Europe has been at the forefront regarding crypto asset regulation with its recently approved Markets in Crypto Assets (MiCA) legislation, which goes into effect in phases starting in 2024. It represents the most significant attempt by global governments to regulate the growing market for digital assets.
In the UK, firms registered with the Financial Conduct Authority (FCA) must comply with anti-money laundering (AML) regulations and the FCA reminds consumers of the risks of investing in crypto assets. The Chief Executive of the FCA has signaled his intention to strengthen cross-border crypto asset regulation.
MiCA law in Europe contains measures to guard against market abuse and manipulation
The European Commission’s Markets in Crypto Assets Regulation (MiCA) created a set of rules for the sector with a significant focus on market abuse and manipulation. The new legislation aims to “harmonise the European framework for the issuance and trading of various types of crypto tokens as part of Europe’s Digital Finance Strategy”. MiCA has been in the works since 2018 and will apply to all the member states in the European Union as well as to all businesses operating in the EU.
The framework has four broad objectives:
- To provide legal certainty for crypto assets not covered by existing EU financial services legislation, for which there is currently a clear need.
- To establish uniform rules for crypto-asset service providers and issuers at the EU level
- To replace existing national frameworks applicable to crypto assets not covered by existing EU financial services legislation
- to establish specific rules for so-called ‘stablecoins’, including when these are e-money.
Worldwide, crypto assets are largely unregulated. In the EU, operators are only currently required to show controls for combating money laundering. At the forefront, MiCA will be the world’s first comprehensive regulatory regime for crypto assets, focusing on measures to guard against market abuse.
MiCA is expected to have global repercussions affecting Crypto Asset Service Providers (CASPs), investment firms and anyone providing custodial services outside of the EU seeking to market to European clients. CASPs will be liable for any loss of customer funds and need a legal entity in an EU country and a license.
In addition, MiCA has several measures to deal with preventing insider trading and market manipulation. CASPs will be required to maintain various investor protections, and regulators will be on the lookout for market manipulation and insider trading.
MiCA is expected to come into force in 2024. It will likely set a benchmark for other regulatory regimes worldwide.
FCA regulation of crypto and recent enforcements
In 2018, the HM Treasury, Financial Conduct Authority and Bank of England joined forces to create a policy paper and report to lay out the UK’s policy and regulatory approach to crypto assets.
Since then, the Financial Services landscape regulated by the FCA has been ever-changing. Since January 2020, the FCA has become the Anti Money Laundering and Countering Terrorist Financing (AML/CTF) supervisor for firms carrying on certain crypto assets activity.
It provided the FCA with new regulatory powers to supervise crypto assets businesses, and firms have to comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the ‘MLR), including being registered with the FCA to continue the business.
Recently, the FCA has warned consumers of the risks of investing in crypto assets and all regulated firms of their existing obligations when they are interacting with or exposed to crypto assets.
Recent developments in other European countries
- In 2020, Germany made crypto assets official financial instruments
- Luxembourg is reportedly set to have its first AIF investing exclusively in crypto assets
- Switzerland and Germany currently allow pure-play crypto exchange-traded products
- France has adopted new rules and regulations for cryptocurrency service providers and firms are now subject to mandatory registration and subject to stricter KYC regulations
- Sweden recently imposed registration requirements, and firms must comply with the Swedish Currency Exchange Act and AML provisions
How can your firm prepare?
MiCA will raise the burden of compliance and present a number of practical challenges for Compliance Officers. The formal implementation of the EU's crypto regulation is at least one year away, but there are a few steps Compliance can take to prepare right now:
- Understand the scope of the legislation, implementation and process of registration under MiCA
- Source systems and set up controls needed to comply with the regulation and detect market manipulation
- Design and review operating policies and practices
- Review the sources of material non-public information (MNPI), ensure adequate documentation of information barriers, and demonstrate knowledge of all sources of MNPI.
Section six of the Regulation focuses on the “prevention of market abuse involving crypto-assets”, so firms in the crypto space will have to take proactive steps to protect their customers from abuse.
Watch our webinar with Thomson Reuters - Insider Trading, Digital Assets and MNPI: Regulatory & Compliance Risk.
Crypto Compliance is challenging
A recent case made the news regarding insider trading and one of the world’s largest cryptocurrency exchanges. The brother of a former company employee who used inside information to trade has pleaded guilty in September 2022. The former employee shared confidential information with his brother and with a friend about new digital assets the crypto exchange was planning to let users trade, and they used that confidential information to trade at least 14 times.
Investment in digital assets is rapidly moving from a retail space, where individuals were investing using an app on their phones without much understanding or knowledge of it, to large financial firms coming into play. With all the regulations now coming forward, firms operating in the crypto space face significant financial and reputational risk if they fail to keep pace as compliance demands emerge.
Whether you’re an organisation whose core business is crypto or a firm looking ahead to ensure that the trading of digital assets is effectively monitored across your compliance program, MyComplianceOffice can help you meet quickly evolving, and increasingly rigorous and rigorous regulatory and investor compliance demands.
Want to understand how technology can give firms a better handle on managing risks when it comes to digital assets? Read our blog.
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