Since the European Union (EU) passed its landmark Markets in Crypto-Asset Regulation (MiCAR), earlier this year, legislators and regulators around the world have shifted their attention to the ways in which crypto-assets are issued and traded. Although it does not become effective until 2024, MiCAR has helped to crystalise thinking about both the need for and the means of regulating crypto-assets as a nascent asset class.

At an international level, there is an increasingly bright line between the regulation of financial instruments represented on blockchain or other distributed ledger technology (DLT), on the one hand, and novel crypto-assets (eg, stablecoins), on the other. Although both asset classes make use of similar technology to execute transactions and maintain records, they are markedly different in terms of their supporting infrastructure, risk profiles, and valuation methodologies. The work to separate them and implement parallel regulation is proceeding at different speeds through legislative or judicial processes, depending on the jurisdiction.

In this note, we summarise the current positions in six key economies: the United States; the United Kingdom; the European Union; Hong Kong; Singapore; and Australia. Of these, only the EU has adopted primary legislation to set out the requirements for issuers, exchanges, brokers, and other intermediaries. We expand, in the section on the EU, on the current work to develop secondary (level 2) technical standards and guidelines that will support the implementation of that legislation.

United States

Enforcement versus legislation

There have been several attempts at creating legislation to regulate stablecoins in the United States. To date, none of these have had sufficient traction to advance through Congress; with the consequence that, despite the appeals of industry heads for clarity, the largest market for crypto-assets operates without federal legislation specifically attuned to its features. That lacuna has left the principal federal regulators – the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) – to apply the existing laws for securities and derivatives. This approach has been controversial, and there are currently proceedings before the US courts which turn on the question whether particular crypto-assets represent securities, as asserted by the SEC. The judges in these cases have not settled the issue, to date, and it is expected to take some time for the common law approach to deliver a definitive answer on the treatment of novel crypto-assets.

In the meantime, Congress has seen several efforts to legislate. The most recent initiative comes from the House Committee on Financial Services, which has approved a bill to address the trading of stablecoins. The Clarity for Payment Stablecoins Act, promoted by the Chair of the Committee, Patrick McHenry, would explicitly distinguish payment stablecoins from securities. It would also subject issuers of payment stablecoins to regulatory standards drawn from banking, while requiring custodians to be supervised. It is, however, unclear how far the bill will be able to proceed, as it lacks bipartisan support and previous attempts to regulate stablecoins have failed without it.

United Kingdom

Future of financial services

HM Treasury undertook a consultation in 2023 on its approach to the regulation of cryptoassets. This exercise followed a previous consultation on stablecoin regulation in 2022. At the end of October 2023, the Treasury released its response to submissions from the public and provided an update on its intentions for the regulation of fiat-backed stablecoins. It also addressed its intention to apply the Financial Market Infrastructure Special Administration Regime (FMI SAR) in certain cases; particularly, those involving systemic issuers of digital settlement assets (DSA) and the service providers to them, as well as systemic service providers.

Secondary legislation to take forward the regulation of fiat-backed stablecoin issuance, exchange-based trading, and custody is expected in early 2024. Regulations focussed on other in-scope cryptoassets and related services are expected later in the year. We have published a two-part summary of the UK Government's proposed approach (part one here and part two here).

FSMA 2023

In August, the UK Parliament adopted the Financial Securities and Markets Act 2023 (FSMA 2023). This legislation sets the stage for the restructuring of UK financial services legislation after Brexit; both substantively and in the ways that laws are made. It gives a significantly expanded role to HM Treasury and the UK's financial services regulators to reform the UK's legal inheritance from the EU. The Act also addresses new requirements, including a definition of crypto-assets and powers to regulate issuers of digital settlement assets (eg, stablecoins used for payments) and payment systems using them. Secondary legislation is expected to clarify the approach to digital settlement assets and relevant payment systems in due course.

Digital securities sandbox

One of the powers given to HM Treasury by FSMA 2023 is the ability to create regulatory sandboxes. These allow certain rules to be modified or disapplied for a period to allow innovative business models to be tested. The Treasury is consulting on the first of these under FSMA 2023, for the trading and settlement of digital securities.

Crypto travel rule

To improve anti-money laundering (AML) and counter-terrorist financing (CTF) controls, the UK implemented the Financial Action Task Force travel rule for cryptoassets in September 2023. The travel rule requires UK cryptoasset exchange providers and custodian wallet providers to collect, verify, and share information about certain transactions involving cryptoassets.

