More systemic oversight on the way for the payments sector

More businesses that are involved in payments chains – even those that do not handle funds directly – are being subject to more regulatory scrutiny.

The Kraken defeated – Time for cryptoasset exchanges to replace US arbitration clauses in UK consumer contracts?

Following a recent UK court decision, crypto exchanges with customer’s agreements that submit to US arbitration may no longer be enforceable.

UK confirms “tough” cryptoasset marketing rules

Getting marketing right is vital for any successful business. Changes in law and regulation mean that marketing cryptoassets to UK consumers is about to get more complicated. Crypto firms, including those based outside the UK, have until 8 October 2023 to make sure they can lawfully advertise and meet the new regulatory standards.

What’s new? 

On 7 June 2023 Parliament made the legislation which brings qualifying cryptoassets into the financial promotions regime.

The following day the Financial Conduct Authority published policy statement 23/6, setting the rules it will apply to cryptoasset promotions, and opened a consultation on additional guidance.

Routes to making cryptoasset promotions

The extension of the financial promotion regime will come into force after a four-month transition period. This means that, from 8 October 2023, cryptoasset adverts will be treated like other financial promotions under UK law.

There will be four routes to communicating cryptoasset promotions in the UK. These are that the communication is:

  1. made by a licensed firm,
  2. approved by a licensed firm which has permission to do so,
  3. made by a cryptoasset business which is registered with the FCA, or
  4. otherwise exempt.

Overseas cryptoasset businesses will be most impacted by these changes to the law. Routes 1 and 3 are unavailable if they do not have a UK presence and route 4 is generally unavailable if they want to market to retail consumers. Route 2 will also be a challenge because the pool of potential approvers is likely to be very small given that approvers need appropriate product expertise as well as specific permission from the FCA.

Client subscribers to the Linklaters Knowledge Portal can read our FAQs on cryptoasset promotions which includes a detailed look at the changes to the legislation.

Making compliant cryptoasset promotions

Making sure you can communicate cryptoasset promotions is only the first step. The next consideration is how you can comply with what the FCA describes as its “tough” new rules for cryptoasset promotions. For any of routes 1 to 3 described above, cryptoasset promotions will need to comply with the FCA’s rules.

Changes to the consumer journey

In its policy statement the FCA confirms the financial promotion rules that it will apply to cryptoassets. This follows a 2022 consultation in which the FCA proposed treating cryptoassets as high-risk investments (regardless of the risk profile of any given cryptoasset). Under the FCA’s policy, mass marketing of cryptoassets is allowed subject to certain restrictions.

The restrictions include:

  • Ensuring that cryptoasset promotions are fair, clear and not misleading
  • Including a standard risk warning on all cryptoasset promotions
  • A personalised risk warning pop-up for first-time investors
  • A ban on incentives to invest, such as additional “free” cryptoassets or “refer a friend” bonuses

Direct offer financial promotions

Some types of cryptoasset promotion will be subject to more onerous requirements. Communications that include details of how to invest (such as a “buy now” button) are likely to be treated as a “direct offer financial promotion” or DOFP. First-time investors must be given a minimum 24-hour cooling off period before they can be shown a DOFP.

Firms can only make DOFPs to consumers who have been categorised as restricted, high net worth or certified sophisticated investors. Restricted investors are consumers who confirm that they are not investing more than 10% of their net assets in cryptoassets and certain other high-risk investments. Firms must also assess whether the consumer has the necessary experience and knowledge to understand the risks involved with investing.

IT build required

Firms will need to update their websites and apps to comply with these new standards. This will include making changes to their consumer onboarding process for new UK consumers e.g. to allow for the cooling off period before providing them with the mechanism to invest. Firms should also reconsider their approach to marketing, including social media.

Firms will also need to record metrics relating to client categorisation and appropriateness assessments.

More guidance

To help firms understand the incoming standards, the FCA has released draft guidance on cryptoasset promotions. The guidance focuses on the core requirement for financial promotions to be fair, clear and not misleading. It also considers specific scenarios such as staking arrangements, stablecoins and cryptoassets with complex yield models.

Consumer Duty

Licensed firms should note that the Consumer Duty will apply when they communicate their own cryptoasset promotions or approve the promotions of unlicensed firms.

Firms in the scope of the Duty must act to deliver good outcomes for retail consumers. Additional rules under the Duty include new requirements focused on consumer understanding. The Duty starts to apply on 31 July 2023.

Consumer research

Alongside its policy statement and draft guidance, the FCA has also released its latest consumer research note on cryptoassets. The findings suggest that awareness of cryptoassets has risen significantly and that social media plays a prominent role in cryptoasset advertising.

What happens next?

The regime starts to apply on 8 October 2023. Firms marketing cryptoassets to UK consumers, including those based overseas, will need to make sure they are ready to comply with the new regime by this date.

Strictly speaking, the rules are “near-final” and the FCA intends to confirm the final rules shortly. It wanted to publish the rules as soon as possible to give firms as much time to prepare for compliance.

The draft guidance is open for consultation until 10 August 2023 and will be finalised in the autumn.

Once the rules are in force the FCA promises to take robust action against breaches, including requesting non-compliant websites to be taken down.

International harmonisation of digital asset law and regulation: a series of meaningful steps, but a long road ahead

The novel and global nature of digital assets has long prompted calls for international coordination as to their legal and regulatory treatment. In recent weeks, we have seen a series of notable developments in this vein. UNIDROIT adopted its principles on the private law treatment of digital assets and launched a joint project with the Hague Conference on Private International Law to build on that work. Meanwhile, on regulatory matters, IOSCO (the global standard setter for securities markets) recommended regulating crypto markets to the same standards as securities markets; the World Economic Forum published its recommendations for a global approach; and the G7 leaders committed to implementing effective regulatory frameworks. Final recommendations from the FSB are also expected in July. Whether and how all this translates into meaningful action at national level, and ultimately increased harmonisation, remains to be seen. In any case, there is likely to be a long road ahead. 

Calls for legal and regulatory harmonisation 

The novel nature of digital assets and their markets has raised fundamental questions as to how they should be treated from a legal and regulatory perspective. There are many complex issues on which there is much room for debate, and over the years we have seen a range of different conclusions, approaches and even taxonomies from law makers and regulators. This can, and does, raise significant challenges. For example, differing approaches can create uncertainty and confusion in the market and barriers to scaling. Given the cross-border nature of the assets and their markets, it can also leave regulatory gaps and opportunities for regulatory arbitrage. Recent failures and turmoil in the crypto markets have prompted renewed calls for regulatory coordination.

UNIDROIT Digital Assets and Private Law Principles

What are the UNIDROIT digital asset principles?

After a number of years of development, UNIDROIT has adopted its digital asset and private law principles. These comprise guidance and best practice for legislators in developing the private law framework for transactions involving digital assets. These principles represent one of a series of initiatives by UNIDROIT to streamline international approaches to the private law treatment of emerging technologies.

To encourage take-up among legislators, the principles are intended to be drafted in a technology, jurisdiction and organisationally neutral way. By design, the principles do not address the regulatory framework that should apply to digital assets, or other ancillary private law matters (such as consumer protection or intellectual property law). 

What do the principles cover? 

The principles apply to “digital assets”, defined to include any “electronic record” that is capable of being subject to “control”. 

“Electronic record” means information which is “(i) stored in an electronic medium; and (ii) capable of being retrieved”. 

Control is a key concept under the principles, as it also forms the basis of other legal consequences (as discussed below). A person is generally considered to have control if they have:

  • the exclusive ability to prevent others from obtaining substantially all of the benefit from the digital asset (i.e. negative control);
  • the ability to obtain substantially all the benefit from the digital asset (i.e. positive control);
  • the exclusive ability to transfer that positive and negative control to another person; and
  • the ability to identify themself as having the powers listed above.

There are also additional nuances included, for example to address a situation where a person has consented to sharing control. 

The commentary suggests there has been much hand ringing as to the question of how the principles apply to forms of information stored digitally which are not digital assets – for example, a password protected Excel or Word file. The conclusion seems to be that while these documents could in theory be capable of being subject to “control”, in practice transfers of these documents are generally unlikely to amount to a transfer of control, as required under the definition of control (but rather the sharing of access to the same information). Nevertheless, the creation of a single regime which encapsulates both digital assets and other forms of digital information is the topic of much debate, with critics highlighting that it is both overinclusive (by extending proprietary status to assets not commonly treated as such in the market) and insufficiently specific (by failing to acknowledge distinguishing characteristics of digital assets as distinct from other electronic information).

We have previously discussed some of the challenges in defining the boundaries of digital assets legislation (see a summary of our responses to the Law Commission’s paper).

What are the key principles UNIDROIT has proposed?

The document sets out 19 principles, categorised into seven chapters, as outlined at a high level below. 

  • Proprietary aspects: UNIDROIT’s primary proposal is that legal regimes should establish that digital assets (as defined) are susceptible to being the subject of proprietary rights. This principle has already been put into action to some extent in several jurisdictions (for example, in Singapore, England and Wales and Hong Kong). 
  • Conflicts of laws: There have been numerous debates as to which law should govern the proprietary aspects of digital assets, particularly those constituted through a cross-border platform and which have no extrinsic existence or issuer. UNIDROIT offers a (partial) solution in the form of a waterfall. This waterfall prioritises the choices of the parties, where specified, but leaves states with considerable discretion in relation to arrangements where there is no governing law specified in relation to the digital assets or system, nor any issuer. This approach is set to be built upon through a joint endeavour launched by UNIDROIT and the Hague Conference on Private International Law. The project will explore, for example, measures to harmonise certain matters currently left to state discretion under the UNIDROIT principles, as well as measures to protect weaker parties. Meanwhile, the Law Commission of England and Wales is due to consult on its approach later this year.  
  • Transfers of digital assets: UNIDROIT steers clear of prescribing the conditions for a valid transfer. It does, however, propose that innocent acquirers of a digital asset who have “control” of that asset (as defined above) and meet certain additional requirements should take the digital asset free of proprietary claims to it. These proposals mirror similar suggestions made by the Law Commission in their recent consultation paper (see a summary of our responses to the Law Commission’s paper).
  • Taking security over digital assets: Under UNIDROIT’s principles, a secured creditor should be able to make a security interest in a digital asset effective against third parties by obtaining “control” of that digital asset (with priority over those that do not have control). Again, this is a point that is discussed at some length in the Law Commission’s consultation paper and our response.
  • Custody: The principles set out the circumstances in which a person should be treated as a custodian of digital assets, and provide that digital assets maintained by a custodian will not form part of its insolvent estate. There are also proposals as to the duties and powers of custodians in respect of digital assets. 
  • Procedural law: UNIDROIT proposes that areas of the law relating to procedural matters (e.g. the enforcement of rights to property) apply equally to digital assets, subject to adaptations as necessary.
  • Effect of insolvency: The principles propose that the proprietary rights of holders of digital assets be effective against third parties and their insolvency representatives on insolvency. 

