5 min readEver since the European Union (EU) ratified its groundbreaking Markets in Crypto-Asset Regulation (MiCAR) earlier this year, global legislators and regulators have redirected their focus towards the issuance and trading of crypto-assets. While MiCAR will take effect in 2024, its passage has served as a catalyst, prompting discussions on the necessity and methodology of regulating crypto-assets as an emerging asset class.
Internationally, a clear distinction is emerging between the regulation of financial instruments on blockchain or other distributed ledger technologies (DLT) and stablecoins. Despite their shared technology for transaction execution and record-keeping, they diverge significantly in terms of infrastructure, risk profiles, and valuation methodologies. Efforts to differentiate and establish parallel regulations are progressing at varying speeds through legislative or judicial channels, contingent upon jurisdictional nuances.
In this briefing, we delineate the current stances in 3 pivotal economies: the United States, the United-Kingdom and the European Union. Among these, only the EU has embraced primary legislation to outline requirements for issuers, exchanges, brokers, and intermediaries. Further elaboration on the EU's ongoing efforts to develop secondary (level 2) technical standards and guidelines supporting the implementation of MiCAR is provided below.
European Union - Navigating MiCAR implementation
In June 2023, the European Union enacted the Markets in Crypto-Assets Regulation (MiCAR), setting forth rules for issuing, offering, and providing intermediary services for crypto-assets.
So what will be regulated under MiCA? MiCA defines crypto assets as the digital representation of a value or right, which may be transferred and stored electronically by using for instance digital ledger technology (DLT). MiCA separates between three types of crypto assets:
Utility tokens, which are crypto assets that are intended to provide digital access to a good or a service, available on DLT, and which are only accepted by the issuer of these tokens (e.g., a share of a company);
Asset-referenced tokens, which are crypto assets aiming at maintaining a stable value by referencing one or more currencies that are legal tender, commodities, other crypto assets, or a combination of those assets; and
E-money tokens, which are crypto assets used as a payment for a good or a service.
To avoid any overlap with other EU regulations, MiCA excludes from its scope financial instruments as defined by reference to MiFID, deposits and structured deposits, and e-money. MiCA aims to supplement the existing EU regulatory framework by filling the gap in crypto assets which currently remains unregulated – MiCA aims to start where current EU regulations (such as Prospectus Regulation, MiFID or AIFMD) stop.
While MiCAR's implementation is slated for this year, several delegated acts and guidelines must be finalised by EU institutions beforehand. Notable steps in completing the regulatory framework include two implementation phases and the development of technical standards and guidelines by entities such as the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA).
Phase 1, effective June 30, 2024, targets issuers of specific stablecoins, while Phase 2, commencing December 30, 2024, extends to other crypto-assets and services within the EU. Recognizing the transition from existing national regimes, MiCAR grants a transition period for crypto-asset service providers (CASPs) authorised by Member States before December 30, 2024.
Additionally, ESMA's regulatory packages, including regulatory technical standards (RTS) and implementing technical standards (ITS), outline detailed guidelines for various aspects of crypto-asset regulation. Furthermore, the EU's adoption of the FATF crypto travel rule and the establishment of a DLT Pilot Regime underscore its commitment to fostering a robust regulatory framework conducive to crypto-assets' responsible growth and integration into financial markets.
United States - Balancing enforcement and legislation
Despite several attempts to enact legislation regulating stablecoins in the United States, none have gained sufficient traction in Congress. Consequently, the absence of federal legislation tailored to crypto-assets has left the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) to apply existing securities and derivatives laws. This approach has sparked controversy, leading to legal proceedings questioning whether specific crypto-assets qualify as securities, as claimed by the SEC. While these cases remain unresolved, it's anticipated that the common law approach will take time to provide definitive guidance on the treatment of novel crypto-assets.
Meanwhile, recent legislative efforts from the House Committee on Financial Services, such as the Clarity for Payment Stablecoins Act, aim to address stablecoin trading. However, bipartisan support for such bills remains uncertain, reflecting previous regulatory endeavours' challenges without consensus.
United Kingdom - Advancing regulation and oversight
Following consultations in 2022 and 2023 on stablecoin and crypto asset regulation, the HM Treasury disclosed its regulatory intentions. The Treasury's response includes plans for regulating fiat-backed stablecoins and implementing the Financial Market Infrastructure Special Administration Regime (FMI SAR) for systemic issuers of digital settlement assets (DSA) and associated service providers. Secondary legislation addressing stablecoin issuance, exchange-based trading, and custody is anticipated in early 2024, with further regulations for other in-scope crypto assets and services expected later in the year.
Additionally, the Financial Securities and Markets Act 2023 (FSMA 2023) provides a legislative framework post-Brexit, empowering HM Treasury and financial regulators to overhaul UK financial legislation. Provisions within FSMA 2023 aim to define crypto-assets, regulate issuers of digital settlement assets, and establish new requirements, facilitating the development of regulatory sandboxes and initiatives like the crypto travel rule.
What does it mean for Crypto Exchange-Traded Products (ETPs) ?
Crypto Exchange-Traded Products (ETPs), whether in the European Union (EU) or the United States (US), operate within the framework of existing securities laws rather than being directly affected by specialised crypto-focused regulations such as MiCAR in the EU.
These products, structured as investment funds (ETFs) in the U.S., exchange-traded notes (ETNs) or exchange-traded commodities (ETCs) in the E.U., fall under the oversight of traditional securities regulators like ESMA in the EU and the Securities and Exchange Commission (SEC) in the US.