Financial promotions

In October 2023, the UK started to require apply new controls to financial promotions involving certain cryptoassets. Features include: a ban on investment incentives; a cooling-off period for first-time investors; mandatory investment risk warnings; annual client categorisation; and restrictions on the approval of promotions on behalf of other firms. The consequences for noncompliance include criminal penalties; and, significantly, the Financial Conduct Authority issued 146 alerts for noncompliance promotions in the first 24 hours following the implementation of its rules.

European Union

MiCAR

The European Union passed the Markets in Crypto-Assets Regulation (MiCAR) into law in June 2023. The new rules for the regulation of issuing, offering, and providing intermediary services (including trading, custody, broking, transfer, and advisory services) for crypto-assets come into effect in two stages in 2024. Before they do, there are several delegated acts and guidelines to be settled by the European institutions tasked by MiCAR. Below, we lay out the steps that are being taken to complete the regulatory framework.

1. Implementation phases

Phase 1

MiCAR comes into effect for those issuing, offering or seeking admission to trading of the two forms of stablecoins recognised by MiCAR on 30 June 2024:

• "Asset-referenced tokens" (ARTs), which are crypto-assets backed by non-fiat currency assets or a basket of fiat or non-fiat assets;
• "E-money tokens" (EMTs), which are crypto-assets backed by a single fiat currency.

Because the issuance of ARTs and EMTs is reserved to credit institutions (for both ARTs and EMTs), e-money institutions (for EMTs), and newly-authorised ART issuers, the impact of the Phase 1 implementation will fall on them, in the first place. In practice, however, the implementation of Titles III and IV of MiCAR will also affect custodians of asset reserves held to support the valuation and liquidity of ARTs and EMTs.

Phase 2

The balance of MiCAR comes into effect on 30 December 2024. It will affect those issuing, offering or seeking admission to trading of crypto-assets other than ARTs or EMTs in or to EU clients. It will also be directly relevant to those offering crypto-asset services for any class of crypto-asset.

Transition period

Recognising that MiCAR will take over from existing national regimes, the Regulation provides a transition period for crypto-asset service providers (CASPs) authorised by a Member State before 30 December 2024. For a period of 18 months, until 1 July 2026, these legacy CASPs may continue to operate while they seek MiCAR authorisation or wind down their business (subject to any restrictions imposed by their home Member State).

2. Technical standards and guidelines

MiCAR is the primary legislation for the regulation of crypto-assets in the EU, but it provides for the adoption of delegated acts and guidelines to fill in many details. Creating these has been assigned to the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Commission.

ESMA has already released two packages of regulatory technical standards (RTS) and implementing technical standards (ITS) for consultation (see our summary of the second consultation package here). A third package is planned for 1Q2024. Once it has had the opportunity to consider the feedback received, ESMA is expected to submit a Final Report to the European Commission with the texts of delegated acts for adoption. The content of each package can be summarised as below:

First Consultation

• RTS on the notification by certain entities of their intention to provide crypto-asset services.
• ITS on standard forms, templates and procedures for the notification by certain financial entities of their intention to provide crypto-asset services.
• RTS on authorisation of crypto-asset service providers.
• ITS on standard forms, template and procedures for authorisation of crypto-asset service providers.
• RTS on complaints handling by crypto-asset service providers.
• RTS on identification, prevention, management and disclosure of conflicts of interest.
• RTS on the proposed acquisition of a qualifying holding in a crypto-asset service provider.

Second consultation

• RTS on content, methodologies and presentation of sustainability indicators on adverse impacts on the climate on the environment.
• RTS on measures that CASPs must take to ensure continuity and regularity in the performance of services.
• RTS on trade transparency.
• RTS on content and format of order book records.
• RTS on the data necessary for the classification of white papers.
• ITS on standard forms and templates for the crypto-asset white paper.
• ITS on technical means for appropriate public disclosure of inside information.

Third RTS consultation

• 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.
• System resilience and security access protocols.

The EBA has provided its response to a Call for Evidence by the European Commission on two topics:

• determining when an asset-referenced token or e-money token is "significant".
• the calculation of supervisory fees for issuers of those tokens.

3. Timeline

The following graphic illustrates the timeline for MiCAR implementation:

Crypto travel rule

The EU has implemented the FATF crypto travel rule through a restatement of the Transfer of Funds Regulation. The rule comes into effect on 30 December 2024, in alignment with MiCAR.

DLT pilot regime

The DLT Pilot Regime is intended to allow the trading and settlement of transactions in certain tokenised securities and UCITS fund units to be tested in a regulatory sandbox. There has been one announcement of a firm entering the DLT Pilot to date.

