A divide has emerged in EU and UK crypto regulation

Matthew Elderfield is a former deputy head of the European Banking Authority

The shape of EU and UK crypto regulation is now clearer than it was before. We have an agreement in Europe on the Markets for Regulation of Crypto Assets (Mica), the Financial Services and Markets Bill is being read by the UK Parliament, and new rules from the UK Financial Conduct Authority are coming for high-risk investments. What does this mean for the scope of regulation, investor protection, supervision and enforcement?

The UK will start by regulating a few specific crypto-assets and service providers, while the EU is largely going for the whole lot. Mica has a broad definition of a “crypto-asset”, but the UK dips its toe in the water with a narrower “digital settlement”. This mainly covers stablecoins used as means of payment, but not (for now) crypto-assets as investments. This election appears to be about facilitating innovation – and FCA caution, as explained by the outgoing leader. The EU’s broader investment focus means that issuers of new cryptoassets (with important exceptions such as purely mined coins) must publish and be responsible for a prospectus-like white paper detailing their plans.

The differences in regulation also apply to service providers. The UK is likely to focus on fewer services, such as exchange and detention. Mica’s more expansive definition covers trading, advisory, transfer of orders and more, as well as custody and crypto-to-crypto and crypto-to-fiat exchanges.

The UK’s next planned step is to legislate for warnings about crypto investment risks. Investors need to have a clear understanding of what protection they get (or don’t get). British consumers have learned the hard way (in the London Capital & Finance minibond scandal) that the scale of regulation can be confusing. The FCA’s new rules now set an admirably blunt and prescriptive risk warning: “This is a high-risk investment and you are unlikely to be protected if anything goes wrong”. This will hopefully quickly be extended to crypto investments – and matched by EU regulators.

Since crypto-assets are not protected by deposit insurance or other compensation schemes, supervisory efficiency is key. Mica and the UK will hold service providers liable for custodial losses, such as cyber-attacks on digital wallets. But policing segregation of client assets is hard enough in the non-crypto world. And thinly capitalized service providers may not have deep enough pockets to absorb losses. Supervisors must be sharp.

France’s Autorité des Marchés Financiers raised some eyebrows recently when it announced it would oversee Binance, the world’s largest crypto exchange, under pre-Glimmer French law. Binance has been scolded by a number of regulators, including in July when it was fined €3 million by the Dutch, and last summer when the FCA concluded that it is “not capable of being effectively supervised”. AMF clearly thinks differently.

The FCA’s concern was linked to Binance’s unwillingness to share information about its complex corporate structure. An opaque structure was at the heart of the BCCI banking scandal in the late 1980s – the post-BCCI directive requires banking structures to be sufficiently transparent so that they can be effectively monitored.

The UK sensibly uses this principle in its terms of supervision. Mica needs detailed rules to require this, and the AMF needs to make Binance revise its corporate structure. National supervisory authorities such as the AMF will continue to supervise service providers under Mica, but the European Securities and Markets Authority will be able to intervene with “significant” providers and the European Banking Authority will have direct supervisory powers for the first time, for stablecoin issuers.

The EBA chief is concerned about his ability to get the right staff, as the authority expands from its regulatory and stress-testing remit. Rightly so: EBA and ESMA beg cash-strapped national authorities and the European Commission for money, and the latter controls their staffing plans. The EBA and Esma need more flexibility to ensure they are not beaten by the crypto firms.

What about enforcement? The US Securities and Exchange Commission has taken decisive action against crypto fraud and insider trading, claiming that many crypto assets are actually securities subject to existing rules. The FCA reached the same conclusion in its 2019 guidance, but enforcement action has yet to follow. Mica will give fine-setting powers to the EBA and national authorities, but in the meantime large fines in the EU have been rare.

Consumers will continue to be ripped off until both UK and EU authorities start taking some enforcement cases under their existing powers – and not just waiting for new ones.