VIDEO | The regulatory landscape for digital assets is advancing rapidly across the EU and UK, with new frameworks aiming to bring order and clarity to this growing sector. During the PostTrade 360° Nordic 2024 Conference, legal experts from Norton Rose Fulbright, Hannah Meakin and Floortje Nagelkerke, highlighted key challenges and opportunities in shaping the future of digital asset regulation, focusing on the EU’s Markets in Crypto Assets (MICA) regulation and the UK’s phased approach to crypto regulation.


The EU’s MICA regulation provides a much-needed legal framework for digital assets across member states, but the transitional periods vary from country to country. “There will still be differences come January regarding whether you’re licensed and in which member states you’re allowed to operate,” said Nagelkerke. For example, France allows an 18-month transition period, while the Netherlands offers only six months, creating a patchwork of regulatory timelines across Europe. MICA covers a broad range of digital asset services, but some activities, such as crypto asset dealing, are still under discussion.“There’s still ongoing debate about whether dealing on your own account with crypto assets requires a license under MICA,” noted Nagelkerke, highlighting that many aspects of the regulation are still open to interpretation.

The regulation also lacks a third-country regime, which means firms based outside the EU must set up entities within the EU to offer services. “If you are providing services from for example Dubai, you still need to be licensed in the EU, and then you need to also have your EU entity,” Nagelkerke explained.

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UK’s two-phase approach

In the UK, the regulatory framework is developing in two phases, but the country lags behind the EU. Phase one focuses on fiat-backed stablecoins and payment services, while phase two will expand to include other digital asset activities, such as custody. “We’re building on what we already have,” said Meakin, explaining the UK’s strategy of expanding upon existing financial regulations rather than introducing a comprehensive new law like MICA.

Post-trade services, a key concern for many, are not specifically included in the UK’s phase two, but related activities such as custody and intermediaries will be regulated. “Custody is very much part of phase two,” Meakin added, highlighting the importance of this service in the broader regulatory framework.

The UK has also introduced its Digital Security Sandbox, a flexible legal framework for testing innovative technologies. While the EU’s DLT pilot regime is more narrowly focused, the UK sandbox is broader and more adaptable, covering a wider range of financial instruments. “It’s very innovative in the sense that it’s actually adjusted some of the legal requirements,” explained Meakin, noting that the sandbox allows regulators to tweak rules and offer waivers to encourage innovation.

Challenges

Institutional investors, such as insurance companies and pension funds, face strict rules that limit their ability to invest in digital assets. “Going into digital assets is probably quite a big step,” acknowledged Nagelkerke. Many institutional investors must adhere to the prudent person rule, which discourages riskier investments in emerging asset classes like crypto. Consequently, many investment funds that do invest in digital assets operate under lighter regimes that avoid full licensing requirements.

Financial crime and reputational risks

One of the biggest hurdles for broader adoption of digital assets remains concerns around financial crime. “There’s still the perception that it’s often used for money laundering or terrorism financing,” Nagelkerke remarked. Despite ongoing efforts to strengthen anti-money laundering (AML) regulations, such as the introduction of the travel rule in the EU, digital assets continue to face reputational risks, particularly among larger investors.

Panelists:
Hannah Meakin, partner, Norton Rose Fulbright
Floortje Nagelkerke, partner, Norton Rose Fulbright


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