In December 2024, the FCA published a Discussion Paper “(DP24/4): Regulating Cryptoassets – Admissions & Disclosures and Market Abuse Regime for Cryptoassets”.
In keeping with the FCA’s latest five-year strategy, the FCA is keen in the DP to introduce a balanced regime which supports growth in the UK.
The focus of DP 24/4 is spot cryptoassets, such as stablecoins and what the FCA refers to as “unbacked cryptoassets” e.g. bitcoin. It does not include those already captured under the existing list of “specified investments” in Part III of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, such as tokenized financial instruments.
The FCA has earlier published Discussion Paper 23/4 to help develop the UK’s regime for fiat-backed stablecoins.
This is part of a series of publications by the FCA designed to facilitate the development of the UK’s cryptoasset regulatory regime. Other FCA consultation papers due to be published during 2025 relating to crypto assets include proposals on:
- Custody record keeping
- Reconciliations
- Segregation of assets and the use of third parties
- The introduction of a new prudential sourcebook for cryptoasset business
Once the FCA’s rules in these areas are finalized, the FCA will have significantly expanded its cryptoasset regulatory regime beyond its current extent of Anti-Money Laundering, Financial Promotion regulation and its rules banning the sale of derivatives that reference certain types of cryptoassets to retail consumers.
The FCA notes in DP 24/4 that it has considered the IOSCO recommendations for crypto and digital asset markets of November 2023 in its proposed approach in relation to Admissions and Disclosures (A&D) and market abuse.
Admissions and Disclosures (A&D)
The FCA is proposing two key activities which trigger an A&D regime:
- Admitting (or requesting admission) of crypto assets to trading on a regulated Cryptoasset Trading Platform (CATP)
- Making a public offer of crypto assets in the UK
For public offers above a threshold, the FCA proposes that
- Information must be disclosed in crypto asset admission documentation
- CATPs will be required to conduct due diligence on issuers and disclosures under the proposals
- All disclosure documents must be filed with the UK’s National Storage Mechanism (NSM)
Through these disclosures in the NSM, consumers would have access to comprehensive information to evaluate whether a cryptoasset is a suitable investment for them.
The FCA is proposing that the information preparer (i.e. the person applying for admission of the cryptoasset to the CATP) could be held liable for consumer losses if it did not include necessary information material for a consumer making an informed assessment of a cryptoasset.
Also being considered is a requirement for CATPs to publicly disclose their standards for admission of cryptoassets to trading, as well as their criteria for rejecting admissions. The FCA seeks views on what details it should require CATPs to disclose. Disclosure requirements, which are proportionate enough to stimulate the growth of the UK as a global cryptocurrency center while preventing undue harm to investors, should be considered.
Market Abuse Regime for Cryptoassets (MARC)
The FCA believes that a Market Abuse Regime for Cryptoassets (MARC) is required to enhance cryptoasset market integrity and better protect market participants. This is welcome as the high volatility of crypto assets compared to traditional asset classes, such as equities and bonds, creates opportunities for abusive practices in crypto markets.
The FCA is proposing a pragmatic approach to MARC given the differences between cryptoassets and traditional assets, such as the highly fragmented nature of crypto markets. If we unpack the term fragmented, we can possibly conclude that the FCA is referring to some 800 exchanges which constitute the crypto markets globally, across which some 13 million digital assets are currently traded 24/7, 365 days a year. Ten exchanges process about 90% of trades, and the largest exchange alone accounts for almost half of global cryptoasset trading volumes. Furthermore, the three crypto assets alone (bitcoin, ether and tether) accounted for 74% of the total crypto market capitalization as of December 20231.
Whilst there are high degrees of distribution of traded activity, being able to focus on those large exchanges helps to reduce the degree of fragmentation.
The UK government is expected to introduce new legislation relating to MARC covering the following areas:
- Prohibiting insider dealing relating to cryptoassets traded on a regulated CATP
- Requiring the disclosure of inside information relating to cryptoassets traded on a regulated CATP
- Prohibiting market manipulation relating to cryptoassets traded on a regulated CATP
The FCA’s MARC proposals have certain similarities with the existing market abuse regime for traditional assets such as:
- Requirements of market participants for prevention, detection and disruption of market abuse
- Safe harbors and exceptions for legitimate behaviors
The FCA proposes that issuers who request admission to a CATP for their cryptoassets should be responsible for publicly disclosing relevant inside information. The FCA acknowledges that inside information disclosure responsibilities may be a challenge for issuers and CATPs. The FCA is considering what channels might be best suited for disseminating inside information relating to cryptoassets.
Conclusion
DP 24/4 is a welcome step in strengthening the United Kingdom’s regulatory framework to develop it as a global hub for cryptoasset technology and investment. It is a progressive move compared to the more comprehensive MICA regime, while mirroring the admissions component of MICA.