What’s next? 

Initiatives are already underway in some jurisdictions to establish whether the existing legal regimes can accommodate digital assets and if and how they ought to be amended. In England and Wales, for example, the Law Commission has run a series of extensive consultations on potential areas for law reform, while the UK Jurisdiction Task Force has helped foster legal certainty as to the support provided by the existing legal framework (see our FAQs on the UKJT statement on cryptoassets and smart contracts and digital securities).

IOSCO Consultation on Policy Recommendations for the Regulation of Crypto and Digital Markets

What is IOSCO consulting on?

IOSCO is consulting on 18 policy recommendations to help its members respond to widespread concerns regarding market integrity and investor protection within the crypto markets.

What are the key recommendations?

The overarching recommendation from IOSCO is that regulators should seek to achieve outcomes for investor protection and market integrity with respect to cryptoassets (including stablecoins) that are the same as, or consistent with, those required in traditional financial markets, with a view to addressing level playing field concerns. 

To this end, IOSCO has encouraged regulators to analyse and identify the extent to which cryptoassets are, or behave like, substitutes for regulated financial instruments.

Its other proposed recommendations are designed to help members apply its existing Principles for Securities Regulation to cryptoasset markets. These include recommendations in relation to:

  • effective governance and organisational requirements to address effectively and mitigate conflicts of interest arising through vertical integration
  • system policies and procedures for fair, orderly and timely execution of client orders and accompanying transparency and resilience requirements
  • procedural and delisting standards and disclosure in relation to the listing of cryptoassets and certain primary market activities
  • effective systems to manage manipulative market practices and to prevent leakage of inside information
  • cross-border cooperation between regulators to ensure effective supervision and enforcement
  • addressing custody-related risk and the safeguarding of client monies and assets
  • addressing operational and technological risk
  • retail distribution.

IOSCO seeks to take an outcomes-focused, functional approach. It does not attempt to develop a one-size fits all prescriptive taxonomy. 

What’s next?

The consultation paper closes on 31 July 2023, with IOSCO intending to finalise its recommendations by the end of the year. DeFI is not included in the recommendations and will, instead, be included as part of a consultation report to be published by IOSCO’s Financial Action Task Force later this summer. 

Other developments

The FSB has also been busy developing international standards in this area in recent years. It published its proposed recommendations for the regulation and oversight of cryptoasset activities and global stablecoins in October 2022. Those are expected to be finalised by July 2023.

Meanwhile, the World Economic Forum has published a whitepaper reiterating the need for a global approach to crypto regulation and setting out specific recommendations for international organisations, regulatory authorities and industry. 

The G7 leaders also expressed their commitment to establishing effective regulatory and supervisory frameworks for cryptoasset activities and stablecoin arrangements, in their recent joint statement.

All this activity suggests that a move towards increased international harmonisation is inevitable. That said, there are considerable challenges in coordinating and harmonising approaches in this area, so there is likely to be a long road ahead.

US illicit finance risk assessment of Decentralized Finance – addressing the regulatory gap

The US Department of the Treasury (Treasury) recently issued a risk assessment describing the illicit finance risks associated with Decentralized Finance (DeFi) services.  Among other things, the risk assessment describes weaknesses in the anti-money laundering and countering the financing of terrorism (AML/CFT) regime governing DeFi services and how illicit actors exploit these weaknesses. 

Failure to meet AML/CFT standards

According to the risk assessment, the most significant vulnerability in the DeFi space results from the failure of DeFi services to comply with existing AML/CFT obligations. 

These obligations are far from uniform: while the United States subjects financial institutions to AML/CFT obligations under the Bank Secrecy Act and its implementing regulations,[i] some non-US jurisdictions have not effectively implemented international AML/CFT standards. 

A regulatory gap

Perhaps unsurprisingly, the above-mentioned failure is partly caused by a regulatory gap under the US AML/CFT regime. To the extent a DeFi service allows users to self-custody and transfer their crypto assets without an intermediary financial institution, the DeFi service may not fall within the definition of “financial institution” under the Bank Secrecy Act. 

To be sure, the regulatory gap is not the only reason why DeFi services fail to comply with AML/CFT obligations. In some cases, DeFi service providers may erroneously think they are not subject to these obligations because their operations have been decentralized. In other cases, DeFi services may operate in jurisdictions that fail to implement international AML/CFT standards.

Recommended actions

In addition to providing a thorough overview of the illicit finance risks present in DeFi services, the risk assessment recommends taking several actions to address these risks, including:

  • issuing additional regulatory guidance
  • engaging with foreign partners; and 
  • engaging with innovative AML/CFT solutions providers in the DeFi space. 

While some market participants embrace the Treasury’s risk assessment for its insight and outreach for public comment, others view the publication as a part of the continuing trend of increased regulatory scrutiny of the cryptoasset market. 

Access the risk assessment in its entirety: Illicit Finance Risk Assessment of Decentralized Finance (

[i] The Bank Secrecy Act is codified at 31 U.S.C. §§ 5311-5314, 5316-5336 and 12 U.S.C. §§ 1829b, 1951-1959, while regulations implementing the Bank Secrecy Act are codified at 31 C.F.R. Chapter X.

Watch: European Parliament formally adopts Markets in Cryptoassets Regulation

After some delay, the European Parliament has finally voted to adopt MiCAR. MiCAR is now expected to enter into force in June and start to apply in 2024. As the countdown towards application begins, we have published a webinar and a new report to help potentially in scope businesses prepare. As part of this, we highlight how implementation and ongoing supervision is likely to differ across different Member States in light of existing regulatory frameworks and approaches.

Webinar recording

Knowledge Portal subscribers have access to our recent webinar: Managing MICAR: regulatory strategizing from a cross-border perspective. Click here to access or subscribe

Our cross-border panel of experts discuss:

  • Background and timeline
  • Overview of MiCAR framework
  • Global implications
  • Strategic planning
  • Authorisation requirements
  • Transitional measures
  • Implementation and transition within Germany, France, the Netherlands, Italy and Spain


Knowledge Portal subscribers have access to our new report: Transitioning to MiCAR: a cross-border guide. Click here to access or subscribe

Among other things, this includes overviews of the existing regulatory frameworks for service providers and current expectations around transition into MiCAR in the following jurisdictions:

  • France
  • Germany
  • Belgium
  • Italy
  • Luxembourg
  • The Netherlands
  • Poland
  • Portugal
  • Spain
  • Sweden

Get in touch

The journey to compliance will look different for different businesses, and market participants will need to develop their own tailored regulatory strategies. Do get in touch with any of our contacts to discuss further.

New SEC Proposed Safeguarding Rule: Inadvertent Crypto Casualties

The U.S. Securities and Exchange Commission (SEC) recently proposed overhauling the Custody Rule under the Advisers Act to enhance the protection of customer assets managed by registered investment advisers. These enhancements, which are proposed to be embodied in new rule 223-1 under the Advisers Act (Proposed Safeguarding Rule), could increase the cost burden on crypto custodians and investment advisers – and harm their clients – prompting the need to exempt investment advisers from certain aspects of the Proposed Safeguarding Rule. We outline some of the impacts of the Proposed Safeguarding Rule in a recent client alert, linked below. Our client alert also proposes an exemption from the Proposed Safeguarding Rule that gives investment advisers the flexibility to custody client assets without a qualified custodian until a more robust custody market (particularly with regard to DeFi) develops, while also safeguarding against the abuses that the Proposed Safeguarding Rule seeks to prevent.

New SEC Proposed Safeguarding Rule: Inadvertent Crypto Casualties

Silvergate, Silicon Valley Bank, Signature and the “unbanking” of U.S. crypto

Over the course of a single week we witnessed, in quick succession, the collapse of three of the most crypto-friendly banks in the U.S. – Silvergate, Silicon Valley Bank (SVB) and Signature. The failure of SVB represented the largest bank failure since the 2008 financial crisis. While U.S. regulators swiftly stepped in to guarantee deposits and avert an immediate banking crisis, the collapse of these three institutions has accelerated what is being called the “unbanking of crypto” in the U.S. While digital asset industry skeptics may view the past week as the final nail in the coffin for crypto, crypto lives on, with Bitcoin rallying to a 9-month high. As we take stock of this latest crisis, we unpack some of the implications for the U.S. digital economy.

The events 

Silvergate, Signature and SVB were considered to be crypto-friendly, although each had its own diverse depositor base that went far beyond the digital assets industry. In addition to banking many in the crypto ecosystem, Silvergate and Signature also provided important infrastructure supporting the digital asset industry in the form of the 24/7 SEN and Signet payment networks, and counted as clients major crypto firms, like Binance.US, Kraken, and Gemini. SVB was the primary bank for many venture capital, tech and digital assets firms, including Circle, Roku, BlockFi and Roblox.

The fates of these banks unravelled quickly: on Wednesday, March 8, Silvergate Capital announced that it would be winding down operations and liquidating its bank, after reporting that it would not be filing its annual report. On Friday, March 9, Silicon Valley Bank collapsed after depositors withdrew more than $42 billion following SVB’s statement on Wednesday that it needed to raise $2.25 billion to shore up its balance sheet. On Sunday, March 12, Signature Bank, which also had a strong crypto focus but was much larger than Silvergate, was seized unexpectedly by banking regulators. Crypto industry veteran Meltem Demirors (@Melt_Dem) tweeted “and just like that, crypto in america has been unbanked Silvergate. Silicon Valley Bank. Signature. in one week”. On Friday, March 17, SVB’s parent filed for a court-supervised reorganization under Chapter 11 bankruptcy protection to seek buyers for its assets.

The response

The rapid collapse of SVB – the second largest bank failure in U.S. history – was a major shock to the venture capital and start-up community. VCs, founders and other depositors faced extreme uncertainty about the fates of their bank accounts and business operations, including concerns about making payroll and having to furlough employees. Many expressed grave concerns about the likelihood of additional “digital bank runs” on Monday morning, while others cautioned about moral hazard – including the view that, if the government came to the rescue, it would be incentivizing and rewarding risk taking behaviors – thereby “privatizing wins and socializing losses.”

