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2024 is set to be a defining year for the regulation of cryptoassets in the UK as the government aims to implement the relevant legislation throughout the year.

1. Overview and Timelines

EU – the implementation of MiCA

Currently, virtual asset service providers ("VASPs") in the EU are subject to various registration and ongoing obligations in the context of laws relating to anti-money laundering and counter terrorist financing. The EU's 5th Anti-Money Laundering Directive (EU) 2018/843 ("5AMLD") amending the 4th Anti-Money Laundering Directive (EU) 2015/849 brought VASPs within scope of the EU's AML/CFT framework by widening the perimeter of the existing regime to cover certain types of VASPs – i.e. those providing cryptoasset exchange services and custodian wallet providers. 5AMLD was subsequently transposed into the national laws of EU Member States, including the UK prior to UK’s exit from the EU.

The Markets in Crypto-Assets Regulation (“MiCA”) has since come into force (on 30 June 2023). The intention of MiCA is to provide a comprehensive and harmonized regulatory framework across the EU, covering cryptoassets that fall outside of existing financial services legislation. The provisions governing stablecoins will apply from 30 June 2024,  while the rest of the provisions will apply from 30 December, 2024.

In the meantime, the European Supervisory Authorities are developing a substantial number of Level 2 and Level 3 measures which will complete the framework envisioned under MiCA. Additionally, the EU Transfer of Funds Regulation incorporating the “Travel Rule” (i.e. the requirement for both originator and beneficiary information in relation to cryptoasset transactions to be collected and shared, pursuant to the standards set by FATF) will also take effect on 30 December 2024 and will apply on an EU-level, alongside MiCA.

It is worth noting that Member States have the option of granting entities already providing cryptoasset services in their jurisdictions up to an additional 18-month transitional period during which they may continue to operate without a MiCA license – this is also known as a “grand-fathering clause”. This means that holders of cryptoassets and clients of cryptoasset service providers may not benefit from full rights and protections afforded to them under MiCA until as late as 1 July 2026, depending on the duration chosen by Member States. On 17 October 2023, the European Securities and Markets Authority (ESMA) published a statement clarifying the implementation timeline for MiCA – see our Engage article for further details.

EU – Looking Ahead

Crucially, unlike the authorizations for cryptoasset service providers to be granted under MiCA, the AML/CTF authorizations granted under domestic regimes cannot be passported across the EU. At this stage, the precise impact of MiCA on current domestic AML/CTF regimes remains to be seen – future developments at an EU level and the approaches taken by local regulators over the course of 2024 will provide additional clarity how the local regimes across the EU and MiCA will interact. For example, in France, the Autorité des Marchés Financiers (“AMF”) has indicated that from 1 July 2026, MiCA will replace the French framework introduced by the PACTE law of 22 May 2019, such that cryptoasset firms that currently hold licenses from the AMF will be required to obtain MiCA authorisation. Accordingly, the AMF has implemented amendments to existing legislation (which apply from January 1, 2024) to align the requirements for the AMF’s licensing regime with those required for a MiCA authorisation, and to introduce a “fast track” procedure to be implemented.

UK – a phased approach

Since January 2020, an Anti-Money Laundering and Counter Terrorist Finance registration regime has been in place for cryptoasset businesses in the UK pursuant to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”). Notably, the approaches taken by individual EU jurisdictions to regulating VASPs from an AML/CTF perspective contain similarities with the UK approach (as a result of stemming from FATF rules and 5AMLD) – for example, the scope of the regime primarily relates to businesses providing cryptoasset exchange or custody wallet services.

Additionally:

  • since 1 September 2023, cryptoasset businesses providing exchange and/or custody services in the UK (as defined in the MLRs) have been required to collect, verify and share information about cryptoasset transfers, in line with the UK’s implementation of FATF’s “Travel Rule”; and
  • new rules bringing promotions with respect to cryptoassets within scope of the UK’s existing regulatory regime governing financial promotions have been in effect as of 8 October 2023.

