The European Union has approved the legal text for its landmark Markets in Crypto Asset Regulation (MiCA), marking a significant step in the journey towards a fully authorised and regulated crypto-asset market in Europe. 

The European Parliament’s Committee on Economic and Monetary Affairs will now vote to pass the final text on 10 October, before a date is decided for the implementation of the regulation. 

The EU said that the lack of an overall regulatory framework for crypto-assets “can lead to a lack of users’ confidence in those assets”, restricting the development of the market and could potentially lead to “missed opportunities in terms of innovative digital services, alternative payment instruments or new funding sources for Union companies”. 

As a result, the EU concluded that it was necessary to establish specific rules for crypto-assets, with a view to support innovation and fair competition, while ensuring protection for participants and wider market integrity around the new asset type.  

“Capital requirements are to be introduced for providers, with the amount dependant on the size and nature of the service provided.” 

The proposed rules lay out provisions on supervision, consumer protection and environmental safeguards for crypto-assets, outlining rules for those issuing, safeguarding and trading the new asset type. Capital requirements are to be introduced for providers, with the amount dependant on the size and nature of the service provided.  

“It is important to ensure that the Union’s financial services legislation is fit for the digital age, and contributes to a future-ready economy that works for the people, including by enabling the use of innovative technologies,” the EU said in the regulation. “The Union has a stated and confirmed policy interest in developing and promoting the uptake of transformative technologies in the financial sector, including distributed ledger technology (DLT).” 

MiCA also sets out guidelines for crypto-asset service providers, covering custodial and administrative services. The rules establish a best-practice framework, detailing rules around fees, communication and security.  

Speaking in June after the provisional text was drawn up, Stefan Berger, the lead MEP on the project, labelled the regulation a European success. “We are the first continent to have a crypto-asset regulation. In the Wild West of the crypto-world, MiCA will be a global standard setter. MiCA will ensure a harmonised market, provide legal certainty for crypto-asset issuers, guarantee a level playing field for service providers and ensure high standards for costumer protection.” 

The full text is available to read here.  

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Martin C. Grant

As the question of crypto regulation gathers momentum, digital assets specialist JST Capital has confirmed the appointment of Martin C. Grant as its new global head of regulatory affairs and integrity, responsible for navigating the evolving digital asset regulatory environment to ensure best practices and hold discussions with global regulators as they work to adopt new policies to regulate this unique marketplace.  

Additionally, he will act as a resource for JST’s global client base to help them understand the intricate nature of regulations in order to make informed investment decisions. 

Grant joins JST from the Federal Reserve Bank of New York, where he held the role of senior vice president and chief compliance and ethics officer for over 15 years, responsible for building and leading the bank’s internal compliance efforts. Grant has also worked with other state and federal regulators as well as government agencies to harmonise compliance policies within Federal Reserve Banks and financial institutions around the globe, and has provided technical assistance and guidance to central banks around the globe on compliance policies and practices.  

Formerly a lawyer in the New York Fed’s enforcement and litigation division, Grant is also the chair of the Conference Board’s Global Business Conduct Council and a member of the Compliance Committee of the Association of the Bar of the City of New York.  

“Throughout 2021, JST has continued to expand in order to meet growing institutional demand. We increased our headcount, tripled the number of clients and saw a 10-fold increase in gross revenue,” commented Scott Freeman, co-founder and partner at JST Capital. “By bringing in Martin, who has over 30 years of experience operating in the regulatory and compliance space, JST is doubling down on its mission to not only offer clients unmatched financial services in the crypto sector, but to also assist in navigating the regulatory environment. We are excited to welcome Martin to the team and work alongside him to engage with regulators around the globe.” 

Grant is the latest senior executive to move into the digital assets arena, a trend that has been notable on both the industry and regulatory sides of the fence. In January this year, Digital Asset appointed former chairman of the United States Commodity Futures Trading Commission (CFTC), J. Christopher Giancarlo, to its board of directors, while in August 2021 former US Securities and Exchanges Commission (SEC) chairman Jay Clayton joined crypto platform Fireblocks as an advisor.  