In the end, depositors won. Amid assurances that there would not be a “bailout” of the banks, the U.S. federal government swiftly stepped in to guarantee all deposits for both SVB and Signature depositors, adding confidence and sparking a small rally in the crypto markets. By helping the banks perform on their contracts and making depositors whole, a Lehman-type situation was averted and market confidence was at least somewhat restored. 

No taxpayer funders were used – instead, the Federal Deposit Insurance Corporation (FDIC) declared that it would create a “bridge bank” to protect SVB customers and another for Signature (typically FDIC insures all deposits up to $250,000 for individual bank customers and does not extend its protection to customers of crypto exchanges). Nevertheless, it is possible that bank depositors may bear additional expenses, such as increased fees, as a result of the backstop facilities.

Fractional reserve banking

Importantly, these events have focused the public’s attention on the risks of fractional reserve banking – a system in which only a fraction of bank deposits are required to be available for withdrawal – risks that, ironically, blockchain technology was designed to avoid. 

In a world in which bank customers no longer need to stand in lines at local branches to withdraw their funds and, instead, can move their funds in seconds using their phones – and where public sentiment can reach frenzied levels based on a Tweet – bank runs may occur more quickly and frequently than ever before. As bank customers realize, perhaps for the first time, that, if they are receiving yields on their deposited funds, those funds might not actually be sitting “at the bank,” available for withdrawal, many have begun to ask whether they could choose to pay a fee to a bank for the certainty that their respective deposits would be available. 

Political drivers

An intense blame game has been unfolding in the media, with some arguing – not for the first time – that crypto needs to “stay out of” big banks. Questions also remain about the extent to which bank regulators were motivated by that very goal. For example, in the search for a buyer to purchase SVB, it was rumored that at least one GSIB (globally systemically important bank) had been prevented from bidding. 

Former Congressman, Barney Frank, an architect of the Dodd-Frank Act (and a member of Signature’s board of directors), has suggested publicly that New York regulators targeted Signature to convey an “anti-crypto message.” Yet according to Reuters, the New York Division of Financial Services (NY DFS) said that its decision was based on “a significant crisis of confidence in the bank’s leadership,” with a spokesperson asserting, “[t]he decisions made over the weekend had nothing to do with crypto. Signature was a traditional commercial bank with a wide range of activities and customers” and emphasizing, “[NY] DFS has been facilitating well-regulated crypto activities for several years and is a national model for regulating the space.

Reuters also described reports that the FDIC had included a crypto-specific condition on bidders for Signature, requiring that “….any buyer of Signature Bank must agree to give up all the crypto business at the bank….” While the FDIC has denied this, it would not be the first time that a U.S federal regulator required a would-be buyer to discontinue digital asset-related activities as a condition to purchasing a bank (for example, when SoFi Technologies, which engaged in some digital asset-related activities, acquired a national bank).

Regulatory drivers

There certainly appear to be a number of regulatory drivers restricting the extent to which banks can participate in crypto markets. As demonstrated in the SoFi acquisition, the OCC confirmed that national banks and federal savings associations “must demonstrate that they have adequate controls in place before they can engage in certain cryptocurrency, distributed ledger, and stablecoin activities,” noting further that a bank “….should not engage in the activity until it receives a non-objection from its supervisory office.” 

In addition, a new Fed rule, which “presumptively prohibits” member banks from holding certain crypto assets, calls into question whether banks will be able to serve as “qualified custodians” for purposes of the SEC’s “custody rule,” under the Investment Adviser Act of 1940, as amended. This new Fed rule has been announced relatively contemporaneously with the SEC’s proposed expansion of the “custody rule” into a “safekeeping rule” – requiring the use of a qualified custodian for all customer assets (including, explicitly, digital assets), rather than only for customer assets that constitute “customer securities” or “customer funds.” 

While banks otherwise might be considered the natural players to serve as “qualified custodians,” constraints exist on their ability to engage in digital asset-related activities. Some have expressed concerns that adoption of the proposed “safekeeping rule,” without clear guidance about which entities constitute “qualified custodians,” may, effectively, result in a ban on crypto VC investments.

Impact on policy

Federal bank interest rate hikes last year may well have a been a factor in last week’s events. Increased interest rates caused the value of fixed-income bonds, like those in which SVB was reported to have invested, to dip, while arguably increasing depositors’ needs to access their funds. This created a negative feedback loop, with banks forced to sell their long-term bond holdings into a down market to meet customer withdrawal demands. 

Some also believe that Jerome Powell’s statements, suggesting an additional 50 basis point rate hike, contributed to the public’s crisis of confidence in SVB and Signature. Now, it appears that a 50 basis point increase is off of the table, with some predicting a 25 basis point increase, or no increase at all.

The bank failures also have spurred suggestions to increase the FDIC guarantee limit above $250,000 – the FDIC limit previously has been raised 7 times – and implement for regional banks new reserve and stress-testing requirements

Impact on stablecoins

Circle (issuer of the USDC stablecoin) also was affected by SVB’s collapse. When Circle disclosed its exposure to SVB, USDC, the world’s second “largest” stablecoin, temporarily lost its peg to the U.S. dollar, sinking to an all-time low of 88 cents. Circle’s disclosure appeared to be clear and timely, explaining where Circle held its funds and its go-forward plan and identifying potential challenges. Although the market’s response to such transparency appeared to be negative, the depegging ultimately was resolved. Unlike last year’s Terra/Luna unravelling, which involved an unbacked algorithmic stablecoin, the U.S. dollar reserve backing USDC always existed in the account, and the “loss” was never realized.

Many regard USDC (backed by real assets like U.S. Treasuries and cash) as a stablecoin with good transparency; its issuer, Circle, is regulated by NY DFS. While Circle held USDC reserves in bank accounts and appears to have provided the public with the types of meaningful disclosure that regulators seek, some wonder whether such frankness, in a real-time, social media-driven world, may have increased the market’s skittishness.

Interestingly, despite all of the market turmoil, Tether’s stablecoin, USDT, never lost its $1 peg. Certain U.S. regulators have criticized USDT (which, as of March 9, reportedly exceeded 54% of the market share among stablecoins), expressing concerns about a relative lack of transparency concerning USDT’s reserves (much of which appears to be held in the form of less-liquid commercial paper) and the potential for systemic risk. It may be a fluke that holding stablecoin reserves in a more opaque way resulted in a more stable situation/price. Yet, some suggest that SVB’s very transparency to the market about SVB’s situation may have contributed to the bank run. 

Circle’s experience also may affect future U.S. federal regulation. In the wake of collapses of previously high-flying digital asset-related players like FTX, Celsius, Genesis, BlockFi, Three Arrows Capital and Voyager, some believe that the digital asset-related federal legislation most likely to be passed first would focus on stablecoins, instituting requirements relating to reserves (perhaps requiring fiat-backing), disclosures and reporting, similar to NY DFS’s existing rules. USDC’s depegging may affect the terms of any such federal legislation, including whether such stablecoin reserves should be held in smaller amounts spread across multiple banks – or whether they should be held in banks at all. Interestingly, some accused banks of introducing risks to crypto.

Impact on crypto liquidity

In addition to drawing regulatory attention, Silvergate’s, SVB’s and Signature’s failures have increased market focus on stablecoins and what backs them, the potential knock-on effects for structures that rely on stablecoins (notably, DeFi and collateral arrangements) and the availability of stablecoins themselves. 

Indeed, the disappearance of both the SEN and Signet real-time payment platforms is significant, because they provided the fiat-to-crypto “on ramps” and “off ramps” – 24 hours a day, seven days a week – via their respective instant settlement services. Although Circle reported having previously discontinued use of SEN, it relied on Signet for purposes of USDC minting and redemptions. 

While Circle swifty found replacement banking partners, in the forms of BNY Mellon – an established “safe” name – for settlements, and Cross River Bank for USDC minting and redemptions, Circle disclosed that, for the time being, USDC minting and redeeming only could be effected during “business hours” – nearly a foreign concept for a digital assets industry accustomed to 24/7 trading. It remains to be seen what the move from a 24-hour market to a business hours market will mean for crypto liquidity. Some have suggested that so-called challenger banks may step-in to try to bridge the gap in 24/7 services. 

Crypto lives on

With the unforeseen failure of three key banks, and reported moves to separate digital assets from Globally Systemically Important Banks – and, perhaps, banks in general – where do we go from here? Many wonder whether the crypto industry will be pushed further and further offshore. It is, however, important to remember that crypto was not to blame for this crisis – arguably, fractional reserve banking was. SVB was not a crypto bank, and although Silvergate and Signature provided crypto payment settlement systems, both were smaller than SVB and also had many non-digital asset-related depositors. 

Indeed, Bitcoin was created in response to the last financial crisis, with a goal to avoid situations and risks posed by fractional reserve lending. Perhaps in response to uncertainties in the traditional financial sector, Bitcoin this week reached a 9-month high. Despite some calling the current banking crisis a death knell for crypto, others predict that it is Bitcoin’s moment to shine. In any event, one thing is clear: crypto lives on.

Hear more on this topic and the Digital Economy from our key Fintech voices in the U.S.: The Unbanking of Crypto // Fintech | The Linklaters Podcast (

UK looks to the future in its case for a “digital pound”

The Bank of England and HM Treasury have launched a new consultation on the proposed introduction of a UK central bank digital currency – a “digital pound”. The consultation marks the next phase of work on a digital pound, which will involve assessing its feasibility and developing a detailed technical blueprint for implementation. A decision on whether to implement a digital pound will be made at the end of this 2-3 year phase of work. As it stands, the Bank and Treasury consider that a digital pound will “likely” be needed by the end of the decade. The consultation is open for feedback until 7 June 2023.

A key milestone for the digital pound

The Bank of England and HM Treasury’s consultation on a UK central bank digital currency heralds the start of the “design” phase for a UK “digital pound” which will span the next 2-3 years.

A digital pound would be a new form of digital money, issued by the Bank of England, for use by households and businesses for everyday payments. Denominated in sterling, the digital pound would be the 21st century’s counterpart to physical banknotes – complementing, rather than replacing, these existing forms of money. Under current proposals, the digital pound would involve a public-private partnership that would see private sector firms making access available to the newly-minted money via their digital platforms.

A final decision will be made at the end of this phase of work, around 2025 / 2026. If the green light is given, the digital pound will launch in the second half of this decade. This would constitute a major financial infrastructure project for the UK, with profound implications for individuals, businesses and financial institutions alike.

