Regulating cryptoassets: comparing MiCA and the HMT Proposals

United Kingdom | Publication | March 2023

Regulatory developments in cryptoasset markets across major jurisdictions are gathering pace, including in the European Union (EU) and the United Kingdom (UK). In the EU, in June 2022 co-legislators reached a provisional political agreement on the Regulation on Markets in Cryptoassets (MiCA). Whilst MiCA’s formal adoption and signing into law is pending – with a vote of the European Parliament scheduled for April 2023 - once applicable it will set out a comprehensive regulatory framework for cryptoassets, covering topics from the issuance of cryptoassets, through the provision of services in cryptoassets to preventing market abuse in cryptoasset markets. In the UK, on 1 February 2023 HM Treasury issued its latest proposals concerning the regulation of cryptoassets. These proposals (the HMT Proposals) build on HM Treasury’s previous work which focused on stablecoins and the financial promotion of cryptoassets and deliver on the Government’s announcement last April setting out plans for the UK to become a global hub for cryptoasset technology. The Government has already started to lay the legislative foundations to bring stablecoins and cryptoassets into financial services regulation via the Financial Services and Markets Bill (FS&M Bill), which is currently working its way through the House of Lords.

This note provides a high-level comparison of some of the key areas of MiCA and the HMT Proposals. It is relevant to participants in EU and UK cryptoasset markets, including service providers and issuers, as well as institutional and retail investors. Readers should note that, since neither regime has been finalised yet, there may be further changes – this is particularly relevant on the HMT Proposals, which remain under consultation, with draft legislation and rules yet to be published.

Comparative overview of select provisions

	MiCA	HMT Proposals
Regulatory approach	MiCA sets out a harmonised and comprehensive legislative framework for cryptoasset markets. It governs a wide range of issues including the issuance of cryptoassets, the provision of services in cryptoassets, the issuance of stablecoins and making them publicly available, as well as a market abuse regime for crypto-markets. MiCA is standalone legislation, setting out a bespoke framework for markets in cryptoassets. As such it does not replace or amend existing European financial services legislation. Neither does it replace existing pieces of EU legislation that currently cover cryptoassets, including the Fifth Anti-Money Laundering and Counter-Terrorism Financing Directive (MLD5) and its national-level application. That said, once applicable, it will replace national regimes that currently exist in certain Member States and govern non-money laundering related issues concerning cryptoassets.	HM Treasury has decided to regulate cryptoasset-related activities within the existing UK regulatory framework, rather than creating an entirely new standalone regime. It will do this via amendments to the Financial Services and Markets Act 2000 (FSMA), the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005, and the FCA Handbook. Some provisions may also be introduced through the new Designated Activities Regime.
Scope	As indicated above, MiCA constitutes a standalone legislative framework for markets in cryptoassets, distinct from European financial services legislation. A defining factor to determine which regime applies is whether an instrument in question qualifies as a “financial instrument” within the meaning of the Markets in Financial Instruments Directive II (MiFID II) – if it does not, and subject to meeting the MiCA definition of cryptoasset, the MiCA regime will apply. MiCA has been designed as a comprehensive piece of legislation, setting out rules on transparency and disclosure requirements for the issuance and admission to trading of cryptoassets, the authorisation and supervision of cryptoasset services providers and issuers, the operation, organisation and governance of issuers of asset-referenced tokens, electronic money tokens and cryptoasset service providers, consumer protection rules, and measures to prevent market abuse and to ensure the integrity of markets in cryptoassets.	HM Treasury’s approach is to focus on the regulation of certain activities performed in relation to a broad array of cryptoassets. Whilst the HMT Proposals adopt a definition of “cryptoasset” that is not dissimilar to that used in MiCA, there are less specifically detailed exemptions incorporated into the HMT Proposals. This is because the UK’s existing regulatory regime – of which these proposals will form part - contains a wide variety of exemptions and negative scope guidance, and so the need to incorporate specific exemptions into the HMT Proposals is less pressing than for MiCA, given the latter is a standalone regime.
