Overview
Earlier this year, the European Union (EU) voted in favour of the Markets in Crypto-Assets (“MiCA”) bill, which aims to regulate the crypto industry within the EU. The bill is seen as a major step towards establishing a comprehensive regulatory framework for cryptocurrencies and other digital assets in the EU that will undoubtedly make the EU an attractive destination for crypto firms. As the United Kingdom (UK) continues to navigate its post-Brexit regulatory landscape, the passing of the MiCA bill notably puts renewed and “significant jurisdictional pressure” on the UK to pass its own framework. The recent publication of the Law Commission of England & Wales’ (Law Commission) report, “Digital Assets: Final report”, has only exacerbated this pressure by highlighting how parts of the UK are already ripe for crypto regulation. Yet, before making any further moves, there are a number of lessons that can be learned first from the passing of the MiCA bill that can positively impact the UK’s crypto industry, which continues to lie in wait for some form of regulation to propel it into action. However, as the UK looks to reaffirm its status as a key global financial hub, it also faces the challenge of implementing an appropriate level of crypto regulation without stifling innovation in the sector.
Background
The UK government has been actively considering the regulation of the UK crypto industry for several years. A timeline of significant events and legislation in relation to the UK government’s position on the industry can be summarized as follows:
- 2014: The UK government established a task force to study digital currencies and their potential impact on financial services;
- March 2018: HM Treasury launched a Cryptoassets Taskforce, consisting of representatives from HM Treasury, the Financial Conduct Authority (FCA), and the Bank of England, to explore the benefits and risks of cryptoassets, as well as the potential impact of blockchain technology on financial services;
- March 2018: Coinbase, one of the world’s largest cryptocurrency exchanges, was granted an e-money license by the FCA, allowing it to offer payment services to UK customers;
- 2019: The FCA published guidance on cryptoassets, stating that it intended to regulate certain types of cryptoassets in the same way as traditional financial instruments;
- January 2020: The FCA announced that it would begin supervising the anti-money laundering activities of businesses engaged in cryptoasset activities from January 2022;
- October 2020: The FCA banned the sale of crypto derivatives to retail investors, citing concerns about potential harm to consumers;
- January 2021: HM Treasury launched a consultation on the regulation of crypto assets and stablecoins, seeking feedback on proposals for a regulatory framework that would bring crypto assets and stablecoins under the scope of existing financial services regulation;
- March 2021: The UK’s Payment Services Regulations 2017 were updated to include new requirements for businesses engaged in cryptoasset activities, including the need for registration with the FCA and the implementation of anti-money laundering measures;
- June 2021: The FCA issued a warning to Binance Markets Limited, a UK subsidiary of one of the world’s largest cryptocurrency exchanges, Binance, stating that the company was not authorized to carry out regulated activities in the UK;
- August 2022: New UK sanctions legislation expanded mandatory financial sanctions reporting obligations to include crypto providers. For more information on this development, please refer to our previous blog post (here); and
- February 2023: HM Treasury published its consultation paper, “Future financial services regulatory regime for cryptoassets,” confirming its approach to cryptoasset financial promotions and making a number of calls for evidence in areas where the UK government needs more information to make a regulatory proposal.
These developments demonstrate the UK government’s increasing focus on the regulation of the crypto industry and the need for companies operating in the industry to comply with existing financial services regulation. However, as the UK government continues to develop its regulatory framework for the industry, there are several lessons that it can learn from the passing of the MiCA bill and its potential impact on the UK’s future regulation of the crypto industry.
Lesson 1: Embrace comprehensive regulation
The passing of the MiCA bill demonstrates that regulators in the EU are taking a proactive approach to regulating the crypto industry. The bill seeks to establish clear rules for the issuance and trading of digital assets, as well as address issues such as market abuse, cybersecurity, and investor protection. By establishing a comprehensive regulatory framework, the EU is sending a signal to the industry that it is serious about promoting innovation while also protecting consumers and maintaining financial stability.
The UK can learn from this approach and seek to establish its own comprehensive regulatory framework for the crypto industry. Currently, the FCA only requires certain crypto assets to be regulated under existing financial services legislation. However, with the growth of the crypto industry and many crypto businesses looking to the UK as a base for expanding operations, the need for a more comprehensive regulatory framework is becoming increasingly apparent. The MiCA bill provides a useful roadmap for the UK in this regard.