The case for a digital pound

Although no decision has yet been made, the case for a digital pound – at least in the eyes of the Bank and Treasury – appears compelling. The consultation deems that “a digital pound is likely to be needed in the UK” in the future, given current trends in the use of money and emerging payment technologies. Two key factors underpin this conclusion:

  • Sustaining access to central bank money: UK central bank money anchors confidence and safety in the monetary system. At present, this is ensured by the use of banknotes and deposit bank accounts (which are interchangeable with banknotes without loss of value), as well as the Financial Services Compensation Scheme which provides insurance on deposits up to £85,000. However, the rapid decline in cash use, rise in electronic payments and potential for Big Tech players to issue their own private forms of digital money all pose a threat to this. A central bank-issued digital pound would ensure that a safe, trusted form of currency remains in circulation in the UK.
  • Promoting innovation, choice and efficiency in domestic payments: Technology and increasing digitalisation continues to transform the UK’s various  payments systems at speed. A digital pound could complement such innovation, acting as a “bridging asset” between digital platforms and payment systems. As a freely available public asset, a digital pound would be well-placed to promote interoperability, efficiency and competition across the payments space without jeopardising what the Bank describes as the safety and uniformity of money in the UK.

Alongside these dual considerations, the Bank and Treasury cite a number of additional potential benefits of a digital pound. This includes cheaper and more efficient cross-border payments, improved payment system resilience, and increased financial inclusion.

Proposed model

The current model for a digital pound centres around a public-private partnership which is referred to as the “platform model”. The key features of this model include:

  • Publicly issued digital money – the Bank itself would issue digital pounds and control the central infrastructure for issuance, namely the “core ledger”.
  • Wallets offered by private sector – private sector firms, who could be banks or approved non-bank firms, would provide the interface between the Bank’s central infrastructure and users, by offering wallets and payment services to wallet-holders. The digital pound would be the settlement asset for such services.
  • “Pass-through” basis – the wallets would operate on a “pass-through” basis, with all digital pounds held on the Bank’s core ledger. Wallets would act as the interface (e.g. via a smartphone or card), allowing users to see their balance and passing through instructions to the Bank for any transfers of digital pounds. Users would not have a claim on the wallet-holder (in the way they may have a claim on a bank for a deposit account), nor would this represent a custody arrangement.
  • Privacy protections – all customer-related data would be held by the wallet-holder and not available to the Bank or Government. Holdings of digital pounds would be recorded anonymously on the Bank’s core ledger. Rigorous privacy and data protection standards would apply, at least equal to those applying to bank accounts.
  • No interest – the digital pound would be used like a digital banknote, for everyday payments both online and in person. Like a banknote, a digital pound would be a direct claim on the Bank and no interest would be paid as it is not designed for savings. Exchanging between digital pounds, physical cash and bank deposits should be seamless. And although primarily designed for UK users, it would also be available to non-UK residents too.
  • Initial holding limits – while neither the Government nor Bank would impose restrictions on how the digital pound could be spent, there may be limits on the size of digital pound holdings. An introductory limit of between £10,000 to £20,000 per individual holding is envisaged. Based on the Bank’s modelling, this would be sufficient to facilitate the majority of payments in the UK (including salary payments) but would mitigate against financial stability risks e.g. rapid outflows from retail bank deposits and higher lending rates. The Bank previously modelled such potential impacts in a 2021 Discussion Paper.

Underpinning all of this, from a technological perspective, would be one key piece of infrastructure: the core ledger operated by the Bank. This would be a fast, secure, resilient platform through which the Bank anonymously records holdings and transfers of digital pounds, and which private sector firms access via an API layer in order to provide wallets to users. No decision has yet been made, however, as to whether the core ledger will operate as a traditional centralised database or using distributed ledger technology. The Technology Working Paper, published alongside the consultation, explores these different potential technologies further.

Interaction with digital payments landscape

Finally, the Bank and Treasury explore how a retail digital pound used for everyday transactions might sit alongside the evolving digital payments landscape. In particular:

  • Cryptoassets – the consultation and accompanying speech by the Bank’s Deputy Governor for Financial Stability stress that a digital pound would not be a cryptoasset. Unlike unbacked cryptoassets, which are described as high-risk, speculative assets, a digital pound would be a safe, stable and trusted store of value.
  • Stablecoins – the development of a digital pound would complement the developing regulatory framework for private sector stablecoins, which is outlined in the Financial Services and Markets Bill 2023. The consultation floats the proposal, for instance, that privately-issued stablecoins be exchangeable on demand with the Bank’s digital pounds, therefore ensuring interoperability and the uniformity of money in the UK.
  • Wholesale CBDC – a digital pound would be used for retail rather than wholesale payments (i.e. high-value payments between financial firms). In the wholesale space, the consultation points to the ongoing renewal of the Real-Time Gross Settlement (RTGS) service, with a new engine due to launch in 2024. The Bank is separately working with HM Treasury and FCA on a sandbox to explore digital settlement for wholesale financial market transactions.
Next steps

A digital pound would clearly be a major piece of national infrastructure, requiring significant investment. The roadmap for launching a digital pound reflects this:

  1. Phase 1: Research and Exploration – ended in 2022, following a series of initial discussion papers published by the Bank on digital money and a UK retail CBDC.
  2. Phase 2: Design – started in 2023 and will end in 2025 / 2026. This phase will involve intensive public and industry engagement, resulting in the development of a detailed technical, operational and legal blueprint for implementation. A decision on whether to proceed will be made at the end of this phase by the Bank and Government.
  3. Phase 3: Build – starting in 2025 at the earliest, this will involve the development of prototypes and live pilot tests for a digital pound. If successful, a digital pound will launch by the end of the decade.

The consultation marks the end of Phase 1 and the start of Phase 2. It runs for four months, closing on 7 June 2023.

Bitcoin network developers may owe fiduciary duty to users

In a recent decision, the Court of Appeal held that the developers behind various bitcoin networks may owe fiduciary duties to owners of bitcoin held on their networks. Some market participants will understandably be alarmed by the potential implications of this. However, though the Court has opened the door to the existence of such duties, the legal position will only be decided after a full trial on the merits.

The High Court previously rejected the existence of a fiduciary or tortious duty.

In March 2022, the High Court declined Tulip Trading Limited (“Tulip”) permission to serve out of the jurisdiction on the developers behind various bitcoin networks (see our previous post for a summary of the facts and the judgment). In doing so, Mrs Justice Falk rejected the argument that the software developers owed a fiduciary or tortious duty to restore access to cryptoassets by implementing a software “patch”.

The Court of Appeal has now re-opened the door to such a duty.

The Court of Appeal reversed the decision of Mrs Justice Falk. Lord Justice Birss (with whom the other judges agreed) held that, on Tulip’s case, there was a realistic argument that the developers owed a fiduciary duty as they were a sufficiently well-defined group of people who (it was assumed for the purpose of this hearing) control the bitcoin software and make discretionary decisions on behalf of people in relation to property (i.e., in this case, bitcoin).

While Birss LJ recognised that recognition of a duty of care would require a significant (rather than an incremental) development of the common law, he also said that “I do not believe the right response of the common law is simply to stop and say that incremental development cannot reach that far.” Importantly, the Court of Appeal did not find that the fiduciary duty contended for by Tulip exists, merely that it was arguable that it could. At this early stage, the Court found that there are unresolved factual matters, and it could not rule out Tulip’s case without hearing the matter at a full trial.

Potential implications

Whether network developers owe any fiduciary (or tortious) duties to users, and the scope of those duties, will be hotly contested, and Tulip has a challenging road ahead if the matter gets to trial.
The most obvious issue the Court will have to grapple with is exactly how a fiduciary or tortious duty should work in this context, were it to apply. Who owes the duty? To whom? And in which circumstances? What is its scope? These questions are particularly challenging to address in a decentralised environment, where, for example, participants are not legally bound to continue performing their roles and where there is likely to be an evolving pool of potential beneficiaries, often with conflicting interests.

There are also several other practical considerations that are unique to a decentralised or blockchain environment. For example, whether it is possible to create a simple patch argued for by Tulip; whether Bitcoin network participants (and in particular miners) will accept whatever patch the developers may be required to issue; whether a fiduciary relationship will open the floodgates for claimants who have been hacked (or lost their private keys); and whether this could potentially undermine the property status of bitcoin (which relies on a set of arrangements that allows one party to spend the asset to the exclusion of all others, including any administrator).

Whether the door remains open following trial is a separate question

While the Court of Appeal’s judgment has the potential to upend the dynamics between network developers and the participants on their networks from a legal perspective, this is just the first judicial step towards properly considering the question. At this stage, it’s clear that the Court recognises that this is a developing area of the law that justifies the rigour of a full trial before ruling on novel duties of care.

UK Crypto Proposals: next steps for firms

The Treasury’s recently launched consultation on cryptoassets has revealed its ambitious plans to regulate the crypto industry. As clarity increases as to the UK’s regulatory trajectory, service providers wishing to access the UK market will need to start considering their regulatory strategies. In this piece, we outline some key considerations for businesses in the sector, based on their regulatory status.

UK consultation and call for evidence 

As we have discussed, the Treasury kicked off February 2023 by launching a consultation and call for evidence on the future financial services regulatory regime for cryptoassets. In this post, we outline some key considerations for firms in formulating their regulatory strategies.

Cryptoasset service providers that are not yet registered

Businesses carrying out cryptoasset exchange services or custodian wallet services in the UK are currently required to be registered with the FCA, in accordance with the UK’s Money Laundering Regulations (MLRs). That does not mean that all cryptoasset service providers proposed to be caught by the new authorisation regime are already registered. Far from it. 

For one thing, the registration requirements do not currently extend to the full range of service providers that fall within the scope of the Treasury’s proposals (such as brokers and lending platforms). The existing registration requirement also only applies where the business is carried out in the UK (unlike the proposed authorisation requirement, which will also apply to overseas firms whose services are available to UK persons). Moreover, most firms that have applied for registration have so far been rejected. As of January 2023, the FCA reported that it had only approved 15% of applications it had determined. All of this suggests that there is likely to be a substantial pool of firms that are not yet registered under the MLRs but which could be caught under the new requirements.  

Some firms will be asking whether it makes sense to seek registration at this stage, when a new authorisation regime is already on the horizon. The Treasury has said that firms that are not yet registered would not need to apply for registration once the new regime comes into effect. They have also said that firms that are already registered will still need to apply for authorisation (as discussed further below).

The key unknown in all of this is timing. The consultation paper is notably free of any deadlines or forward-looking timeframes. However, it is clear that we are still at the early stages of this process, and there is likely to be a long road ahead, including FCA consultations on the detailed rules. 

