Matthew Elderfield is a former deputy chairman of the European Banking Authority
The shape of EU and UK crypto regulation is now clearer than it was before. We have a OK in Europe in the cryptoasset regulation markets (Mica), financial services and markets invoice is being read by the UK parliament and the new UK Financial Conduct Authority rules come for high-risk investments. What does this mean for regulatory reach, investor protection, oversight and enforcement?
The UK will start by regulating a few specific crypto assets and service providers, while the EU will take care of just about everything. Mica has a broad definition of a “crypto asset”, but the UK is dipping its feet in the water with a narrower “digital settlement asset”. This basically covers stablecoins used as a means of payment, but not (for now) crypto assets as investments. This choice seems to be aimed at facilitating innovation – and the caution of the FCA, because Explain by its outgoing president. The EU’s broader investment focus means that issuers of new crypto assets (with important exceptions like purely mined coins) must publish and be responsible for a prospectus-style white paper that sets out their plans.
Regulatory differences extend to service providers. The UK will likely focus on fewer services, such as exchange and custody. The broader definition of Mica covers trading, advisory, order transmission and more, as well as crypto-to-crypto and crypto-to-fiat custody and exchange.
The next step planned by the UK is to legislate crypto investment risk warnings. Investors must have a clear idea of the protection they benefit from (or not). UK consumers have learned the hard way (in the London Capital & Finance mini-bond scandal) that the scope of regulation can be confusing. The new FCA rules now set out an admirably direct and prescriptive risk warning: “This is a high-risk investment and you are unlikely to be protected if anything goes wrong.” Hopefully this will soon be extended to crypto investments – and matched by EU regulators.
Since crypto assets are not protected by deposit insurance or other compensation schemes, effective oversight is critical. Mica and the UK will impose liability on service providers for losses of custody, such as cyberattacks on digital wallets. But controlling the segregation of client assets is hard enough in the non-crypto world. And small-cap service providers might not have deep enough pockets to offset losses. Supervisors need to be sharp.
The French Financial Markets Authority recently raised some eyebrows when it announced that it would oversee Binance, the world’s largest crypto exchange, under French pre-Mica law. Binance has been reprimanded by a number of regulators, including in July when it was fined €3 million by the Dutch, and last summer when the FCA concluded that it “is not capable of being effectively controlled”. The AMF clearly thinks differently.
The FCA’s concern centered on Binance’s reluctance to share information about its complex corporate structure. An opaque structure was at the heart of the BCCI banking scandal in the late 1980s – post-BCCI directive requires that banking structures be sufficiently transparent to be able to be controlled effectively.
The United Kingdom reasonably applies this principle in its monitoring conditions. Mica needs detailed rules to require it and the AMF needs to get Binance to revise its corporate structure. National supervisors such as the AMF will continue to supervise service providers under Mica, but the European Securities and Markets Authority will be able to intervene with “significant” providers and the European Banking Authority will have direct supervisory powers for the first time. , for issuers of stablecoins.
The EBA president worries about his ability to recruit the right staff, as authority stretches from his rule-making and stress-testing mandate. Rightly so: the EBA and Esma plead with cash-strapped national authorities and the European Commission, and the latter controls their recruitment plans. The EBA and Esma need more flexibility to ensure they are not overwhelmed by crypto firms.
What about execution? The United States Securities and Exchange Commission has taken decisive action against crypto scams and insider trading, arguing that many crypto assets are actually securities subject to existing rules. The FCA came to the same conclusion in the 2019 guidelines, but enforcement action has yet to follow. Mica will grant fine powers to the EBA and national authorities, but in the meantime big fines in the EU have been rare.
Consumers will continue to be ripped off until UK and EU authorities start taking enforcement action under their existing powers – not just waiting for new ones.