Digital Asset Manager CoinShares Comments on Global Crypto Regulatory Updates

Townsend Lansing, Head of Product at CoinShares and Nick du Cros, the Head of Compliance and Regulatory affairs at CoinShares, have noted that there appears to have been “quite a bit of confusion” in the digital assets community recently regarding the proposals in the EU Parliament’s draft legislative text for the proposed EU Markets in Crypto Assets regulation (MiCA).

The community was “particularly concerned about language from the Green Party (supported by the Social Democrats) proposing a ban on proof of work protocols under MiCA,” the update from CoinShares noted.

As mentioned in a blog post, the initial proposal was “rather severe,” with the Green’s demanding that MiCA:

  • Recognize the sustainability issues associated with proof of work protocols,
  • Require sustainability disclosures,
  • Force all crypto assets “issued, offered or admitting to trading” in the EU to meet sustainability standards, and
  • Prevent EU-based crypto-asset service providers from providing “services related in any way, shape, or form” to crypto-assets that do not meet the requisite environmental sustainability criteria.

Given that the above represented a possible de facto ban on proof of work protocols, it was “never likely that the Parliament would adopt it for trialogue discussions or that it would have survived those discussions.”

Indeed, the centre-right EPP proposed an alternative (and extremely less expansive) requirement that “would subject crypto assets to the EU Taxonomy on Sustainability, thereby applying the same EU classification system that governs environmentally sustainable financial products.”

The CoinShares team pointed out that Greens then “reacted with a proposal to impose “minimum environmental standards” on crypto assets before they could be issued, offered or admitted to trading in the EU.” The team at CoinShares also mentioned that it was these two proposals that “ultimately went to the Parliament’s ECON committee, and it was the EPP proposal that won out by a meaningful margin.”

As mentioned in the update:

“Hopefully, we finally move to trilogue discussions, where the European Parliament, Council and Commission meet to reconcile their various legislative proposals and reach some provisional consensus on a text acceptable to both the Council and the Parliament. We expect that provisional agreement to focus on sustainability (something that we at CoinShares work quite a lot on) but doubt that focus will result in a ban on proof of work protocols.”

In the United States –Biden’s Executive Order was “a big sigh of relief.”

As with the EU Parliament’s proposed draft, there was equal concern that the Biden administration’s long-awaited Executive Order “might also contain harmful legislative proposals.”

The CoinShares team added:

“And, as in the EU, the ultimate outcome was far from worrisome (some might say that in both cases, the concerns were always a bit overcooked).”

Clearly, the market expected Biden’s Order “to involve some kind of blanket ban or the imposition of a dramatic regulatory regime, given the way the Bitcoin price surged after publication.”

Fortunately, those fears “were unfounded.”

Indeed, the Order “did little more than inform the many federal agencies impacted by the rise of digital assets that they need to develop and implement strategies for policies and regulations.”

So we can “expect a flurry of reports from the various federal agencies over the next 3–7 months,” according to the update from CoinShares.

The team continued:

The Order was another meaningful step in the long and winding road towards regulatory transparency in the United States, even if it did re-affirm the US commitment to ‘sovereign money [being] at the core of a well-functioning financial system.'”

The UK: Where the real ban continues apace:

As mentioned in a blog post, “unfortunately, the UK remains the outlier among Western regulatory regimes, as it continues its push to effectively ban retail access to digital assets.” This all started back in early 2020, “when the FCA banned retail access to financial instruments that offer exposure to crypto.”

Not content with preventing people from accessing crypto via regulated instruments, the FCA and the Treasury “appear to be coming up with plans to limit access to the underlying digital asset markets as well.”

Step 2 was “to impose such high standards that only a limited number of digital asset companies would be able to comply with the FCA’s crypto AML/KYC registration process.”

The March 31 deadline for the Temporary Registration Regime “is rapidly approaching, and clarity remains ever elusive.”

According to reports, approx. 100 firms applied, 25 were fully registered, a disproportionate number of firms (some 54) “were rejected altogether, and 27 remaining firms, including big names such as Revolut, remain in limbo.

These numbers “don’t tell the full story of all the firms who simply closed up shop in the UK and moved elsewhere to avoid the regime altogether.”

As noted in the update:

“Step 3 is for the Treasury to finalize its plans to bring all digital assets within the scope of the Financial Promotions regime. Following on from its consultation, the Treasury is moving forward (even if the actual legislation will take some time). Although this seems innocuous, it will represent a dramatic transformation of the ability of digital asset businesses to promote or advertise their services. Essentially, before making any advertisement or other financial promotion, a digital asset company will have to comply with the Financial Promotions Regime.”

This means that almost “all advertising will have to be approved by a firm authorized to carry on regulated financial services.”

CoinShares added:

“Given that most crypto firms will not be regulated financial service firms, they will require the assistance of an external firm to conduct the appropriate review and provide the requisite approval. … at the same time, the FCA is consulting on rules that would restrict the ability to approve financial promotions for complicated products … to a limited subset of pre-approved authorized firms.

So looking at the cumulative effect of the steps being taken in the UK:

  • advertisements for crypto services will “need to comply with the Financial Promotions Regime and unauthorized crypto firms will need an authorized firm to approve their advertisements,”
  • becoming an authorized firm “involves an additional approval by the FCA and therefore additional risks and costs for the limited number of firms able to be able to provide such a service,”
  • the Financial Promotion Regime “will require the appointed representatives to consider a variety of factors, including ensuring that the promotion is ‘fair, clear and not misleading’,”
  • the FCA wanting to strengthen financial promotion rules “by including crypto assets as high-risk investments (currently under consultation).” The effect of these new rules “is likely to include mandatory high-risk disclosures, as well as red, highlighted wealth warnings,” and
  • the UK Advertising Standards Authority has “banned a significant number of crypto advertisements in the last few months but only just provided guidance to the industry.”

The FCA has “explicitly said it does not believe that digital assets are appropriate/suitable for retail; so before approving a financial promotion to retail, the approver will have to reflect on the FCA ‘s position before it can conclude that the promotion is ‘fair, clear and not misleading’; ergo, it is highly unlikely that a crypto advert could be approved for retail investors.”

Although this does not mean those services cannot continue to be offered, it is
“hard to see how any company could build a meaningful brand if it cannot advertise.”

As mentioned in the update from CoinShares:

“Effectively a back-door ban on crypto advertising. Or, next best option, advertisements will have red highlighted wealth warnings (like cigarette packet warnings) and a host of mandated disclosures on risk and taxes which go way beyond those required for a regulated product.”

As covered, the FCA is looking for a Head of Department Digital Assets to “lead and coordinate the FCA’s regulatory activity in this emerging market.”

As noted by CoinShares, we might think “this is better late than never, but some might reflect that by this time this person starts, there will be very few crypto businesses left in the UK to regulate.”

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