“Regulators around the world have begun to realize the full scope of digital assets and the role they play in the global economy and as a result are rushing to establish fulsome policies that protect market participants at all levels,” commented Grant. “I am looking forward to working with regulators and establish an open dialog in order to advance regulation that benefits both the investors that use our services and the wider crypto industry.” 

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US crypto exchange FTX US has confirmed that it will be making a strategic investment into IEX Group, the operator of the US-based Investors’ Exchange, in order to develop a transparent market structure for the buying, selling and trading of digital asset securities.

The question of crypto regulation has long been a thorny problem , and FTX US has been clear about its ambitions to become a regulated exchange, working with regulators to create a platform that enables both retail and institutional engagement with digital assets.  

The new partnership with IEX, an alternative trading system first launched in 2013 with a focus on investor protection, is another step down this road.  

“To unlock its full potential, the crypto and digital asset industry needs to engage with regulators and truly scale what has been built,” said CEO and Co-Founder of IEX, Brad Katsuyama.  

“From the first conversation with Sam [Bankman-Fried, CEO of FTX and FTX US], it was clear to me that FTX and IEX were truly aligned on the future potential for digital assets and the unique roles our firms could play as partners in shaping market structure that benefits the end investor. We both see the regulators as important allies in providing a clear path forward and attaining the highest possible standards for investor protection. The US market should be the largest player in digital assets globally and we believe that this partnership will help facilitate that.”

Earlier in March, parent company FTX Trading partnered with US-based crypto platform West Realm Shires Services to launch a new unit targeted at institutional investors. FTX Access will initially provide institutional investors interested in gaining exposure to digital assets with trade execution, analytics, index products, advisory services  and capital introductions, with plans to expand into custody, derivatives, structured products and other asset management products later down the line.

The recent developments accompany a growing interest in regulatory oversight for the sector. On 9 March, President Biden signed into law the ‘Executive Order on Ensuring Responsible Development of Digital Assets’, the first real attempt by US authorities to comprehensively address supervision of the fast-growing crypto space – including the potential development of a US central bank digital currency.  

“The order is a significant step toward developing a comprehensive federal approach on digital assets,” explained law firm Shearman & Sterling in a recent analysis. “Although the order does not prescribe a regulatory framework itself or require the issuance of new rules, it directs various parts of the federal government to issue reports and recommendations on potential regulatory or legislative actions concerning digital assets.” 

In November 2021, non‑state issued digital assets reached a combined market capitalisation of $3 trillion, up from approximately $14 billion in November 2016, marking a compound annual growth rate of 192.5% over the past five years, and this explosive growth has not gone unnoticed.  

“The unique and varied features of digital assets can pose significant financial risks to consumers, investors, and businesses if appropriate protections are not in place,” stated President Biden in March. “In the absence of sufficient oversight and standards, firms providing digital asset services may provide inadequate protections for sensitive financial data, custodial and other arrangements relating to customer assets and funds, or disclosures of risks associated with investment. 

The latest partnership between FTX and IEX Group looks to be preparing for the potential advent of further regulation, and the two firms have promised more information in the coming weeks on how they plan to broaden investor participation in the digital asset securities market – including a new initiative encouraging all investors to join the conversation about the future of market structure for digital asset securities. 
 
“Investing in IEX created a tremendous opportunity for FTX US,” commented Bankman-Fried. “With this investment, we’re aligned with one of the most trusted and innovative companies in equities markets. I’ve long respected Brad’s vision for IEX to be an exchange that caters to the needs of the investor and treats them fairly – part of the reason why we’ve operated similarly at FTX. As a result, we will collaborate on the further establishment of crypto market structure and work closely with regulators, allowing institutions around the world to enter the marketplace seamlessly.” 

