Crypto – Q2 2023

Thematic parallels can be drawn between recent developments in European, UK, and American crypto regulation. This article examines recent literature from these regulatory environments to showcase the increasingly prevalent attitude that greater regulatory clarity is required for cryptoassets and digital currencies.

Europe

In March, the European Banking Authority (EBA) proposed amendments to its Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) guidelines. This consultation is open to comments from the industry until 31 August 2023 and focuses on extending common regulatory expectations to Cryptoasset Service Providers (CASPs). The EBA proposes that firms integrate sector-specific risk factors relating to Money Laundering and Terrorist Financing into their risk assessments and client due diligence. These factors include CASPs’ target markets, geographical locations, use of technologies, and the anonymity associated with their service offerings.

Elsewhere in Europe, the European Central Bank (ECB) published its third progress report on the digital euro, which includes further details on design and distribution options. The proposed digital euro could be:

• Accessible to euro area residents, merchants, and governments.
• Made available to consumers from select external jurisdictions (Andorra, Monaco, San Marino, Vatican City, Northern Ireland, and Switzerland are cited).
• Distributed via Payment Service Providers (PSPs) who would be required to provide a set of mandatory core services to end-users.

In addition to the report, the ECB published the findings of a focus group study to gauge the interest of participants in specific digital wallet features. The research concluded the following to be ‘essential features’:

• person-to-person money transfers
• offline payment capability
• budget management tools
• conditional payments

The ECB has stated that, in the autumn, its Governing Council will take these findings into account when deciding whether the Digital Euro will move from the investigation phase to a project phase where technical solutions and business arrangements would be tested.

United Kingdom

In early June, the FCA published two pieces relating to industry feedback on CP22/2 ‘Strengthening our financial promotion rules for high-risk investments, including cryptoassets’, setting out their “final policy position and near-final Handbook rules”.

The first, Policy Statement 23/6, details the new financial promotion rules for cryptoassets that intend to protect consumers from cryptoasset-specific risks including high price volatility and limited regulatory scope. Guidance Consultation 23/1 assists firms in complying with these new rules. It covers a series of topics including the content of financial promotions, the use of testimonials, and the suitability of social media integration.

Some key takeaways from PS23/6 and GC23/1:

• Cryptoassets are classified as Restricted Mass Marketed Investments (RMMI), allowing them to be marketed to consumers, subject to restrictions.
• Cryptoasset financial promotions must be ‘fair, clear and not misleading’.
• Firms have a responsibility to educate consumers on the risks associated with cryptoasset investment.

These rules, which are still subject to change, apply to all firms that promote cryptoassets, including financial services firms, investment firms, and individuals promoting via social media. Breaches of these rules will be subject to enforcement action such as fines or restrictions on activity.

30 June saw the closure of HM Treasury and the Bank of England’s (BoE) joint consultation on a proposed central bank digital currency (CBDC), the Digital Pound. Key themes emerging from consultation responses included:

• Privacy, security, and data protection.
• Governance of the Digital Pound.
• The Digital Pound’s impact on financial inclusion.
• How a Digital Pound would provide incentives for stakeholders.

HM Treasury and the BoE will continue to work with stakeholders and monitor international developments relating to CBDCs before publishing a response to the consultation in due course.

In May, UK Finance published ‘Aligning the UK’s Rhetoric on Crypto Assets with the Regulation’, a piece that evaluates the current state of UK Crypto regulation. The piece highlights the apparent decline in the UK government’s rhetoric around Britain becoming a “global hub for crypto” since April 2022, citing a lack of clarity in the regulatory environment.

To support this call for greater regulatory clarity, UK Finance raised the question of whether the government’s mixed messaging over crypto regulation will cause businesses to look elsewhere. Additionally, a useful contrast is made between the UK environment and the EU’s Markets in Crypto-Assets (MiCA) framework.

United States

To conclude, we look at the thoughts of Michael S Barr, Vice Chair for the Supervision of the Board of Governors of the Federal Reserve. His March speech, ‘Supporting Innovation with Guardrails’, discussed the recent turmoil in the crypto sector, highlighting the clear risks, but also appraising the potential crypto has to revolutionise the way we interact with money and payments.

Throughout the speech, Barr reiterated that the Federal Reserve’s main sectoral priorities include addressing the levels of fraud and money laundering using cryptoasset facilities. Their focus is also on bolstering regulations to address the lack of clarity around how banks should engage with crypto-related activities safely. Barr emphasises the fact that the Federal Reserve is working with smaller federal bank regulatory agencies to consider how Cryptoasset activities can be more consistently regulated across the US going forward. The Fed’s collaborative approach invokes ideas relating to the potential for international standards on cryptoasset regulation. This could represent a positive approach to promoting fairness, transparency, and the protection of consumers within Cryptoasset markets.