Hong Kong

Crypto trading platforms

Since June 2023, it has been mandatory for virtual asset trading platforms (VATPs) in Hong Kong or actively marketing services to users in Hong Kong to be licensed by the Securities and Futures Commission (SFC). A 12-month transitional period is in place for VATPs which had substantial presences in Hong Kong immediately prior to that date, as well as VATPs which had opted-in to supervision under the previous local regime.

The new requirements are found in amendments to the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, as supplemented by The Guidelines for Virtual Asset Trading Platform Operators. The SFC has warned against noncompliance; noting that there are firms making false claims about their regulatory status or creating local subsidiaries, with a declared intention to seek authorisation, while launching new products in contravention of the rules. A joint task force has been established by the SFC and the Hong Kong police, in order to facilitate monitoring of VATPs. 

Singapore

Stablecoins

The Monetary Authority of Singapore (MAS) has published its response to feedback on its consultation for the regulation of single-currency stablecoins (SCS). Forthcoming rules will regulate the issuance of and intermediary services for SCS tied to the SGD or other G10 currencies, issued in Singapore. Other stablecoins will continue to be regulated as digital payment tokens (DPT) under the Payment Services Act.

Entities which provide a "Stablecoin Issuance Service" will need to obtain a Major Payment Institution licence and comply with SCS issuer requirements. There are two notable exceptions: non-bank SCS issuers with SCS in circulation not exceeding SGD 5 million in value, who will remain subject to DPT requirements; and banks issuing SCS by tokenising their liabilities.

Redemption requests are to be honoured by SCS issuers at par value, within five business days. To support this, a reserve of assets which is at least equivalent to the outstanding par value of the issue must be held in segregated accounts and invested in liquid assets. Credit, liquidity, and concentration risks are to be addressed by the SCS issuer. SCS issuers must meet own-funds requirements, issue white papers, make transparent disclosures to users, and obtain audits of reserve assets. Monthly independent attestations will have to be obtained, published, and filed with the MAS.

Further, SCS issuers will be restricted in the business that they can undertake, although the restrictions will not extend to affiliates. Lending or staking of SCS and other DPTs will be forbidden, as will lending to or investing in other companies, as well as trading in DPTs.

The new stablecoin rules are expected to become legislation in 2H2024. On an interim basis, the MAS has given in-principle approval to three issuers of stablecoins that it believes will comply substantively with the forthcoming legislation and qualify as "MAS-regulated stablecoins." This is a label that will be applied to SCS issues which fulfil all requirements under the SCS framework. It is reserved as a quality mark, and misuse will be subject to penalties and placement on the MAS' Investor Alert List.

Consumer protection and DPT market integrity

The MAS has adopted a policy against staking/lending of retail customers' DPTs by service providers (DPTSPs). New proposals address custody holdings, while adapting market integrity requirements to DPT markets. The MAS is consulting further on regulatory changes to implement these policies.

The MAS will require the segregation of customers’ DPTs from those of DPTSPs. Omnibus accounts for customers’ DPTs will be acceptable, but the risks must be disclosed to customers. Cash safeguarding will require the appointment of a financial institution in Singapore by each DPTSP. Daily reconciliations of customers’ DPTs and cash positions will be required, and separate books and records must be kept for each customer. At least 90% of customers’ DPTs will need to be in cold wallets. An independent audit of the DPTSP will also be required. Senior managers and personnel of DPTSPs will need to be based in Singapore to control the movement of customers’ assets and return assets in response to court proceedings.

Conduct of business regulations will address conflicts of interest, listing requirements for DPTs, and complaints-handling and dispute-resolution policies. DPTSPs will be required to discourage cryptocurrency speculation by retail customers by:

• determining a customer’s risk awareness to access DPT services;
• not offering any incentives to trade in cryptocurrencies;
• not providing financing, margin or leverage transactions;
• not accepting locally-issued credit card payments; and
• limiting the value of cryptocurrencies in determining a customer’s net worth.

MAS has said that the regulatory measures on DPT services will be implemented through regulations and guidelines. These are expected to take effect in phases from mid-2024, to provide an adequate transitional period for DPTSPs to properly implement them.

Australia

The Australian government is consulting on proposals to regulate digital assets platforms, based on the existing financial services regime. Platforms that hold more than AUD 1,500 for individuals and AUD 5,000,000 in aggregate will be required to obtain an Australian Financial Services Licence. In addition to the common requirements applicable to licence-holders, the proposed rules will create specific rules for standard form platform contracts, minimum standards for holding tokens, standards for custody software, and standards when transacting in tokens. New rules would also apply to trading, staking, tokenisation, and fundraising.

The Australian Treasury has flagged further consultation on exposure draft legislation in 2024, which will then be followed by a 12-month transitional period once the legislation becomes law.