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News and Views

FCA to regulate qualifying crypto assets – comparison with EU MiCA regime

Posted on 22 Sep 2022

The FCA is expected to issue new provisions for crypto assets and high-risk investments once Parliament passes the latest proposed amendment to the Financial Services and Markets Act. The new regulatory framework will substantively differ from the EU’s Markets in Crypto Assets Regulation (MiCA).

Financial promotions of crypto assets are already governed by the rules contained in the FCA’s Policy Statement PS22/10 which will likely soon be incorporated into a wider set of rules regarding crypto assets.

A first glance at the bills that is currently being read in the House of Commons reveals that the its purview is set to be much more limited than MiCA (the EU regulation on markets in cryptoassets). Whereas the EU purports to regulate all types of crypto assets, the UK will (for now, at least) only seek to restrict the circulation or promotion of ‘digital settlement assets’, which refers to crypto coins used as a mean of payment. In an expected fashion, the EU’s approach aims to put consumer protection and market stability on a pedestal. Across the English Channel, the FCA’s outgoing chair has described that the regulator is taking caution not to deter innovation.

Further, the activities within the remit of each regime differ. The UK is expected to first regulate services such as exchange and custody services. MiCA, on the contrary, will reach a wide range of activities in relation to crypto assets. These notably encompass trading, advising, transmitting orders, executing orders, custodian services, and crypto-to-crypto and crypto-flat exchanges.

Resulting from the aftermath of the London Finance & Capital minibond scandal, the FCA is expected to soon regulate on risk warning for high-risk investments, which should hopefully soon cover crypto investments as well. On the continent, the French Autorité des Marchés Financiers (AMF) has already launched initiatives to probe crypto firms in the likes of Binance Limited under pre-MiCA rules. The FCA has expressed concern in the past in relation to Binance’s unwillingness to disclose material information concerning its opaque and complex corporate structure.

MiCA and the reform FSMA Bill will impose liability on service providers for assets lost under custody caused by unlawful data breaches such as cyber-attacks. Taking the learned lessons from other European regulators such as the AMF, the FCA will need to enforce rigorous and precise supervision rules to ensure that firms are effectively segregating crypto assets. Another concern may be that crypto-related service providers may not hold sufficient capital or own funds to cover for such losses, in which case the regulator will need to take a stance between enabling said-innovation and consumer protection.

In the EU, national regulators will be backed up by the European Banking Authority who will be conferred authority under the Post-BCCI Directive on Reinforcing Prudential Supervision of the Financial Services Sector to intervene and hold direct supervisory functions over stable coin issuers and other ‘significant’ providers across the Union.

As with any framework, enforcement powers will determine the impact of the enacted rules. Whilst MiCA confers enforcement powers to all national regulators and the EBA, only a few of financial authorities have so far taken on the task to probe crypto asset service providers. Similarly, the FCA has yet to take any sanctions against the likes of Binance Limited despite categorising them as incapable of being effectively supervised. In the US, however, the Securties Exchange Commission has begun taking enforcement actions against crypto issuers, determining that the latter already come within the purview of existing laws and regulations.