NFTs	Following much debate during the legislative review, European co-legislators decided to exclude non-fungible tokens (NFTs) from the scope of MiCA - except for those whose features or uses would qualify them as cryptoassets within the scope of the regulation. The provisions currently in MiCA are certainly not the end of a debate about the future EU approach to regulating NFTs, as the European Commission is required to submit a report 18 months following MiCA’s entry into force to assess the opportunity and potential ways of regulating such products.	The HMT Proposals suggest that certain activities performed in relation to NFTs may be in scope and therefore require authorisation. There is, therefore, no blanket exemption for NFTs. In terms of the extension of the financial promotions regime to cryptoassets, a “qualifying cryptoasset” is defined as being fungible, which the industry has taken to mean that NFTs are not captured by this extension of the financial promotion regime.
Issuance of cryptoassets	MiCA will regulate the issuance and offering of cryptoassets to the public in the EU and request of admission for such cryptoassets to trading on a trading platform for cryptoassets. Such activities will be subject to a prescribed set of requirements, including an obligation to publish a white paper containing a detailed description of the planned cryptoasset offering or admission to trading. No person will be able to offer cryptoassets to the public in the EU or seek their admission to trading on a trading platform for cryptoassets unless it is a legal person – but the co-legislators decided to abandon a much debated EU-location requirement. MiCA sets out requirements applicable to marketing communications relating to the offering of cryptoassets and admission of such cryptoassets to trading, as well as conduct rules for cryptoasset issuers. There are also liability rules for the provision of false, misleading or incomplete information in the white paper and marketing communications.	Under the HMT Proposals, the mere issuance of a cryptoasset is not in itself a regulated activity, save where that cryptoasset is a fiat-backed stablecoin. The UK does, however, propose to regulate the admittance of a cryptoasset to trading on a cryptoasset trading venue and public offers of cryptoassets that are not security tokens will also be a designated activity. The HMT Proposals set out detailed measures in relation to public offers of cryptoassets, including preparation of disclosure / admission documentation, liability requirements, and general marketing requirements. These proposals seek to align with the UK’s proposed Public Offers and Admissions to Trading Regime. There is currently no suggestion in the HMT Proposals that a whitepaper will be utilised as the relevant disclosure / admission document, which is a key difference from MiCA. Where there is no issuer of a particular cryptoasset – such as Bitcoin – it will be the responsibility of a cryptoasset trading venue to take on the responsibilities of an issuer if it wishes to admit that asset to trading on its venue.
Issuance of stablecoins	MiCA sets out a new framework governing the issuance of asset-referenced tokens and electronic money tokens (jointly “stablecoins”) and their admission to trading on a trading platform. MiCA distinguishes between “standard” stablecoins and those that will be deemed “significant”, with more stringent requirements applicable to the latter. In high-level terms, the issuance of stablecoins will be subject to prior authorisation by a Member State competent authority (NCA) – depending on the type of stablecoin, this could be either MiCA-type authorisation or an authorisation as a credit institution, or an electronic money institution. In respect of credit institutions seeking to issue stablecoins, MiCA sets out a separate set of requirements, applicable alongside the relevant sectoral legislation. Stablecoin issuers will be subject to general conduct rules, marketing communication rules, governance, organisation and prudential requirements – including an obligation to have a reserve of assets, and rules regarding management and custody thereof.	The HMT Proposals do not specifically address the issuance of stablecoins, as measures to address those asset classes that have already been consulted on by HMT and changes are being made via the FS&M Bill to reflect the intended regulatory outcomes for persons issuing and providing various activities in relation to fiat-backed stablecoins.
Monitoring and restrictions on use of stablecoins	For all stablecoins issued with a value higher than EUR 100 million, the issuer will be obliged to provide its NCA with a quarterly report. Such a report will include information concerning customer base, the values of stablecoins issued and the size of the reserve of assets, the average number and value of transactions per day and an estimation of the average number and value of transactions per day associated to uses as means of exchange within a single currency area. Importantly and relevant for future distribution of stablecoins in the EU, MiCA also includes restrictions on the use of stablecoins as a means of exchange. The restrictions will kick in when the estimated quarterly average number and value of transactions per day associated to uses as a means of exchange is higher than 1 million transactions and EUR 200 million respectively, within a single currency area. The relevant restrictions will involve banning the further issuance of the stablecoin and presenting a plan to the NCA to ensure keeping the use within permissible limits.	As above.
