Financial Promotions Regime for Cryptoassets

The FCA’s Financial Promotion Regime for Cryptoassets took effect on 8 Oct 2023 and applies to all firms that market cryptoassets to UK consumers, regardless of whether the firm is based overseas. To ensure firms clearly understand the requirements for cryptoasset promotions, alongside the FCA final rules (PS23/6) for Cryptoasset Financial Promotions published on 8 Jun 2023, the FCA published the Final Guidance for Cryptoasset Promotions (FG23/3) on 2 Nov 2023.
Under the regime, cryptoasset financial promotions must be fair, clear, and not misleading. SupraFin offers crypto risk analysis reports that can help with the required due diligence and the actual financial promotions.

Future Financial Services Regulatory Regime for Cryptoassets

On Oct 2023, HM Treasury published the results of their consultation on cryptoassets (“Future Financial Services Regulatory Regime for Cryptoassets“). In summary, most regulations affecting cryptoassets will be implemented in Phase 2 (the timeline for Phase 2 will be introduced in 2024). In Phase 2, all cryptoasset exchanges must apply for full FCA authorisation, and investment management activities related to cryptoassets won’t be regulated in Phase 2 but in a later phase. The UK government plans to leverage the work of the Financial Stability Board (FSB) and the Organization of Securities Commissions (IOSCO) to regulate DeFi and set sustainability standards related to crypto.

Discussion Paper (DP23/4): Regulating cryptoassets Phase 1: Stablecoins

As part of the UK government’s regulation on stablecoins (Phase 1), the FCA launched a consultation on Nov 2023, which ended on 6 Feb 2024. The FCA’s regime will aim to address the risks of stablecoins that claim to maintain a stable value relative to a fiat currency by holding assets denominated in that currency when used as money-like instruments, i.e. for payments (and other uses) at a non-systemic scale. They will regulate, for prudential and conduct purposes, all non-systemic UK-based issuers of stablecoins. They will also regulate custodians of such stablecoins, including those providing custody services from the UK and those providing custody services to UK-based customers. HM Treasury is also exploring how stablecoins issued outside the UK can be safely used in UK payment chains.

Topics covered in the consultation paper included:

• Backing assets
• Regulated stablecoin issuers
• Custody requirements
• Organisational requirements
• Conduct of business and consumer redress
• Prudential requirements
• Managing regulated stablecoin issuers and custodian firm failures
• Regulating payments using stablecoins
• Overseas stablecoins used for payment in the UK

Regulatory Regime for Systemic Payment Systems Using Stablecoins and Related Service Providers

As part of the UK government’s regulation on stablecoins (Phase 1), the Bank of England (BoE) launched a consultation on Nov 2023, which ended on 6 Feb 2024. The Bank of England is responsible for creating a new regulatory framework for “systemic” payment systems using stablecoins and related service providers. The new regulatory framework will ensure that stablecoins can be utilised as a safe “payment” means in the UK. Below are the key items addressed in the paper:

• HM Treasury decides which payment systems and service providers are systemically important.
• Systemic stablecoins should only be used for payments (not other functions), always be exchanged at par, and be sterling-denominated and backed by sterling-denominated assets.
• Systemic stablecoin issuers should fully back the stablecoins in issue with central bank deposits, and they should not receive interest on the deposits or pay interest to stablecoin holders.
• Assets backing systemic stablecoins are expected to be kept in a segregated account and protected from claims of other creditors through a trust arrangement.
• BoE recommends that one entity (e.g., the stablecoins issuer) be responsible for the safe and proper operation of the transfer function; however, we think independent third parties should also help assess and monitor the risks of public blockchains and their respective cryptoassets.

Consultations related to MiCA by ESMA

During the implementation phase of MiCA, the European Securities and Markets Authority (ESMA) is consulting with the public on a range of technical standards that will be published sequentially in three packages. The date for the measures’ entry into application is subject to their adoption by the European Commission and approval by the European Parliament and the Council of the EU.

The first package, published in July 2023, included content of notification from selected entities to National Competent Authorities (NCAs), forms and templates for notification from entities to NCAs, content of the application for authorisation for Crypto-Asset Service Providers (CASPs), forms and templates for CASP authorisation application, complaint handling procedure, management and prevention, disclosure of conflict of interest, and intended acquisition information requirements.