In the meantime, firms caught within the MLRs will not be able to carry on their businesses in the UK without a registration. On top of this, changes to the rules on financial promotions will mean that a broad range of service providers (in the UK and overseas) will be prevented from approving their own promotion communications if they are not registered (or otherwise authorised). For firms focused on developing UK market share now, registration may therefore be inescapable, even if it only provides a short-term solution. 

Given the high rejection rate, firms applying for registration should take note of the FCA’s feedback on good and poor applications and consider seeking legal advice in advance of submitting an application.

Cryptoasset service providers that are already registered

Firms that have already cleared the hurdle of acquiring an FCA registration may have been disheartened to hear that the registration requirement will soon fall away, only to be replaced by a new authorisation requirement. 

The Treasury is not currently envisaging a grandfathering process as such, on the basis that “businesses will need to be assessed against a wider range of measures than they have been as part of the MLR registration process”. They have indicated, however, that they will try to smooth the application process for registered firms, by endeavouring to avoid duplicative information requests. They have also sought further feedback as to how the administrative burdens for registered firms can be mitigated. We expect many registered firms will want to take advantage of this opportunity to influence the process.

But, in any case, obtaining an authorisation is only the first step. Once firms are authorised, they will be faced with a far heavier regulatory burden than they have been used to. The uplift will be greater for some firms than for others. Some firms, for example, have already sought to establish their operations in a manner that is consistent with traditional regulatory standards in order to attract particular segments of the market and/or in anticipation of further regulation. However, even these firms may need to implement new policies and procedures to meet their obligations under the new regime. 

Trading venues, in particular, are facing significant new responsibilities, due to their role as gatekeepers for the industry. The proposals envisage, for example, that they will be ultimately responsible for meeting disclosure requirements for coins admitted to trading on their platforms (in the absence of any issuer picking up the mantle) and for policing market abuse.

Firms that are already authorised under FSMA

Firms that are already authorised under FSMA and which intend to offer a newly regulated activity will generally need to apply for a variation of their permission. The Treasury has emphasised that these permissions will not be granted automatically for firms simply because they are already authorised. 

For such firms, a preliminary question will often be whether the activities they are seeking to undertake fall within their existing permissions. This analysis will not always be straightforward. There is also currently a degree of uncertainty as to the precise scope of the new regimes, particularly given the broad definition of “cryptoasset” in the Financial Services & Markets Bill. The consultation paper does suggest that future regulations will typically use a narrower definition, depending on the precise purpose, but exactly how those definitions will be framed is yet to be seen. Firms exploring arrangements that they would expect to fall outside the scope of the new rules may wish to consider engaging with the Treasury and the FCA as to where the boundaries should appropriately fall.

Firms considering authorisation under MiCAR

The Treasury has said that it intends to pursue equivalence type arrangements “whereby firms authorised in third countries can provide services in the UK without needing a UK presence, provided they are subject to equivalent standards and there are suitable cooperation mechanisms to make this work”. 

This raises an obvious question as to whether firms authorised under the EU’s upcoming Markets in Cryptoassets Regulation (MiCAR) will be permitted to access the UK market under such arrangements.

If any jurisdiction were to get the benefit of such arrangements, the EU seems an obvious candidate. There are substantial similarities between the Treasury’s proposals and the MiCAR regime. However, there are also notable differences, including as to scope. It would be highly unlikely that service providers which fall outside the scope of MiCAR but within the scope of the UK’s regime would get the benefit of any equivalence measures. 

At the same time, we would expect that in pursuing this objective, the Treasury would at least try to achieve equivalent outcomes for UK regulated firms, in order to allow them to access EU markets without further authorisations. This would certainly be a highly desirable outcome for UK based firms, as well as overseas businesses that prefer the prospect of dealing with UK regulators. Whether this is achievable in a post-Brexit world remains to be seen. 

In any case, firms shaping their regulatory strategies now will welcome answers to these questions sooner rather than later.

UK Crypto Proposals: how do they compare to the EU’s?

The Treasury’s recent consultation on cryptoasset regulation takes the UK a step closer towards closing the gap with the EU in this space. But how closely will the UK framework align with the EU’s? In this piece, we explore ten areas of potential difference between MiCAR and the proposed UK regime.


As previously discussed, the Treasury recently published its long-awaited consultation on the future regulatory regime for cryptoassets. Whereas prior to the consultation the UK was playing catch-up with the EU, which has proposed its own regulation on markets in cryptoassets (MiCAR), the race to regulate crypto has now significantly narrowed. While the approaches appear to be broadly aligned in many respects, certain areas of potential divergence are emerging.   

10 key differences

1. Single comprehensive framework versus phased approach

The EU’s legislative answer to cryptoassets regulation came in the form of MiCAR: a single pan-European crypto regime intended to provide comprehensive regulation of the crypto industry and replace the divergent approaches of its member states. The UK, however, has opted for a phased approach, with Phase 1 covering fiat-backed stablecoins used for payment and Phase 2 covering other cryptoassets. 

Much of the detail of the UK regime remains to be fleshed out by the Treasury, the FCA and the Bank of England, which could take some time. By contrast, much of the regulatory detail is already contained within the MiCAR legislation, albeit with some further technical standards to be produced by the European Supervisory Authorities. The precise degree of divergence between the two regimes is therefore not yet completely clear.

As is typical in the EU, MiCAR has had to go through a long and cumbersome legislative process. Even after nearly three years in the making, the legislation will not be adopted until later this year, with most of the rules beginning to apply 18 months later. While the UK has proposed comprehensive regulation of the sector at a much later stage, and is yet to finalise the substance of its rules, it could potentially act more quickly so as to meet the EU at the finish line.

2. Integration with the existing regulatory landscape

In order to achieve the commonly held regulatory objective of “same risk, same regulatory outcome”, the Treasury is proposing to integrate stablecoins and other cryptoassets into existing legislative frameworks, such as the Regulated Activities Order and Electronic Money Regulations. Many elements of MiCAR echo regulations applicable in the traditional markets and attempts have been made to avoid regulatory overlap. However, fundamentally, MiCAR represents a new, standalone piece of regulation, the parameters of which are defined in part by reference to underlying technology. In some cases, this is expected to lead to outcomes that are not technology-neutral, particularly in relation to stablecoins backed by a single fiat currency. The UK is attempting to avoid this, including through the use of more technology-agnostic definitions (as discussed below). However, whether it achieves this in practice remains to be seen.

3. What is a “cryptoasset”? 

While drawing from the same international standards (such as the Financial Action Task Force’s definition of “virtual asset”), the definitions of “cryptoassets” currently contemplated by the EU and UK do exhibit some differences. The EU definition is, for instance, explicitly tied to distributed ledger technology or similar technologies, although the EU has emphasised that these terms should be interpreted as widely as possible to capture all the different types of cryptoassets. A more technologically neutral approach has, by contrast, been adopted in the UK, where the definition of cryptoasset does not refer to a particular type of technology (except to say that the asset must be “cryptographically secured”). 

Additionally, after much debate it was determined that truly non-fungible tokens (NFTs) would fall outside the first iteration of MiCAR, although not all tokens labelled “NFTs” in the market would be considered non-fungible. The Treasury’s proposal is couched in slightly different terms. Notably, it indicates that any type of NFT would have the potential to be included in the future regulatory perimeter if it is used in a regulated activity. That would appear to include making a public offer of an NFT or operating an NFT trading platform. While it is not yet clear how this will be translated in the final rules, there is potential here for considerable divergence in relation to NFTs between the UK and EU regimes.  

We would expect that technological deployments that merely use DLT as a means of recordkeeping (and which do not give rise to a distinct asset) should fall outside the scope of both MiCAR and the UK’s cryptoasset regulations. While it is relatively clear that such deployments will fall outside MiCAR, at this stage there remains a degree of uncertainty in the UK, given the broad definition of cryptoassets. The Treasury does have the ability to narrow this definition when it comes to defining the precise boundaries, however. 

4. Categories of cryptoassets

Cryptoassets within the scope of MiCAR may fall into one of three categories:

  • Electronic money tokens, which are cryptoassets that “purport to maintain a stable value by referencing” the value of a single fiat currency
  • Asset-referenced tokens, which are cryptoassets that purport to maintain a stable value by referencing “any other value or right or a combination thereof” (which are not otherwise regulated, e.g. as financial instruments)
  • A third catch-all category which captures any other cryptoasset that is not an electronic money token or asset-referenced token. 

The regulatory framework depends on the categorisation of the cryptoasset, with asset-referenced tokens broadly facing the heaviest regulatory burden and those in the catch-all category facing the lightest. “Significant” electronic tokens and asset-referenced tokens are also subject to additional requirements, for example in relation to prudential safeguards. Algorithmic stablecoins are intended to be regulated as e-money tokens or asset-referenced tokens, despite no asset backing as such. The purpose a cryptoasset serves is largely irrelevant to its categorisation under MiCAR (except that asset-referenced tokens and electronic money tokens that are used as a means of exchange are subject to certain caps and monitoring requirements).

The UK takes a different approach to categorisation. Fiat backed stablecoins which are used in payments will be regulated as a matter of priority, and on a different basis to other cryptoassets. It remains to be seen what the parameters of this are (including how stablecoins used for both payment and investment purposes are treated). The regulatory treatment of other cryptoassets is not differentiated under the Treasury’s proposals. Instead, it appears their regulatory treatment will largely be determined by how those cryptoassets are used and whether this will constitute a regulated activity. That includes asset-backed tokens that do not qualify as financial instruments, algorithmic stablecoins and crypto-backed tokens. The Treasury’s proposals also do not currently contemplate any caps or monitoring requirements in relation to exchange tokens.

5. Scope of regulated activities

There is considerable overlap between the list of regulated activities under the Treasury’s proposals and under MiCAR. Key points of divergence have, however, arisen. The Treasury is, for instance, proposing to regulate the activity of operating a cryptoassets lending platform. This is not currently included in MiCAR. It may be that following recent market turbulence and prominent failures, this is soon revisited by the EU.

On the other hand, some activities that are covered under MiCAR are not proposed to be caught by the Treasury within Phase 2, such as advising on cryptoassets. 