Provision of services in cryptoassets	MiCA foresees 10 types of services in cryptoassets – not dissimilar in structure to the MiFID II framework applicable to financial instruments. As such and in respect of cryptoassets, MiCA will regulate: custody services operating trading platforms, exchange services, executing orders on behalf of clients, providing placement services, reception and transmission of orders, advice, portfolio management and transfer services on behalf of clients. Providers of services in cryptoassets will be subject to a range of requirements, covering organisational and disclosure rules, rules regarding safekeeping of client funds and outsourcing, conduct rules, as well as prudential requirements. MiCA subjects the provision of any type of service in cryptoassets to an authorisation – either authorisation in accordance with the MiCA framework, or a financial services license for a credit institution, central securities depository, investment firm, market operator, e-money institution, UCITS management company or an alternative investment fund manager. MiCA will also allow for the provision of services in cryptoassets by undertakings that are not legal persons “if their legal status ensures a level of protection for third parties’ interests equivalent to that afforded by legal persons”.	The HMT Proposals envisage that persons performing a range of intermediary activities in relation to cryptoassets could be required to seek authorisation with the FCA. This would capture firms engaged in one or more dealing activities, such as dealing as principal, dealing as agent, arranging (bringing about) deals in investments and making arrangements with a view to transactions in cryptoassets. A key difference between the HMT Proposals and MiCA is that the HMT Proposals envisage more segmented requirements for firms performing cryptoasset-related regulated activities. Rather than one chapter of provisions relating to cryptoasset service providers in general (as with MiCA), the HMT Proposals contain separate provisions that would apply to trading venues, cryptoasset intermediaries, cryptoasset lending platforms and cryptoasset custodians. Cryptoasset intermediaries would need to comply with a range of ongoing requirements once authorised, including best execution, conflicts, appropriateness, data reporting, capital requirements, outsourcing and operational resilience standards, and governance requirements.
Location requirement for cryptoasset service providers	MiCA-authorised cryptoasset service providers will have to be legal persons, with a registered office in a Member State where they carry out at least part of their cryptoasset services. They will also be required to have the place of effective management in the EU, and to ensure that at least one of the directors is resident in the EU.	Whether or not providers are required to have a physical presence in the UK in order to become authorised to carry out cryptoasset remains under consideration. It is expected that the FCA will apply its existing approach to international firms when determining whether a firm is mandated to be located here as part of any authorisation. The HMT Proposals clearly anticipate that operators of cryptoasset trading venues would need to establish a UK-based entity if they wished to be authorised under the regime.
Trading venues for cryptoassets	In addition to compliance with general requirements applicable to providers of services in cryptoassets, operators of trading platforms in cryptoassets will have to maintain clear and transparent operating rules for the trading platform. They will also have to have in place appropriate systems, procedures and arrangements to ensure their platform’s resiliency, orderly functioning and protection against market abuse and money laundering / terrorist financing. Before admitting a cryptoasset to trading, they will have to ensure that a cryptoasset complies with the trading platform’s operating rules and assess its suitability. Operators of cryptoasset trading platforms will be prohibited from dealing on own account on their platform. They will, however, be able to engage in matched principal trading, subject to client consent. Transparency requirements, akin to those applicable to securities trading venues will also be applicable.	The HMT Proposals include a series of requirements for operators of cryptoasset trading venues that are not unlike those to which existing operators of trading venues are subject. Such operators will need to comply with a range of ongoing requirements relating to their own funds and liquidity, governance, conflicts (particularly relevant for “vertically integrated” businesses), outsourcing and operational resilience, data reporting, systems and controls, and transparency. Operators of cryptoasset trading venues are also expected to play a key role in enforcing the requirements of the amended regime, particularly in relation to market abuse and in assessing cryptoassets in connection with admission to trading.