The second package, published in October 2023, included sustainability indicators, business continuity requirements, trade transparency data and order book record-keeping, record-keeping requirements for CASPs, classification and templates and format of crypto-asset white papers, and public disclosure of inside information.

The third and final consultation package, published in two documents in January 2024 and one document in March 2024, covers all remaining mandates, including qualification of crypto-assets as financial instruments, monitoring, detection, and notification of market abuse, investor protection, reverse solicitation, suitability of advice and portfolio management services to the client, policies and procedures for crypto-asset transfer services (including clients’ rights), and system resilience and security access protocols.

Consultations related to MiCA by EBA

Under MiCA, The European Banking Authority EBA supervises “significant” ARTs and EMTs.
The EBA is also responsible for developing 17 technical standards and guidelines to specify further the requirements for any (significant and non-significant) ARTs and EMTs. As part of that, EBA has launched several consultations, five of which were due on 8 Feb 2024.

Below are the five consultations that were due on 8 Feb 2024:
1. Draft Guidelines on recovery plans under Articles 46 and 55 of the Regulation (EU) 2023/1114: set out an obligation for issuers of asset-reference tokens (ARTs) and issuers of e-money tokens (EMTs) to develop and maintain a recovery plan providing for measures to be taken by the issuer to restore compliance with the requirements applicable to the reserve of assets in cases where the issuer fails to comply with those requirements.
2. Draft Regulatory Technical Standards (RTS) to further specify the liquidity requirements of the reserve of assets under Article 36(4) of Regulation (EU) 2023/1114. Issuers of asset-referenced tokens, whether the asset-referenced tokens are classified as significant or not, are required to constitute and maintain a reserve of assets at all times.
3. Draft RTS to specify the highly liquid financial instruments with minimal market risk, credit risk and concentration risk under Article 38(5) of Regulation (EU) 2023/1114. Issuers of asset-referenced tokens, irrespective of whether they are significant or not, are required to decide to invest the proceeds they receive from the issuance of the tokens and form part of the reserve of assets, shall do it in financial instruments that are highly liquid and with minimal market risk, credit risk and concentration risk.
4. Draft RTS to specify the minimum contents of the liquidity management policy and procedures under Article 45(7)(b) of Regulation (EU) 2023/1114.
5. Draft RTS to specify the adjustment of own funds requirements and stress testing of issuers of asset-referenced tokens and of e-money tokens subject to the requirements in Article 35 of Regulation (EU) 2023/1114 on markets in crypto-assets.

Final Report on DeFi by IOSCO

On Dec 19 2023, the International Organization of Securities Commissions (IOSCO) published its final report on DeFi, which includes nine recommendations for regulators worldwide. IOSCO is the international body that brings together the world’s securities regulators.

DeFi refers to the provision of financial products, services, arrangements and activities that use distributed ledger technology (DLT): decentralized exchanges (DEX), decentralized lending, DEX aggregators, yield aggregators, etc.

Below are IOSCO’s nine policy recommendations to address market integrity and investor protection concerns arising from DeFi.

1. Analyze DeFi products, services, activities, and arrangements in accordance with the principle of “same activity, same risk, same regulation/regulatory outcome.”
2. Identify responsible persons and entities of a purported DeFi arrangement that could be subject to its applicable regulatory framework. These responsible persons include those exercising control or sufficient influence related to the DeFi arrangement.
3. The regulatory approach should be functionally based to achieve regulatory outcomes for investor protection and market integrity that are the same as or consistent with those required in traditional financial markets.
4. Require responsible persons to identify and address conflicts of interest.
5. Require responsible persons to identify and address material risks, including operational and technology risks.
6. Require responsible persons to provide clear, accurate, and comprehensive disclosures to the DeFi products and services offered.
7. Enforce applicable laws on DeFi that are consistent with the principle of “same activity, same risk, same regulation/regulatory outcome.”
8. Promote cross-border cooperation and information sharing.
9. Understand and assess Interconnections among the DeFi market, the broader Crypto-Asset market, and traditional financial markets.

June 6, 2024

The EY FinTech Growth Programme

SupraFin successfully concluded the EY FinTech Growth Programme on June 6. The six-week program was full of great networking opportunities, presentations by EY expert consultants, investors and successful entrepreneurs, and interactions with other companies in the programme.