6. Issuance of cryptoassets

Both the EU and UK propose to regulate the issuance of cryptoassets (including through disclosure obligations on issuers), upon admission to trading on a regulated trading venue or a public offer. Both also place obligations on trading venues in the absence of any identifiable issuer, although it is not yet clear if the UK and EU rules in this respect will operate in exactly the same way. In terms of the nature of disclosure obligations, the EU requirements are largely an adaptation of its prospectus regime (e.g. MiCAR generally requires a disclosure document in the form of a “whitepaper”, and there are exemptions from this requirement for qualified investors or where a deminimis threshold is not reached, mirroring those under the prospectus regulation). The UK has similarly indicated that its issuance regime will be based on the UK’s prospectus regulation. However, the Treasury has so far reserved its position somewhat, noting that traditional disclosure and issuance regulations for securities may not map well onto cryptoassets and that it is still considering whether ongoing requirements will be placed on issuers. 

7. Overseas issuers and service providers

To issue an electronic money token or asset-referenced token under MiCAR, an issuer must establish a legal entity in the EU. A cryptoasset service provider operating under MiCAR must similarly have its “place of effective management” in the EU, at least one director residing in the EU and have a registered office in the member state in which it is authorised. While the Treasury has made clear that it wants to regulate activities provided “in or to” the UK, it has for now left open the question of whether overseas firms will be required to have a physical presence in the UK to access the UK market (although the consultation paper does say that firms operating cryptoassets trading venues would likely be required to establish UK subsidiaries). Both regimes have proposed a reverse solicitation exemption for cryptoasset services solicited by the customer from third country service providers. The Treasury has also considered the possibility of equivalence arrangements with third countries, which, as yet, has not been contemplated by the EU. 

8. DeFi 

European authorities have indicated that while services provided in a “fully decentralised manner” should not be in scope of MiCAR, many activities within the DeFi ecosystem will be caught, as they involve some form of regulated activity being conducted by a centralised entity. In many ways, the Treasury’s approach appears to be similar. The notable difference is that, as we have said above, the UK is purporting to make operating a cryptoasset lending platform a regulated activity as part of Phase 2, whereas MiCAR does not do this. Both the UK and EU have also suggested that more tailored regulatory approaches for truly decentralised activities will be explored at a later stage. 

9. Market abuse

The EU and UK are both proposing to introduce a market abuse framework for cryptoassets. At this stage, the frameworks appear to be similar in scope and application. Each type of restricted market abuse is, for instance, based on the existing regulatory framework and both regimes extend liability for market abuse to a wide range of market participants, while placing specific market abuse prevention obligations on issuers, cryptoassets service providers and trading venues. 

10. Financial promotions

As we have previously discussed, the UK is bringing “qualifying cryptoassets” within the scope of its financial promotions regime. This is in part down to the UK’s phased approach, under which cryptoasset service providers will not be fully regulated or require a licence to operate in the short term. The UK will attempt to bridge that gap by requiring financial promotions from these entities to be subject to rigorous controls, even in the absence of wider regulation. The EU, on the other hand, regulates marketing activities in respect of cryptoassets through MiCAR. For example, marketing communications of offerors and cryptoasset service providers are required to be fair, clear and not misleading.

Linklaters FAQs on the UKJT Legal Statement on Digital Securities

The UK Jurisdiction Taskforce has published a legal statement confirming that English law already supports a range of digital securities structures without the need for statutory intervention. This is a highly welcome development for the market. In this publication, we answer twelve frequently asked questions on the conclusions and implications of the legal statement.

UKJT Legal Statement on Digital Securities 

Linklaters FAQs on the UKJT Legal Statement on Digital Securities

UK Crypto Proposals: registered firms win breathing space over financial promotions

As we entered 2023, it looked as though plans to regulate cryptoasset ads would severely curtail how crypto businesses could market to UK customers. In a change of tack, the government now proposes that a special exemption will allow registered crypto firms to continue promoting their services. These firms will still need to prepare for FCA rules to bite on their ads. For other firms, the restriction is set to be highly disruptive, particularly for marketing to retail customers.

The financial promotions restriction

UK regulation restricts who can make “financial promotions”. It requires that a person must not, in the course of business, communicate an invitation or inducement to engage in “investment activity” unless the communication is made, or approved by, an authorised person or is exempt.

This restriction means that unauthorised firms (such as those relying on exemptions to licensing requirements) must have their financial promotions – effectively most marketing materials – approved by an authorised person before they are communicated, or they must rely on a relevant exemption.

Currently, promotions in respect of unregulated cryptoassets are not caught by the financial promotions restriction. This is because cryptoassets, and activities relating to them, do not fall into the scope of “investment activity” unless they qualify as regulated investments.

Even though they are not regulated as financial promotions, the Advertising Standards Authority has already sought to enforce its rules on misleading crypto ads.

Government plans for crypto promotions

Concerned about misleading advertising, in 2020 the government proposed bringing “qualifying cryptoassets” within the scope of the financial promotions restriction. Last year the Treasury confirmed that it would proceed with the plan, noting that the definition of qualifying cryptoasset was still being developed.

The government’s approach concerned the industry. Most crypto firms are not authorised and few authorised persons are expected to be willing – or able – to approve the financial promotions of unauthorised crypto firms. This could have effectively acted as a ban on advertising of cryptoasset services, particularly to retail customers where financial promotion exemptions are generally not available.

New approach

In a policy statement the government now says that this was not the intended outcome of its proposals.

In response to industry concerns, the Treasury says that it will introduce a bespoke exemption to the financial promotions restriction. This will allow cryptoasset businesses that have registered with the FCA as a cryptoasset exchange provider or custodian wallet provider under the Money Laundering Regulations to communicate their own financial promotions in relation to qualifying cryptoassets.

These registered businesses would not be able to approve others’ financial promotions or communicate promotions in relation to other (non-crypto) investments.

The FCA, however, has confirmed in an accompanying statement that this exemption will not be available to firms authorised under the Electronic Money Regulations or Payment Services Regulations, which are not considered “authorised persons” under the current financial promotions regime.

Impact on MLR registered firms

Crypto firms already registered with the FCA for anti-money laundering purposes will breathe a sigh of relief. The exemption means that they should be able to continue communicating with prospective customers even once the financial promotions restriction is extended to cryptoassets.

That relief, however, may be short-lived. Firstly, these firms will need to make sure that they comply with FCA requirements for their communications, including the general requirement that their promotions are fair, clear and not misleading. The FCA has also already indicated that they intend to treat cryptoassets as “high-risk investments” and the FCA has recently tightened up its rules in this area.

The exemption will also be temporary. In the longer run, the AML registration regime will be replaced by a full licensing regime.

Impact on other firms

Firms which are not registered with the FCA will be left with limited options once cryptoassets are brought within the scope of the financial promotions restriction. This includes firms which are based overseas, but which market to UK customers.

Such firms may be able to rely on an exemption (for example where marketing is directed to ‘investment professionals’ or ‘high net worth companies’ only). However exemptions are generally unlikely to apply when communicating with retail consumers. In particular, the Treasury indicated that it was not minded to make the exemption for ‘certified high net worth individuals’ available in relation to cryptoassets.

Otherwise, impacted firms will have to find an authorised person willing to approve their communications and ensure compliance with the relevant FCA rules. The authorised person in question would, once a new “gateway” takes effect, also need to have specific permission from the FCA to approve the promotions of unauthorised firms and appropriate expertise in relation to the underlying product. Finding an appropriate approver could therefore prove to be a challenge in practice.

Next steps

The Treasury is expected to introduce the legislation which will give effect to the cryptoasset financial promotions regime, including the bespoke exemption, later in 2023.

In its original consultation, the Treasury suggested that the new rules would start to apply after a six-month implementation period. The policy statement says that this will be reduced to four months in response to recent volatility in cryptoasset markets and the risks presented to consumers.

UK Crypto Proposals: a short series reflecting on the implications

Following the launch of the UK’s most recent consultation on crypto regulation, this week we are releasing a short series of blog posts considering the implications. During this series, we will look at the Treasury’s change of tack in relation to financial promotions; next steps for crypto businesses seeking to access the UK market; and how the UK proposals compare with the EU’s MiCAR regime.

It’s like buses 

As the saying goes, nothing comes along for ages, and then they all come at once. So it has been with UK legal and regulatory developments for digital assets. After a relatively quiet 2022, this month we have already seen the Treasury launch its far-reaching consultation on the future of cryptoassets regulation as well as the Bank of England’s consultation on a UK central bank digital currency. We are also expecting the release of a legal statement on the legal validity of digital securities under English law from the UK Jurisdiction Taskforce. 

This series

This week we will be launching a series of posts under the banner “UK Crypto Proposals”. These posts will cover:

  • The Treasury’s change in tack on financial promotions
  • Next steps for crypto businesses 
  • Comparison with the EU’s Markets in Cryptoassets Regulation 

For our initial summary of the Treasury’s proposals, click here.

Watch out also for upcoming posts on the Bank of England’s digital pound consultation and digital securities under English law.

UK government plans next phase of cryptoasset regulation

HM Treasury has launched its hotly anticipated consultation on the future regulatory regime for cryptoassets. Its proposals would bring the UK closer to the EU’s MiCA legislation by regulating a wide range of cryptoassets and related activities. Many industry players (including those outside the UK) would need to apply for authorisation for the first time, even if they are already registered with the FCA. Likewise, firms that are already authorised may need to apply for new permissions. The proposed market abuse regime will also have significant consequences for market participants, including individuals. The consultation is open for comment until 30 April 2023.

The UK’s “phased approach”

HM Treasury has launched its long awaited consultation on how it should regulate cryptoassets in financial services. The consultation, which HM Treasury has dubbed “phase 2” of its plans to regulate the sector, follows earlier proposals to regulate fiat-backed stablecoins and “digital settlement assets” as part of the Financial Services and Markets Bill, as well as separate plans to regulate financial promotions of certain cryptoassets. It also runs parallel with other related initiatives, such as the UK FMI Sandbox which is expected to be launched this year. 


The Financial Services and Markets Bill clarifies that HM Treasury can bring cryptoasset-related activities within the scope of regulation. The Bill seeks to future-proof the concept of “cryptoasset” by defining it widely (without reference to distributed ledger technology) and empowering HM Treasury to amend the definition via regulations. This does not mean that all future regulation will apply to all “cryptoassets” as defined in the Bill; specific rules may apply only to a subset of these cryptoassets.

The main substance of the consultation focuses on the activities which would be caught by the future regime rather than the types of cryptoasset which would fall in its scope. The design principle is “same risk, same regulatory outcome”, meaning that the starting point is for crypto services to be regulated in the same way as other financial services to the extent that similar risks apply.

