on new digital asset classes. Regulatory developments have mirrored the evolution of cryptocurrency – or ‘crypto asset’ – which means a digital asset that is secured and operated using a set of cryptographic keys. The importance of regulating digital assets
was evident when the European Commission published its digital finance package in 2020. This included a new digital finance strategy, a proposal for a regulation on markets in crypto assets (MiCAR) and a proposal for a regulation on a distributed ledger technology (DLT) pilot regime for market infrastructure, among others. MiCAR will be an anchor regulation for other initiatives that aim to provide legal certainty as it aims to create a holistic regulatory framework for the crypto-asset industry. We expect MiCAR to enter into force in the course of 2022 with a general application date 18 months later, whereby some provisions will already apply from the date it comes into force. As regulatory certainty improves and mainstream users enter the market, the participants of traditional finance are more likely to enter the crypto asset space. This raises regulatory concerns about the risks
Europe
The European landscape is driven by a harmonised approach across member states in the EU. As such, the bank sees a combination of regulatory and European Central Bank (ECB) driven initiatives across the region.
ECB-driven initiatives The ECB is driving initiatives to promote market harmonisation. This includes the Eurosystem Collateral Management System (ECMS), which aims to harmonise current collateral management processes, where differences in business processes and messaging create operational barriers to efficient management. The ECMS will replace 19 different collateral management systems with a single system capable of managing the assets used as collateral in the Eurosystem credit operations for all jurisdictions. With go- live in November 2023, this is expected to increase efficiency in the management of collateral and level the playing field among Eurosystem counterparties. This is critical to the further integration of a pan- European market. To facilitate the ECMS, the ECB Advisory Group on Market Infrastructures for
Securities and Collateral (AMI-SeCo) endorsed standards for a Single Collateral Management Rulebook in Europe (SCoRE). SCoRE standards apply to debt instruments, equities and investment funds issued via European (I)CSDs, and should be implemented by all relevant actors in the AMI-SeCo markets (the EU, the UK and Switzerland). The compliance date for the SCoRE standards on Triparty Collateral Management, Corporate Actions and Billing is November 2023, and for seven other harmonisation activities the standards and compliance dates are yet to be confirmed. The compliance date of corporate action standards for debt instruments is November 2023, and the compliance date for equities and investment funds standards is November 2025, although CSDs may indicate an earlier application date.
Capital Markets Union The Capital Markets Union (CMU) intends to ensure the success of a single capital market across the EU to increase competitive investment and financing opportunities. The CMU Action Plan, published by the EU Commission
in November 2021, includes legislative proposals relating to the following areas:
1. European Single Access Point (ESAP) 2. Review of the European Long-Term Investment Funds (ELTIFs) regulation
3. Review of the Alternative Investment Fund Managers Directive (AIFMD)
4. Review of the Markets in Financial Instruments Regulation (MiFIR)
The CMU provides an opportunity to harmonise market practices and enhance technical integration of market participants. There will be the potential to resolve previous implementation challenges from the Shareholder Rights Directive II (SRDII), such as introducing a uniform ‘definition of a shareholder’ and introducing a harmonised framework for withholding tax, which will promote cross- border investment.
MiFID II/MiFIR Refit
In 2021, MiFID II Quick Fix was entered into force, with implementation by all EEA countries by 28 February 2022. This introduced changes related to the annual cost and charges settlement, quarterly
of digital assets on traditional financial institutions, and heightened investor protection needs. Regulatory authorities are revisiting their existing legislations with a focus on modernisation and compliance to international standards. Regulations concerned with market integrity like Know Your Customer (KYC), Anti-Money Laundering (AML) and sanctions are being implemented across the globe, driven by guidance from the Financial Action Taskforce (FATF).
Participants of traditional finance are more likely to enter the crypto- asset space
However, open questions remain, such as what the scope is of custodial liability according to MiCAR. The current EU Parliament and EU Council compromises, flowing from EU trialogue negotiations, predict that liability does arise unless the crypto custodian can prove that a loss did not result from an operational incident attributable to the custodian, such as a malfunction or hack. This is a diametric shift from the existing market standard, where custodians are generally free to limit their liability contractually to cases where a loss was caused by the negligence, fraud or wilful default of the custodian. In March 2022, the US Securities and Exchange Commission (SEC) published Staff Accounting Bulletin (SAB) No.121 that provided an interpretation related to financial reporting of crypto assets. Expressing concerns surrounding technology, legal and regulatory risks, SAB No.121 said that if an entity is responsible for safeguarding crypto assets held “for its platform users, including maintaining the cryptographic key information necessary to access the crypto assets…”, then that
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