latest step in the development of an EU framework for the regulation of cryptoassets, an area that the UK is also developing in parallel. Indeed, on July 5, 2022, the Bank of England (the BoE) stated the case for significant new regulation for cryptoasset firms.5 The extreme volatility in cryptoasset markets in recent times, the BoE noted, "underscores the need for enhanced regulatory and law enforcement frameworks to address developments in these markets and activities." This was particularly the case, the BoE argued, in relation to stablecoins that are "used as money-like instruments in systemic payment chains," which "should meet equivalent standards to commercial bank money in relation to stability of value, robustness of legal claim and the ability to redeem at par in fiat."
The BoE's announcement comes off the back of HM Treasury confirming its intention to introduce significant new UK regulation for cryptoasset firms.6 The changes would include, in particular:
HM Treasury and the FCA are also planning to amend UK rules on the promotion of financial services and products to include certain "qualifying cryptoassets" (e.g., utility and exchange tokens) and certain activities carried out in relation to them (e.g., dealing, arranging deals in, managing and advising on, qualifying cryptoassets). In summary, this change will prohibit the promotion of certain fungible and transferable cryptoassets and related services unless the promotion is made, or approved, by an FCA or PRA-authorised firm.
What's Next?
It is anticipated that the proposed expansion of UK authorization and financial promotion requirements will be finalized and come into effect during 2022-23.
Publication of the final text of MiCA is anticipated in H2 2022, with the final Regulation expected to apply from 2024. One important caveat to the summary above is that, because the agreed text of MiCA has not yet been published, the full extent and nuance of MiCA may not become apparent for some time.
Cryptoasset issuers and service providers operating in the EU and/or the UK should note the direction of travel under the proposals and reassess their position once the relevant requirements are finalized.
For more information about MiCA, UK developments in this space and operating as a crypto asset issuer or service provider, please contact Wilson Sonsini attorneys Josh Kaplan and Chris Hurn.
[2] The EU Member State where: (i) the issuer has its registered office or a branch; (ii) if the issuer has no registered office in the EU but two or more branches in the EU, the branch Member State chosen by the issuer; and (iii) if the issuer has no registered office or branches in the EU, the Member State in which the offering or admission to trading is first made.
[3] The EU Member State where the issuer has its registered office.
[4] Regulation (EU) No 575/2013 and Directive 2009/110/EC, respectively.
[5] The Bank of England, Financial Stability Report, July 5, 2022.
[6] HM Treasury, UK regulatory approach to cryptoassets, stablecoins and distributed ledger technology in financial markets: Response to the consultation and call for evidence, April 4, 2022.