The move comes as institutional interest in digital assets continues to grow. In December 2021, research from London-based digital assets hedge fund manager Nickel Digital Asset Management revealed that over $60 billion worth of Bitcoin is currently held through various Bitcoin closed-ended trusts and exchange traded products, with US and Canadian funds accounting for an overwhelming 75% of the holdings. 

Anatoly Crachilov, CEO and founding partner of Nickel Digital, said analysis of digital assets performance versus traditional asset classes shows sizable outperformance by digital assets over the medium to long term. “This helps explain the increasing interest in digital assets by corporations and institutional investors as part of their wider asset allocation.” 

In January, MSCI moved into the digital asset sphere for the first time through a collaboration with institutional digital asset investment product and services provider, Menai Financial Group; while sector is also creaming off industry talent, poaching numerous high-level executives from more traditional roles.

Most recently, decentralised Financial Market Infrastructure (dFMI) firm Bosonic hired former global head of LCH ForexClear, Paddy Boyle, as its global head of clearing and derivatives; while in November 2021 Citi promoted Puneet Singhvi from its global markets business to head up digital assets for its institutional client group, with plans to hire up to 100 more within the division.  

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During a keynote speech at a FinTech Conference in Brussels, Steven Maijoor outlined ESMA’s work to date and current position on the regulation of crypto-based assets and the underlying technology, the majority of which is based on DLT or blockchain systems.

“Crypto-assets and the underlying DLT command our attention because they are at the frontier of innovation,” Maijoor said during the Association for Financial Markets in Europe (AFME) event. “They therefore pose a challenge to firms, who seek to turn the promise of frontier technology into workable business models. Likewise, crypto-assets and DLT pose a challenge of regulators, because they are partly in unchartered territory.”

Referencing “commentators and analysts” that are increasingly calling on crypto market participants to begin delivering on the early promise, and subsequent market hyperbole, of the technology, Maijoor underlined the importance of regulatory bodies remaining “objective, with an open mind but a critical eye.”

Regulation for crypto-assets has often been cited as one of the main challenges hindering greater institutional take-up of crypto-related activities, with firms on both the buy- and sell-sides unwilling to move into the space, or at least publicly so, until further regulatory clarity had been provided.

Maijoor also highlighted how the nature of crypto technologies require a level of decentralisation and, as such, present another layer of challenges for both market participants and regulators, particularly as the technologies have yet to evolve far beyond the initial stages.

“Creating immutable records required enormous computing power. And it did not solve the problem of trust, as decentralisation brought the risk of fraud and money laundering,” he commented.

“Decentralisation is hard to square with some of the features we need in the financial markets, such as clear ownership, clear responsibilities and a degree of privacy. It also makes security very costly, financially and environmentally.”

Definitions

In January this year, ESMA authored and published advice to the European Commission, Council and Parliament that certain platforms ought to be subject to the regulation, according to three broad categories.

Those platforms trading crypto-assets that have a central order book and/or match orders under other trading models are likely to qualify as multilateral systems and therefore should operate under MiFID II regulation, while  platforms that are dealing on their own account and executing client orders against proprietary capital would qualify as broker dealers, rather than as a multilateral trading venue, and so should also comply with the requirements.

During his speech, Maijoor again underlined ESMA’s advice, however he clarified that while most European national authorities agree that crypto-assets “are likely to qualify as MiFID financial instruments”, regulators cannot legally qualify crypto-assets through a “one size fits all” approach and that investors may not be able to distinguish if certain crypto-assets fall under the purview of regulatory bodies or not.

“Importantly, we believe that a more elaborate bespoke regime for those crypto-assets that do not qualify as financial instruments is premature,” Maijoor concluded. “A more elaborate regime may risk legitimising crypto-assets and encouraging greater participation. Any novel framework should also protect the integrity of existing capital markets and be flexible enough to capture the variety of risk factors that the different types of cryto-assets introduce.”

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