Lesson 2: Promote international co-operation
The MiCA bill also highlights the importance of international co-operation in regulating the crypto industry. The bill includes provisions for cross-border trading and co-operation between national regulators, reflecting the global nature of the crypto industry. By promoting international co-operation, the EU is seeking to establish a level playing field for all market participants and to avoid regulatory arbitrage.
The UK can learn from this approach by seeking to co-operate with other jurisdictions in regulating the crypto industry. The UK has already taken steps in this direction by joining the Global Financial Innovation Network (GFIN), a group of international regulators seeking to promote innovation in financial services while ensuring consumer protection. As the crypto industry continues to grow, it will become increasingly important for regulators to work together to establish a consistent regulatory framework.
Lesson 3: Strike a balance between innovation and regulation
Finally, the passing of the MiCA bill highlights the need to strike a balance between promoting innovation and maintaining regulatory oversight. The bill seeks to establish clear rules for the issuance and trading of digital assets while also providing a supportive environment for innovation. By striking this balance, the EU is seeking to ensure that the crypto industry can continue to grow and innovate while also minimizing risks to consumers and financial stability. The UK can learn from this approach by seeking to strike a similar balance in its own regulatory framework.
So far, in the absence of any clear regulatory framework, the US has opted for a more punitive approach to crypto regulation, which has caused many US-based crypto businesses to consider investing more overseas, or even relocating. Some of these crypto businesses have taken issue with the US’ seemingly haphazard approach when it comes to targeting large crypto businesses with enforcement actions, causing many innovators in this field to believe that the US does not have a clear rule book for the crypto industry. The UK will likely attempt to avoid similar action in order to prevent the stifling of innovation, as it aims to reaffirm its reputation as a global hub for fintech innovation. The growth of the crypto industry presents an opportunity for the UK to continue to lead in this area. However, embracing innovation must be balanced against the need for effective regulation to protect consumers and maintain financial stability.
Recent UK Developments
In March, 2020, the Ministry of Justice asked the Law Commission to review the law on crypto-tokens and other digital assets and to consider how the principles of private law, specifically personal property law, apply to digital assets and what regulatory changes may need to be made to accommodate such assets.
On June 28, 2023, the Law Commission published its final report, which found/recommended the following:
- There will likely be a tripartite approach to law reform in this area involving: (i) targeted legislative reform, (ii) continued development of the common law; and (iii) guidance from a panel of industry specific technical experts;
- Statutory reform will be necessary to confirm the existence of a third category of personal property rights of “things” to include digital objects, but without strict definitions or boundaries, which should instead be developed by common law;
- The concept of “control” in the case of digital assets can be highly complex and may differ between factual and legal control such that this is an area where non-binding guidance from a technical expert group would be of assistance;
- The introduction of a bespoke statutory legal framework that facilitates entering into, operating, and enforcing certain crypto-token and cryptoasset collateral arrangements will be necessary; and
- The Financial Collateral Arrangements (No 2) Regulations 2003 will need to be amended to clarify the treatment of collateral arrangements involving certain cryptoassets (including Central Bank Digital Currencies (CBDCs), stablecoins, equity and debt securities and credit claims).
While the recommendations within this report will serve only as a guideline for UK legislators, the report highlights that UK laws have already proven themselves to be sufficiently resilient and flexible in their recognition of digital assets as things to which personal property rights can relate. These findings should empower legislators to act more decisively in establishing a regulatory framework for the crypto industry sooner rather than later.
Conclusion
The passing of the MiCA bill represents a major milestone in the regulation of the crypto industry in the EU. As the UK government continues to develop its regulatory framework for the industry, there are several lessons that it can take from the passing of the MiCA bill, which could ultimately see the EU offering a trading environment that is more permissive and looks more attractive to institutions and to innovators when compared to the UK. By embracing comprehensive regulation, promoting international co-operation, and striking an appropriate balance between innovation and regulation, the UK can establish a regulatory framework that promotes innovation while also protecting consumers and maintaining financial stability. With the findings of recent research suggesting that the UK regulatory landscape is ripe and ready for the introduction of definitive crypto-related legislation, there has never been a better time for the UK government to capitalize on this momentum. However, as the UK crypto industry continues to evolve, it will still be important for regulators to remain proactive and adaptive to ensure that the benefits of this technology can be realised while minimizing the risks.