Importantly, the plan does not envisage making cryptoassets “financial instruments”. Instead, HM Treasury will specify new regulated activities in relation to cryptoassets and any person carrying on that activity by way of business in or to the UK will need to seek a regulatory licence, unless an exemption applies, and comply with relevant rules. HM Treasury may also use the incoming designated activities regime to regulate certain cryptoasset activities. 

Crypto activities to be regulated

HM Treasury proposes a broad range of new specified activities in relation to cryptoassets, which largely mirror existing regulated activities. These include:

  • 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 or safeguarding and administering (or arranging the same) a cryptoasset other than a fiat-backed stablecoin and/or means of access to the cryptoasset (custody)

Authorised persons carrying on one or more of these activities will be subject to various requirements under the existing regulatory regime, including rules on systems and controls, conduct of business, client money handling, and capital requirements. The detail of these rules will be set by the FCA. Firms will also be required to pay regulatory fees and levies to the FCA. 

Once the new licensing regime comes into force, crypto firms will no longer need to be separately registered with the FCA under the Money Laundering Regulations. 

New obligations for crypto firms

In addition to becoming subject to the general FCA rulebook, each of these activities will carry their own new obligations that are broadly analogous with the regulatory regime in traditional finance.

For example, the new activities of “admitting a cryptoasset to a cryptoasset trading venue” and “making a public offer of a cryptoasset” will carry prospectus and disclosure obligations on either the issuer or the exchange. The detail of these requirements will be determined in part by the outcome of the Treasury’s Prospectus Regime Review

Likewise, the UK market abuse framework will be extended to exchange-traded cryptoassets. However, HM Treasury acknowledges that the enforcement of this regime is unlikely to be as effective as the framework for traditional securities.

Other crypto activities

This consultation marks another step towards the UK regulating cryptoassets but more is still to come. For example, several activities are either ruled out from the perimeter or left for future phases, including:

  • post-trade exchange activities (e.g. continuing obligations for issuers or exchanges)
  • advising on cryptoassets
  • managing cryptoassets
  • mining or validating transactions
  • using cryptoassets to run a validator node infrastructure on a proof-of-stake network (layer 1 staking)

HM Treasury envisages regulation in some of these areas but seeks views on how best to proceed.

Extraterritorial effect

As with other international cryptoasset regulatory frameworks, HM Treasury proposes to apply its rules in relation to any cryptoasset activities provided “in or to” the UK. This would capture activities provided by UK firms to persons in the UK or overseas as well as activities provided by overseas firms to persons in the UK.

HM Treasury indicates that it will consider various exemptions in line with existing financial services regulation, such as “reverse solicitation”. One question for many overseas firms will be whether they need to have a physical presence in the UK to access the UK market. HM Treasury leaves this to the FCA to decide at a future date. 

What happens next

The consultation closes on 30 April 2023. Any changes to the regulatory framework would need to follow the enactment of the Financial Services and Markets Bill. 

As noted, this consultation is one part of the continuing phasing-in of crypto regulation and there will be more policy proposals to follow both from HM Treasury and the FCA. For example, the consultation includes an open call for evidence on decentralised finance, on other cryptoasset activities and on the sustainability implications of cryptoassets including how regulation might interact with the Task Force on Climate-Related Financial Disclosures (TCFD) and UK sustainability disclosure requirements (SDR). 

The consultation is a welcome step toward more legal certainty for the crypto sector but only in later parts of this phase, and future phases of this work, will it become clear how tailored the UK’s approach will be to address the unique features of these markets.

Basel Committee finalises global standard on prudential treatment of cryptoassets

Following a second consultation last summer, the Basel Committee on Banking Supervision (BCBS) has now finalised its prudential standard on cryptoasset exposures. Some key concessions have been made, notably in relation to the proposed infrastructure risk add-on for Group 1 cryptoassets. However, the final framework remains conservative, particularly in relation to unbacked cryptoassets, which is perhaps no surprise given recent events. Member governments have committed to national implementation by 1 January 2025.

A new global standard

Just as many of us started to wind down for the festive period, the BCBS released its final standard on the prudential treatment of cryptoasset exposures. Once implemented, this will have direct implications for a broad range of digital asset arrangements entered into by banks across the globe. It could also influence prudential requirements for other types of institution. 

The standard has been a long time coming, and follows two in-depth consultations, as summarised in our recent webinar and blogpost. However, the timing has turned out to be particularly apt, falling amid the so-called “crypto winter”. Recent events in the crypto sector have strongly fuelled debate around the need for further regulation and global standards, including to limit potential contagion effects and financial stability risks, as prudential regulation is designed to do. 

Notable concessions

The BCBS has made a few significant changes in response to industry feedback.

Most notably, its proposed capital add-on for DLT infrastructure risks will no longer apply by default. The Committee had previously suggested that tokenised traditional assets and stablecoins, in each case which met the onerous classification conditions for (preferential) “Group 1” treatment, should automatically be subject to an additional fixed 2.5% infrastructure capital add-on, due to their use of novel technologies. This prompted strong industry pushback, in particular to the prospect of creating an uneven playing field and undermining the economic viability of innovations designed to improve efficiencies and reduce risks in the financial markets. 

The final standard retains the ability for authorities to impose an infrastructure risk add-on for specific projects, based on observed weaknesses. However, the reversal of the presumption of additional risk as well as the increased flexibility for national authorities will generally be seen as a big win for financial market innovators.

Another notable relaxation relates to the quantitative test that stablecoins must meet in order to qualify for Group 1. The second consultation proposed a two-part test, covering redemption risk (i.e. the risk of the asset reserve falling short of the amount needed to meet redemption requests) and basis risk (i.e. the risk of the stablecoin’s market value falling relative to the asset by reference to which it is stabilised). The final standard has dropped the basis risk element. However, this has gone hand in hand with a new requirement for the stablecoin to be issued by a prudentially regulated entity, as well as some bolstering of the redemption risk test.

Remaining challenges

Notwithstanding the concessions, the framework remains highly conservative, both in relation to the treatment of Group 2 cryptoassets, i.e. all those that do not meet the classification conditions for Group 1, and in relation to the strictness of the classification conditions for Group 1. 

Regarding Group 2, the punitive 1250% risk weight continues to apply, subject to modification for cryptoassets that meet the hedging recognition criteria proposed in the last consultation. There also remains a tight cap on aggregate exposures to Group 2 cryptoassets. This continues to be set at 1% of Tier 1 capital, although some favourable measures have been introduced:

  • to ensure banks that take steps to hedge exposures are not penalised under the limit (with exposures now measured as the higher of the gross long and gross short position in each cryptoasset, rather than the aggregate of the absolute values of long and short exposures, as previously proposed); and 
  • to mitigate the cliff effects of exceeding this 1% threshold (with Group 2b capital treatment applying only to the amount by which the limit is exceeded, rather than to all Group 2 exposures, provided that a higher threshold of 2% is not exceeded). 

Tough standards in relation to unbacked cryptoassets are perhaps not surprising in light of recent events. However, it remains to be seen precisely what impact this will have on banks considering entering the crypto markets, including in relation to those Group 2 cryptoassets that will benefit from hedging recognition.

In relation to the classification conditions for Group 1, the BCBS has helpfully removed the requirement for satisfaction of these conditions to be pre-approved by a regulatory supervisor. However, the conditions themselves remain complex and onerous and are likely to rule out certain deployments and business models, as we have previously discussed.  In particular, the BCBS has acknowledged that public DLT arrangements will struggle to meet the conditions and, more generally, it is unclear how strictly the classification conditions will be interpreted.

Next steps

The final standard will soon be incorporated into the consolidated Basel Framework. 

Authorities from BCBS members have agreed to implement the standard by 1 January 2025. The BCBS standard is a minimum standard so there is likely to be some degree of divergence in implementation.

The BCBS plans to monitor implementation and issue additional refinements over time. It has flagged up front that it will, in particular, be considering:

  • the introduction of new quantitative tests to distinguish stablecoins suitable for Group 1 qualification;
  • whether deployments on permissionless blockchains should be capable of qualifying for Group 1 treatment (the current standard appears to rule these out on a blanket basis);
  • whether Group 1b cryptoassets (i.e. stablecoins) should be capable of qualifying as eligible collateral for credit risk mitigation purposes (the current standard reserves this status for Group 1a, i.e. tokenised traditional assets);
  • the criteria and application of hedging recognition criteria for Group 2 cryptoassets; and
  • the thresholds in relation to the exposure limit on Group 2 cryptoassets,

all of which could have significant implications going forward.

EU plans to push banks to provide instant payment services

Infrastructure enabling instant account-to-account payments has existed for several years but consumers and banks in the EU have been relatively slow to pick it up. The European Commission has proposed changing the law to spur a more radical shift. The plans involve requiring nearly all banks to provide affordable instant payment services to their EU customers.

How does the EU regulate payments?

Cashless or electronic payments are regulated through a variety of laws in the EU. These include PSD2, which places various obligations on payment service providers (PSPs), and a regulation on cross-border payments, which limits the charges that can be imposed on cross-border euro-payments.

Another important piece of law is the regulation on the Single Euro Payments Area. The SEPA Regulation creates and harmonises standards for cross-border and domestic payments in euro, categorised as “credit transfers” and “direct debits”. Credit transfers, which are also known as wire transfers, credit a payee’s account upon a payer’s instruction to its payment service provider. In contrast, direct debits are initiated by a payee on behalf of the payer (e.g. automatic monthly deductions for an online subscription).

The European Commission classifies instant payments as a subset of credit transfers. These are payments that, among other attributes, are available round-the-clock and ensure the receipt of funds within 10 seconds of a payment order.

In its proposal for a regulation, the Commission now seeks to develop the SEPA Regulation to mandate the provision of “instant credit transfers” in euro.

What changes are proposed?

The legislative proposal puts new obligations on payment service providers relating to instant credit transfers. These are intended to apply in addition to the general requirements for credit transfers under the SEPA Regulation. They include the following.

Mandatory instant payments

EU PSPs offering credit transfers will have to offer instant credit transfers to customers in the EU and EEA.

E-money and payment institutions are exempt from this obligation. However, this position may be revised if they are given access to certain payment systems under the EU Settlement Finality Directive. In the meantime, any e-money and payment institution which chooses to offer instant credit transfers must comply with the requirements described below.

PSPs that offer instant credit transfers, either by mandate or choice, will have to ensure that the service:

  • is available on the same user interface as the one that provides non-instant credit transfers;
  • is reachable every day and at all times; and 
  • conducts verification and settlement immediately.