Crypto-lending platforms	MiCA does not include provisions governing the operation of a cryptoasset lending platform.	The HMT Proposals introduce a new regulated activity of operating a cryptoasset lending platform. Operators of such platform will need to be authorised and have to comply with a range of ongoing obligations, including disclosure requirements, capital and prudential standards and clear legal terms describing ownership of lent and borrowed assets.
Passporting rights	Authorised cryptoasset service providers will be able to provide their services cross-border in all EU jurisdictions, which is akin to “passport” rights known from other pieces of European financial services legislation. They will also be able to establish branches.	As a domestic regime, the HMT Proposals do not include any passporting rights for persons authorised to provide cryptoasset-related regulated activities. However, HMT states its intention to seek to establish equivalence arrangements for overseas firms subject to comparable obligations. This could potentially apply to firms authorised under MiCA, but this will only be known once further information on the scope and basis for equivalence is provided.
Custody of cryptoassets	In addition to comply with general requirements applicable to providers of services in cryptoassets, persons seeking to provide a cryptoasset custody and administration service will have to enter into an agreement with their clients to specify their duties and responsibilities. They will also need to establish a register of positions, a custody policy and report regularly to the clients a statement of position of cryptoassets recorded in the name of those clients. Cryptoasset custodians will have to comply with the relevant segregation rules. MiCA prescribes additional liability rules for cryptoasset custodians. They will be liable to their clients for the loss of any cryptoassets or the means of access to the cryptoassets, capped at the market value of the cryptoasset lost.	Persons safeguarding and administering cryptoassets and / or means of access to a cryptoasset (i.e. private keys) will need to seek authorisation under the regime. The FCA will also be tasked with using the existing bones of its Client Assets Sourcebook to create a bespoke regime for cryptoassets. This regime will cover books and records requirements, safeguarding arrangements, controls and governance requirements and organisational requirements.
Territorial scope	However, MiCA will not include a separate regime for third-country cryptoasset service providers. While allowing some limited reliance on the reverse solicitation approach, third-country persons planning to actively solicit clients based in the EU and/or to promote or advertise services in the EU, will need to obtain authorisation as an EU cryptoasset service provider. Within 18 months from MiCA’s entry into force, ESMA will develop guidance on when a third-country firm is deemed to solicit clients established or situated in the EU.	The regime to be established under the HMT Proposals would capture cryptoasset-regulated activities that are provided in or to the UK. This would, therefore, capture overseas firms servicing UK-based customers, unless such firms are able to benefit from a relevant exemption.
M&A rules for stablecoin issuers and cryptoasset service providers	MiCA prescribes requirements applicable to the proposed acquirers and the proposed vendors, and concerning qualifying holdings in a stablecoin issuer and cryptoasset service provider. This includes notifications to the relevant NCAs, and their subsequent assessment of the envisaged transaction.	Firms authorised to perform cryptoasset-related regulated activities would be authorised persons and so would fall within scope of the FCA’s change in control regime. This means persons acquiring control in such firms will need to seek prior approval from the FCA.
Market abuse	MiCA sets out a framework of rules intended to prevent market abuse, which will be applicable to cryptoassets that are admitted to trading on a trading platform for cryptoassets, or for which a request for admission to trading on such a trading platform has been made. The relevant prohibitions will also apply to any transaction order or behaviours in relation to the cryptoassets in scope of the market abuse regime, taking place either in the EU or in a third-country, regardless whether or not such transaction, order or behaviour takes place on a trading platform. The basic structure of the MiCA regime for the prevention and prohibition of market abuse involving cryptoassets is broadly based on the regime applicable to financial instruments, as set out in the Market Abuse Regulation (MAR). This includes rules regarding inside information and disclosure thereof, as well as a prohibition from engaging or attempting to engage in market manipulation. Any person professionally arranging or executing transactions in cryptoassets will need effective systems, procedure and arrangements to monitor and detect market abuse, as well as to report suspicious orders and transactions to competent authorities.	The intention is to expand the existing scope of the UK’s market abuse regime to address cryptoassets that have been requested to be admitted to trading on a UK cryptoasset trading venue. The regime would apply to all persons, regardless of where they are based, and would create civil offences covering insider dealing, market manipulation and unlawful disclosure of inside information. A core feature of the regime would be the imposition of requirements on the operators of cryptoasset trading venues, with such operators required to develop systems and controls and procedures to identify and investigate suspected market abuse.