Over the course of 2023, the UK has (on the heels of MiCA) also been developing an approach to regulating the cryptoasset sector beyond the AML/CTF regime. However, in contrast to the all-encompassing approach taken in the EU under MiCA, the UK is taking a phased approach to regulating cryptoassets by prioritizing according to the areas of greatest risk and opportunity.

The UK’s Financial Services and Markets Act 2023 sets the scene for “Phase 1”, i.e. the introduction of a regime that will allow for the regulation of fiat-backed stablecoins which are used for payments. The regime under Phase 1 will address issuance and custody activities relating to fiat-backed stablecoins, as well as payment-related activities for those fiat-backed stablecoins. The government intends to bring forward secondary legislation by early 2024, subject to Parliamentary time. Subsequently, “Phase 2” will address other cryptoassets and cryptoasset activities, such as the trading of and investment in cryptoassets, which are considered to be associated with a high degree of consumer risk − the intention is for secondary legislation to be laid in 2024, subject to Parliamentary time. “Future phases” will then cover more nascent areas of the market such as DeFi and staking.

UK − Looking ahead

2024 is set to be a defining year for the regulation of cryptoassets in the UK as the government aims to implement the relevant legislation throughout the year. Importantly, although the UK may be trailing the EU in terms of the implementation timeline, the UK approach will tackle areas that are not currently covered under MiCA such as cryptoasset borrowing/lending activities, staking, as well as the distinction in legislative definitions between fiat-backed stablecoins, e-money and tokenized deposits (i.e. different forms of digital money or money-like instruments, as discussed in a ‘Dear CEO Letter’ published on 6 November 2023 by the PRA – see our Engage article for further details). 

2. A “snapshot” comparison of the upcoming frameworks

a) Legislative Framework

UK: The FCA’s AML/CTF regime has been applicable to VASPs since January 2020.

With respect to the proposed regulatory framework:

  • Phase 1: The issuance and custody of fiat-backed stablecoins will be regulated under the FSMA 2000 regime, while the use of such stablecoins as a means of payment will be regulated via amendments to existing payments legislation (i.e. Payment Services Regulations 2017).
  • Phase 2: The intention is to include the financial services regulation of certain cryptoasset activities within the regulatory framework established by FSMA 2000, rather than develop a standalone bespoke regime.
  • Future phases: TBD.

EU: The current patchwork-landscape of AML/CTF regimes applicable to VASPs due to local law implementations of the EU's 5th Anti-Money Laundering Directive (EU) 2018/843

MiCA introduces an EU-level regulatory framework covering a range of cryptoasset activities which fall outside of existing financial services legislation. It is set to apply from 30 December 2024 (with provisions relating to stablecoins applying from 30 June 2024).

b) Definition of cryptoassets

UK: FSMA 2023 defines cryptoassets as “any cryptographically secured digital representation of value or contractual rights that – (a) can be transferred, stored or traded electronically, and (b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology).”

EU: MiCA defines cryptoassets as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.”

c) Scope of regime

UK: The list of activities to be regulated under Phase 1 includes:

  • Issuance of fiat-backed stablecoins
  • Custody of fiat-backed stablecoins

Separately, payment service providers which use fiat-backed stablecoins in payment chains may need new permissions under the PSRs 2017.

The indicative list of activities to be regulated under Phase 2 includes:

  • Admitting a cryptoasset to a cryptoasset trading venue
  • Making a public offer of a cryptoasset
  • Operating a cryptoasset trading venue
  • Dealing in cryptoassets as principal or agent
  • Arranging (bringing about) deals in cryptoassets
  • Making arrangements with a view to transactions in cryptoassets
  • Operating a cryptoasset lending platform
  • Safeguarding and/or administering (or arranging the same) a cryptoasset other than a fiat-backed stablecoin (i.e. custody)

EU: MiCA covers:

  • issuance of stablecoins
  • custody and administration of cryptoassets
  • operation of a trading platform for cryptoassets
  • exchange of cryptoassets for funds
  • exchange of cryptoassets for other cryptoassets
  • execution of orders for cryptoassets
  • placing of cryptoassets
  • reception and transmission of orders for cryptoassets
  • providing advice on cryptoassets
  • providing portfolio management on cryptoassets
  • providing transfer services for cryptoassets

Unlike the UK approach, MiCA deliberately does not cover lending and borrowing of cryptoassets (Recital 94). However, MiCA does impose an obligation on the European Commission to present a report on cryptoasset developments by 30 December 2024, and such report must contain (among other things) an assessment of the necessity and feasibility of regulating lending and borrowing of cryptoassets.

d) Authorizations required 

UK: Cryptoasset exchange providers and custodian wallet providers must register with the FCA under the AML/CTF regime as a VASP. In future, entities carrying out cryptoasset activities by way of business falling within Phase 1 or Phase 2 would need to be authorised by the FCA under Part 4A of FSMA 2000.