Affordable charges

PSPs will not be able to charge for instant credit transfers more than they do for non-instant credit transfers.

To allow PSPs located in countries with a non-euro domestic currency to comply with this requirement, the Commission proposes an exception to the regulation on cross-border payments. Specifically, the charge for a cross-border instant credit transfer will not need to be the same as that for a domestic instant credit transfer if doing so would result in a higher charge than allowed by the latest legislative proposal.

Security checks

PSPs offering instant credit transfers will have to match the payee’s name against their unique identifier (such as an IBAN) immediately after these details are entered by the payer.

If there is a discrepancy between the payee’s name and the unique identifier, the payer will have to be notified and warned before authorising the transfer. PSPs can potentially charge for this service.

Sanctions screening

PSPs remain bound by all existing sanctions screening requirements. However, to maintain instantaneity, PSPs will not need to screen instant payments on a transaction-by-transaction basis. Instead, PSPs will have to identify if any of their customers are subject to EU sanctions at least once a day, as well as immediately upon a new person being designated as a sanctioned person in the EU.

If a PSP fails to conduct appropriate (daily) screening and executes an instant credit transfer involving a sanctioned person, it will be liable to the other PSP involved in the transaction for financial damage resulting from penalties.

Why are instant payments being mandated?

The Commission foresees various benefits to a wider adoption of instant payments. Real time payments mean that funds do not remain locked in the financial system but become immediately available to end users to spend or invest. More generally, European supervisors have expressed concerns about increased reliance on largely American-dominated card schemes and Big Tech payment solutions and a need to promote the “strategic autonomy” of the EU. Instant payments may help the development of alternative homegrown and pan-European payment solutions.

The uptake of instant payments in the euro has been slow. According to the Commission, this is down to factors such as high prices and security concerns. The Commission therefore sees coordinated policy compelling the adoption of instant payments as the way forward. This also addresses the risk of market fragmentation within the EU posed by varying national regulatory frameworks.

What next?

The European Council and Parliament are considering the Commission’s proposal. They are expected to focus on aspects such as the definition of instant credit transfer, the cap on charges for instant payments and the liability of PSPs for checking unique identifiers. The Commission’s proposal was originally released in autumn 2022 and the ordinary legislative procedure typically takes around 18 months which means that there should be time to agree and pass the law before the end of the current parliamentary session in 2024.

Once passed, the requirements will be introduced in a phased manner, depending on the location of the PSP. For PSPs in the euro area, the requirements are expected to kick in from end-2024, i.e. 6 months after the new rules are expected to enter into force. For PSPs outside the euro area, the requirements will not start applying until a year after entry into force. Though the UK is still a member of the SEPA, these proposed amendments to the SEPA Regulation will not automatically apply in the UK.

Mandating and regulating instant payments forms one of several initiatives in the pipeline per the Commission’s retail payments strategy. A comprehensive review of PSD2 is underway, which will account for changes introduced by this proposal and extend consumer protection measures to instant payment customers. The Commission hopes that this and complementary projects for open finance and digital euro will help “future proof” the EU payments landscape.

With thanks to Oorvi Mehta for writing this post.

The legal outlook for global fintech – 2023

We are pleased to launch our Fintech Legal Outlook 2023 which explores the key legal and regulatory developments we expect to see in the fintech space over the coming year.  

Disruptive forces are shaping the outlook for 2023

Macro market headwinds are impacting the sector and the crypto winter is leading to increased regulatory activism globally, and galvanising efforts for bespoke regulation for cryptoassets. New forms of digital assets are emerging as digital financial and payments infrastructure develops, meanwhile increasing financial crime is impacting DeFi and crypto. Developing regulation in the digital economy is increasing the compliance challenge and ESG is acting in some cases as a problem, and in others a solution.

Nevertheless, there is still plenty of interest in the digital assets space from established financial institutions and other corporates who are increasingly accessing fintech ideas and technology via strategic investments, collaborations and partnerships. 

Read more in our review which covers the full breadth of the fintech legal spectrum and looks across 19 jurisdictions in Asia, the EU, Latin America, the UK and U.S.

Regional outlooks and global trends

Visit our FLO23 landing page:

  • for our video on the global, Asia, EU, UK and US outlooks
  • for an interactive map with links to our 19 individual outlooks
  • to read more on the 7 global trends we have identified for 2023
  • to view key global fintech contacts
  • to download the publication itself.

Follow up

Please reach out to any of us, or to any to the contacts listed on our landing page if you would like to hear more on the topics covered in our Fintech Legal Outlook 2023, or for more on our general fintech offering.

FSB suggests framework for international coordination on regulating crypto

As different countries take different approaches to how they police cryptoassets, there have been calls for more international coordination on crypto regulation. The Financial Stability Board – a global financial markets standard-setter – has now proposed a framework aimed at greater consistency between emerging crypto regimes. The FSB is inviting feedback on its proposals by 15 December 2022.

Concerns around cryptoassets and financial stability

In the overview to its proposals, the FSB observes that the turmoil experienced in the cryptoasset markets earlier this year has highlighted a number of structural vulnerabilities, exposing:

  • inappropriate business models,
  • significant liquidity and maturity mismatches, 
  • extensive use of leverage, and
  • a high degree of interconnectedness within crypto markets.

It considers that all of these vulnerabilities were amplified by: 

  • a lack of transparency,
  • poor governance,
  • inadequate consumer and investor protection, and
  • weaknesses in risk management.

The FSB concludes that – for now – there has been limited spillover into established financial markets due to relatively low interconnectedness with the wider financial system but warns that this could “change rapidly” as cryptoasset markets recover. In essence, given the speed with which crypto markets are evolving, there is a real possibility that crypto markets could reach a point where they influence global financial stability.

Issues with the current regulatory landscape

The FSB considers that cryptoassets are “predominantly used for speculative purposes” and that many remain non-compliant with or outside the scope of existing regulation. Whether existing financial regulation applies depends on a case-by-case assessment of whether the relevant assets and activities are regulated under each jurisdiction’s laws. The result for cross-border cryptoasset activities is a global patchwork of regulatory frameworks which is becoming more complex as crypto-specific regimes are being developed.

A design for crypto regulation – key takeaways

To help guide consistency between those emerging regimes, the FSB has issued a framework for the regulation of cryptoasset activities for public consultation. Once finalised, this will be delivered to the G20 Finance Ministers and Central Bank Governors and is intended as guidance for national regulators to follow.

In summary, the FSB recommends that national regimes should:

  1. Empower regulators to oversee cryptoasset activities and markets, including crypto issuers and service providers
  2. Regulate crypto issuers and service providers in a way which is proportionate to the (potential) financial stability risk they pose
  3. Facilitate information-sharing between regulators
  4. Expect crypto issuers and service providers to have comprehensive governance frameworks in place with clear lines of responsibility
  5. Require crypto service providers to have effective risk management frameworks and require issuers to address financial stability risks in their relevant markets
  6. Allow for regulatory reporting of relevant data
  7. Impose disclosure requirements on crypto issuers and service providers
  8. Monitor risks arising from interconnections both within the cryptoasset ecosystem and between the crypto ecosystem and the wider financial system
  9. Address risks associated with the combination of functions in a single entity, including requirements to separate certain functions and activities

Some points to note are:

  • The FSB does not prescribe how these recommendations should be implemented. In some cases the aims may be achieved through the extension of existing regulation to cryptoassets; in others crypto-specific guidance or regulation may be required.
  • The proposals are based on the principle of “same activity, same risk, same regulation”. In other words, (unregulated) cryptoassets performing an equivalent economic function to (regulated) financial instruments should be subject to equivalent rules.
  • The recommendations apply very broadly to all cryptoasset activities, issuers and service providers that may pose risks to financial stability. This could present a challenge for countries which have so far chosen not to follow the EU’s approach in pursuing a comprehensive regulatory structure for a wide range of cryptoassets.
  • The aim is for regulators to provide effective guardrails around cryptoassets and markets, providing for adequate transparency, accountability, market integrity, investor and consumer protections and AML/CFT defences across the cryptoasset ecosystem.
  • The recommendations support rules being imposed on crypto issuers and service providers to, for example, require them to act honestly and fairly with stakeholders, comply with prudential and market conduct standards, and establish effective contingency arrangements and business continuity plans. The recommendations also envisage segregation requirements to make sure that customer assets are safeguarded.
  • Many providers offer a wider range of crypto services – such as trading, custody, settlement and lending – from a single entity. The combination of multiple functions in a single provider complicates the provider’s risk profile and introduces conflicts of interest. The FSB suggests regulation could require certain functions and activities to be kept separate.
  • The FSB considers that more rigorous regulatory standards should apply to cryptoassets, such as stablecoins, that could be widely used as a means of payments and/or store of value because they could pose significant risks to financial stability.

An update on global stablecoin arrangements

As well as presenting a general framework for regulating crypto, the FSB is also consulting on changes to its recommendations for supervising global stablecoin arrangements. The revisions are a response to recent market and policy developments. The recommendations represent a higher level of regulatory standard for this category of cryptoasset.

Among the changes, the FSB proposes extending the scope of its recommendations to include stablecoins with the potential to become global stablecoins. The revised recommendations also suggest regulators require global stablecoin arrangements to prepare for run scenarios by having comprehensive liquidity risk management practices and contingency funding plans in place.

The most significant changes relate to stabilisation mechanisms. Many stablecoins in today’s market rely on algorithmic protocols and/or arbitrage activities to maintain a stable value. In the wake of the Terra/Luna collapse, the FSB has concluded that relying on algorithms or arbitrage is not an effective stabilisation mechanism. Its revised recommendations call on national regulators to impose robust requirements for the composition of reserve assets, “consisting only of conservative, high quality and highly liquid assets”. Few existing stablecoins would meet this standard.

As well as changes to stabilisation mechanisms, the FSB also calls for improvements to governance, risk management, redemption rights and disclosures relating to global stablecoin arrangements.

Next steps

Feedback on the consultations is requested by 15 December 2022. The FSB then expects to finalise its recommendations by mid-2023. Given that the FSB reports to the G20 nations, any suggestions it makes can be expected to influence the approach being taken by national policymakers and so could have a real impact on crypto market participants. The FSB plans to review progress made on implementing its final recommendations before the end of 2025.

One area which is not covered in detail in these papers is the role of decentralised finance. An annex on DeFi suggests that DeFi protocols purport to rely on decentralised governance but that in practice governance is often concentrated in the hands of the protocol development team and/or a small group of related stakeholders. The FSB says that it will consider in 2023 whether additional policy work focusing on DeFi is needed.