Since there are so many developments occurring around the world geopolitically, with broader economic headwinds, it can be difficult to keep track of all the consultations and proposed regulations in the digital finance world. There are five consultations which have recently closed that have been key areas of industry focus as of late and these consultations are crucial as they are one of the easiest ways that industry can provide feedback to the public sector. It is an opportunity to provide detailed and technical feedback to policy makers, and also can serve as a chance to highlight regulatory risk prior to regulation becoming codified and enforced. This article aims to provide a summarised and non-exhaustive reading list of these five consultations, whilst also highlighting which are the most well-received by industry, or cause for great concern.
Source: Global Digital Finance
UK Consultations
· FCA and PSR call for information on digital wallets
Recently closed, Global Digital Finance worked with fellow global association, Crypto Council for Innovation (CCI), to respond to the Financial Conduct Authority’s (FCAs) and Payment Systems Regulator’s (PSRs) call for information (CfI) on digital wallets. Whilst the CfI purported to focus mainly on BigTech wallets, there were three key points of industry concern that were raised related to crypto and digital wallets:
1. The FCA/PSR’s broad definition and discussion of ‘digital wallet’ does not distinguish between digital wallets that rely on centralised intermediaries and self-hosted wallets, which do not?????????
2. Different types of wallets may require different regulatory treatment - requirements should be proportionate and appropriate.
3. Emerging frameworks should be technology neutral and future proof as the digital wallet ecosystem is fast evolving.
· Bank of England’s (BoE’s) discussion paper on payments innovation
Just closed last week, the BoE sought views on its approach to payments innovation. This discussion paper (DP) is part of an important effort for the BoE. The DP is cross departmental, meaning responses will help inform its broader approach to digitisation. It was a chance for industry to provide feedback, not only to the innovation and sandbox teams but also to economists, financial stability experts and seniors across the bank who are considering the impact of technologies such as DLT and how it could be incorporated into their long-term strategic objectives. On that basis, industry worked collaboratively to develop five key points of feedback to support the BoE in this work:
1. DLT and programmable platform adoption is highly likely as well as relevant for both capital markets and regulatory objectives.
2. There is industry support for further innovations in wholesale settlement.
3. Stablecoin and tokenised deposit regulation should be distinct and proportionate to the risks presented by each asset.
4. Programmable platforms and DLT can support the Bank of England in achieving its objectives.
5. The UK must act quickly to regain a competitive advantage or risk falling further behind.
EU Consultations
· ESA’s consultation on classification and templates
A helpful consultation published recently for all those considering their MiCAR implementation journey is the soon-closing consultation from the European Supervisory Authorities (ESAs) on establishing templates for explanations and legal opinions regarding the classification of crypto-assets along with a standardised test to foster a common approach to classification. Industry is broadly supportive of this consultation and in particular the classification flow chart provided by the ESA. The ESA’s note is that:
- “To support market participants and supervisors in adopting a convergent approach to the classification of crypto-assets, the Guidelines propose a standardised test, as well as templates for explanations and legal opinions that provide descriptions of the regulatory classification of crypto-assets in the following cases.
- The white paper for the issuance of asset-referenced tokens (ARTs), which contains comprehensive information about the crypto asset, must be accompanied by a legal opinion that explains the classification of the crypto asset - in particular, the fact it is not an electronic money transfer nor a crypto-asset that could be considered excluded from the scope of MiCA.
- The white paper for the crypto-asset must be accompanied by an explanation of the classification of the crypto asset – in particular, the fact it is not an EMT, ART or crypto-asset excluded from the scope of MiCA.”
Source: ESMA
· EBA classification and templates
One of the most contentious consultations that closed recently is the European Banking Authority’s (EBA’s) consultation on: “Templates to assist competent authorities in performing their supervisory duties regarding issuers’ compliance under Titles III and IV of Regulation (EU) 2023/1114”. Although the title sounds quite dry, the proposals within this consultation could have significant implications - and cause a heavy compliance burden - for issuers and crypto asset service providers (CASPs) operating in the EU. Specific concerns raised by industry include:
1. Proportionality for reasonable reporting encouraged.
2. Further alignment to global and EU standards supported.
3. Concerns noted for unprecedented reporting requirements.
4. Identification of competition concerns.
5. Proposal of adjustments to reporting requirements to mitigate risks.
Noting in particular the concerns for unprecedented reporting requirements, industry has also noted that some of the reporting may be in conflict with GDPR as it requires reporting of sensitive personal information such as “name” and “passport number”. Global Digital Finance responded to this consultation with our members. Check our consultation response page for the full and detailed response.
UAE Consultation
· FSRA consultation on fiat referenced tokens (FRTs)
Closed on October 2nd, the Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) consulted on its proposals to allow the issuance of fiat-referenced tokens (FRTs) from the ADGM, inviting public feedback and comments on the proposals. The FSRA defines FRTs as a stablecoins that are backed by high-quality, liquid assets denominated in the same currency as the FRT, and that can be liquidated rapidly with minimal adverse price effect. FRTs are intended to be used as a means of payment and share certain characteristics with stored value. Broadly, these proposals were seen as quite competitive by the digital finance industry and there was support for FRTs being regulated as a unique activity. However, a few other points were noted where adjustment and clarity would be welcomed including:
1. Encouraged amending of attestation timing from monthly to quarterly.
2. Further clarity requested on redemption actions to be taken in t+2 time frame.
3. Additional guidance requested with regards to foreign stablecoins.
In conclusion, industry welcomes, and should continue to welcome, this type of engagement from authorities; a chance for firms to give direct feedback on how requirements may impact them. It also gives regulators a chance to gather information to inform their broader thinking such as the Digital Wallet Call for Information and BoE Payments Innovation Discussion Paper. Whilst many proposals are welcome, such as those from the ESA’s providing clarity on crypto-asset classification as well as the ADGM offering a competitive stablecoin regime, the one to watch is the EBA’s consultation on reporting templates. Industry would certainly welcome the EBA taking its feedback into consideration, and the final policy proposal will have a wide impact on firms operating across the EU. Furthermore, if you are interested in how you can stay further up to date with policy and regulatory updates, feel free to join the Digital Finance Forum. To get more involved with GDF’s policy work and consultation responses you can find more information here. Our co-regulatory approach calls for further engagement between agencies and industry to drive global, digital innovation, with meaningful compliance in mind. Through roundtable events, responding to regulatory consultations with membership or the closed-forum Regulators’ Knowledge Series, our team of regulatory experts create forums for engagement between industry and global agencies.
This article first appeared in Digital Bytes (12th of November, 2024), a weekly newsletter by Jonny Fry of Team Blockchain.