The growth in crypto

The last decade has seen an enormous amount of innovation in digital currencies and other forms of digital assets. Remember the plans for Facebook to issue its own stablecoin, a kind of parallel digital currency backed by investments in traditional currencies like the euro and dollar? Facebook's plans for Libra, or Diem as it became, caused a lot of anxiety in the world of central bankers who saw it as a potential rival and threat to national currencies. Libra was cancelled in 2022 but there are reported to be a couple of hundred stablecoins in existence today.   

But stablecoins are massively outnumbered by unbacked cryptocurrencies (like Bitcoin and Ethereum) which, like normal fiat currencies, have no underlying assets behind them. There are many thousands today. And there have of course been some significant failures along the way, including in the platforms or exchanges designed to trade in them, with FTX's collapse in late 2022 perhaps the biggest.

The evolution of digital assets 

Innovation does not stop there. Cryptocurrencies are arguably just the start of a revolution in digital assets. Investors can already trade many kinds of non-fungible or tokenised digital assets, and there is much discussion in the financial sector about tokenising more traditional assets like securities. Core to most of these developments is the use of blockchain or distributed ledger technology (DLT) that records ownership on a decentralised record rather than a centralised exchange or settlement system. 

The regulatory response in the EU and the UK 

We discussed the emerging regulatory responses in the EU and the UK to these fast-moving developments in our recent event in Brussels. Jonathan Herbst, Global Head of Financial Services at Norton Rose Fulbright LLP moderated a terrific panel with Peter Kerstens, Adviser for Technological Innovation and Cyber Security at DG FISMA in the European Commission, Ian Taylor, Board Advisor at CryptoUK, and Laura Chaput, Head Regulatory Compliance at Keyrock. The event was an excellent opportunity to compare the emerging regulatory regimes on digital assets in the EU and the UK and discuss first lessons learnt on both sides.  

The EU and MiCA

The EU outlined its plans for an EU Regulation for Markets in Crypto Assets (MiCA or MiCAR) in 2020 which was then agreed by the Council and Parliament in June 2023. MiCA, though, does not take effect until the end of 2024. And it does not catch all forms of digital assets. It focused on creating an authorisation regime for what it defines as asset-referenced tokens (ARTs) and electronic money tokens (EMTs). Our panel welcomed MiCA as an attempt to harmonise EU rules in a fast-moving market and set standards similar to those applied in traditional markets.  

While discussing the MiCA regime, Peter Kerstens emphasised its design for European issuers, European asset providers, European investors, European consumers, and for the single market. He explained, “MiCA has what we call passporting rights. If you are licensed in one member state, you are good to go in any member state.” 

The UK's two-phased approach

We also heard from the panel about the UK’s regulatory developments. The UK Treasury (HMT) has outlined its plans to use new regulatory powers granted in the Financial Services and Markets Act 2023 in several papers published last year. These set out a two-phased approach, with the first considering stablecoin regulation and the second a potentially wider cryptocurrency regime that might go further than MiCA. HMT’s papers were followed by FCA and BoE discussion papers on stablecoin regulation, where the consultation periods have recently closed. Our panel expected that the UK rules to emerge will align closely with MiCA.  

There are some regulations already in place in the UK. Already in 2020 the FCA banned the sale of derivatives and exchange traded notes that reference certain types of cryptoassets to retail consumers. In June 2023 the FCA published its Policy Statement on financial promotion rules for cryptoassets and the Guidance Consultation on cryptoasset promotions. The regime came into force in October last year. 

In our recent discussion, Jonathan Herbst pointed out that "in terms of approach, there are a couple of differences and a lot of similarities. The EU has its new regime, MiCA, and the UK is building out from our existing regulated activities order and designated activities regime. We sort of end in the same place broadly, but technically, how they go about it is different." 

Collaboration between both sides will be important to avoid misunderstandings and unnecessary divergence between both regimes. The new EU-UK joint forum on regulatory cooperation on financial services, which had its second meeting on 22 May, can be an excellent platform to discuss and work on interoperability between the two approaches. 

EU-UK cross-border activities

When asked if there will be any EU-UK cross-border activities, Jonathan Herbst said: "In both regimes, unless it's reverse solicited, you are going to need to be regulated. The question is, what does that mean for a third-country firm outside of the EU and the UK? The current view, at least in the EU, is you would probably have to set up an EU entity. In the UK, although the Treasury has been talking about the idea of a branch of a third-country entity possibly being able to be regulated, that remains to be seen. For the UK this is a big change. The EU has had this approach in other areas."

Global outlook

The EU and the UK are not alone in thinking about regulating digital assets. In the US the House just passed the Financial Innovation and Technology for the 21st Century Act (FIT21). It brings digital assets and their regulation to the federal level in the US system, imposing disclosure requirements, making fund raising easier and, it is claimed, demarcating clearly the responsibility of the SEC versus that of the CFTC. But FIT21, with the SEC Chair strongly criticizing it and the White House threatening to veto the act, is also a good example that regulation of digital assets needs to get all stakeholders on board. 

But the global discussion goes beyond regulation. For example, more than 134 countries in the world are currently exploring a Central Bank Digital Currency (CBDC). Three, the Bahamas, Jamaica and Nigeria, have already fully launched a CBDC. 

Singapore launched in 2023 Project Guardian, a collaborative initiative between policymakers and the financial industry to enhance liquidity and efficiency of financial markets through asset tokenisation. The FCA is, together with their counterparts from Japan, Switzerland and of course Singapore, part of the project. Hong-Kong launched in March this year Project Ensemble, a new wholesale central bank digital currency (wCBDC) project to render support to the development of the tokenisation market in Hong Kong facilitate seamless interbank settlement of tokenised money. Both projects are examples of collaborative approaches between regulators and the financial services industry. 

Future innovation

The panel also discussed the complexities of regulating innovative and global markets. Both the EU and UK regimes will have to deal with digital assets issued overseas, for example. And many firms trading these will hold a mixture of different assets - stablecoins, cryptocurrencies, NFTs and other tokenised assets as well as in the future potentially central bank digital currencies. The consensus was however that regulators should not overreact or react prematurely to market innovation. MiCA will no doubt be followed by MiCA 2 in due course, but MiCA 1 and the likely UK regime were seen as a sensible starting point.  

In our interview, Glenn Hall, Head of Government Relations and Public Policy and Partner at Norton Rose Fulbright, stressed the importance of regulatory clarity in promoting crypto and innovation by the UK Government. He expressed that "one of the best things a UK Government can do to promote crypto and innovation is to create clarity and certainty in the regulatory regime because that will breed confidence both for business and consumers." 

The City of London Corporation will continue to inform the debate between the EU, the UK and beyond to steer a fruitful exchange between all stakeholders involved. 

About the author

Nick Collier joined the City of London Corporation as Managing Director of the Brussels office in March 2019. He was previously Global Head of Government Relations at Refinitiv (Thomson Reuters). Before that he worked at a range of organisations in the financial services sector, including Morgan Stanley and the Bank of England and, until recently, served as Chair of TheCityUK’s Public Affairs Group as well as Deputy Chair of the International Regulatory Strategy Group. Nick is chair of diplomatic engagement at the International Business and Diplomatic Exchange. He holds a MSC in Economics and Finance from the London School of Economics and a BA from Oxford.