AML / CFT and existing VASP regimes	MiCA does not cover anti-money laundering / countering the financing of terrorism issues relating in cryptoassets. The existing regime applicable to “virtual currencies” as set out in MLD5 will remain applicable. In respect of transparency for crypto transfers, the Transfer of Funds Regulation will be revised to implement the FATF “travel rule” in European law. This will introduce an obligation for cryptoasset service providers to collect and make accessible data concerning the originators and beneficiaries of the transfers of cryptoassets they undertake, regardless of the amount of cryptoassets being transferred.	Once the amended regime is in force and applicable, the UK’s existing cryptoasset service provider registration regime under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) will cease to apply. Instead, firms undertaking regulated cryptoasset activities will be expected to adhere to the same financial crime standards and rules that apply to similar traditional financial services activities. These are broader than those contained in the MLRs and cover anti-bribery and corruption, sanctions, fraud and other aspects of financial crime.
Timeline	MiCA is pending formal adoption by the co-legislators, which is expected to take place in April / May 2023. Following that, the final legal text will be published in the EU Official Journal. MiCA will apply 18 months after the date of entry into force. Provisions applicable to stablecoins will apply 12 months following the entry into force.	The date to provide responses to the HMT Proposals closes on 30 April 2023. The timing thereafter remains uncertain. There are various moving parts that will influence the timeline. The first is that HMT will need to digest the industry’s feedback to the measures and determine next steps. That will take some time. Secondary legislation needs to be passed to effect various of the measures proposed, whilst the FCA will need to design various new regimes and then consult on changes to its own rules to effect such regimes. Our working assumption is that, unless there is a concerted effort to push through these various stages at pace, we will not see the HMT Proposals in force until Q4 2024 at the earliest.
Transitional arrangements	Requirements regarding the issuance of cryptoassets will not apply to offers to the public which ended before the date of MiCA’s entry into application (i.e. 18 months following publication in the EU Official Journal). There will be limited requirements applicable to those cryptoassets (other than stablecoins) that were admitted to trading on a trading platform for cryptoassets before MiCA’s entry into application. Subject to Member States’ discretion, cryptoasset service providers that provided their services in accordance with national law before MiCA’s entry into application, may be able to continue doing so until the sooner of 18 months after the date of MiCA’s application or until they are granted an authorisation. Issuers of asset-referenced tokens that issued such instruments before Title III MiCA provisions become applicable (i.e. 12 months following publication in the EU Official Journal), may continue doing so provided that they applied for authorisation within one month following Title III application (or notified their NCA, if they are credit institutions). Member States may apply a simplified procedure for applications for an authorisation that are submitted between the date of MiCA’s application and 18 months afterwards, by entities that by the time of MiCA’s application were authorised under national law to provide cryptoasset services.	The HMT Proposals do not currently envisage any transitional arrangements, whereby firms registered as cryptoasset exchange providers and / or custodian wallet providers would be afforded more time or a different route to apply for full authorisation under FSMA.
Grandfathering arrangements	MiCA provides that credit institutions and investment firms already authorised in a Member State are able to perform relevant cryptoasset services in the EU via notification to the NCA in their home Member State. Those firms are only able to perform those cryptoasset services which align with their existing permissions under those other authorisation regimes, but there is a clear mechanism to allow such firms to “roll” those authorisations into MiCA.	Comparably, there are no grandfathering arrangements established under the HMT Proposals. HMT states clearly that firms already authorised under FSMA will need to apply to the FCA to vary their permissions to address the performance of any cryptoasset-related regulated activities. Firms registered as cryptoasset service providers under the MLRs will need to apply to the FCA afresh under the amended regime.