EU: Pursuant to 5AMLD, cryptoasset service providers falling within scope of national AML/CTF regimes will need to register with the relevant authority. In future, under MiCA, cryptoasset entities carrying out activities falling within scope of MiCA will need to obtain permissions under MiCA to issue stablecoins, or the relevant authorizations as a cryptoasset service provider.

e) Transition process

UK: VASPs already registered with the FCA under its anti-money-laundering regime will not be automatically granted authorizations under the new regime, as the new regime will cover aspects of regulatory compliance that may not have previously been assessed. However, the FCA will consider the regulatory histories of all firms applying for authorisation under the new regime.  Other firms that have an existing authorizations under Part 4A of FSMA (for example, those authorised to operate a Multilateral Trading Facility) will need to apply for a Variation of Permission in order to undertake newly regulated cryptoasset activities

EU: The transition processes will depend on the approach to be taken by individual Member States.

f) Geographic coverage

UK: Phase 1 will cover the activities of issuance and custody of fiat-backed stablecoins where the coin is issued in or from the UK. Stablecoins issued overseas may need to be subject to approvals by payment arrangers authorised by the FCA. Phase 2 will cover cryptoasset activities provided in or to the United Kingdom (i.e. including the activities of overseas firms).

EU: MiCA will apply to all persons that offer cryptoassets or provide cryptoasset services to EU residents, regardless of their geographical location. However, there may be an exemption under Article 61(1) where an EU customer approaches a cryptoasset service provider by their own initiative (i.e. the “reverse solicitation” principle).

g) Treatment of Non-fungible Tokens (NFTs)

UK: NFTs generally are not expected to fall within scope of the future financial services regulatory regime. However, such NFTs will need to be assessed on a case by case basis – for example, an NFT would be in scope if it was in practice used as a financial services instrument

EU: MiCA states that it shall not apply to cryptoassets that are unique and not fungible with other cryptoassets – accordingly, NFTs should not fall within scope of MiCA (Recitals 10-11). MiCA further clarifies that whether an NFT will fall within the regulatory perimeter of MiCA will depend on how the NFT is used in practice rather than how it is designed or marketed. Additionally, fractional shares of a single, non-fungible cryptoasset are also not considered to be an NFT.

MiCA also imposes an obligation on the European Commission to present a report on cryptoasset developments by 30 December 2024, and such report must contain (among other things) an assessment of market developments in NFTs and of the appropriate regulatory treatment of NFTs.

h) Approach to Decentralized Finance (DeFi)

UK: The UK government does not intend to ban DeFi. However, HM Treasury considers that it would be premature and ineffective for the UK to introduce a UK regulatory framework at this stage. Instead, the UK will support efforts at the international level through work at both the FSB and standard setting bodies.

EU: MiCA does not set out a regulatory framework covering DeFi. However, MiCA imposes an obligation on the European Commission to present a report on cryptoasset developments by 30 December 2024, and such report must contain (among other things) an assessment of DeFi, including an assessment of the necessity and feasibility of regulating DeFi.

i) Approach to Staking

UK: HM Treasury has provided some additional clarity on the definition and potential future treatment of staking in its Consultation Response, and has confirmed that it will accelerate its exploratory work which involves extensive engagement with stakeholders. In particular, the aim is to: (i) develop a clear definition of staking, (ii) establishing a taxonomy of different staking business models currently in the market, and (iii) identifying how to mitigate associated risks.

EU: MiCA does not expressly address staking. Staking may be covered in the future under a “MiCA 2.0”. 

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