UK cryptoasset regulation: FCA seeks feedback on admissions & disclosures, and market abuse regime

Background

In accordance with the FCA’s indicative roadmap outlining the timeline for a series of publications intended to facilitate the development of the UK’s cryptoasset regulatory regime—see our previous article on this—the FCA has, on 16 December 2024, published a discussion paper (DP24/4) (the “Discussion Paper”) on the cryptoasset admissions and disclosures regime (A&D) and the market abuse regime for cryptoassets (MARC).

For the purposes of the Discussion Paper, ‘cryptoassets’ refers to spot cryptoassets, such as stablecoins and unbacked cryptoassets (eg Bitcoin and Ether). The FCA clarifies that 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 (RAO), such as tokenised financial instruments, or the rights to the same, which includes security tokens.

The Discussion Paper builds on previous publications by the Government on its intention to legislate for a future financial services regime for cryptoassets (see this article for an overview). (However, it is worth noting that in contrast with previous plans,  the Government will no longer be pursuing a “phased” approach to legislation—see this article for further details.) 

In future, the FCA’s regulatory remit is expected to expand beyond its AML/CTF regime and the Financial Promotions regime to a broader conduct regime covering a range of cryptoasset activities (e.g. custody, trading, stablecoin issuance and other activities). This Discussion Paper specifically covers the FCA’s proposed approach in relation to admissions and disclosures, and market abuse. In developing the proposals under this Discussion Paper, the FCA notes that it took into consideration the recommendations in the IOSCO Policy Recommendations for Crypto and Digital Asset Markets (published in November 2023).

Admissions and disclosures regime

Overview

The Discussion Paper outlines a regime which includes proposed requirements for disclosures by issuers or offerors at the point of admission to trading on a cryptoasset trading platform (CATP), highlighting in particular the following elements:

1. disclosures: The person who initiates the application for admission to trading (which may be the CATP itself) would be responsible for the production and publication of any required admission documents;
2. due diligence: The CATP would undertake appropriate due diligence, and make the summary of such due diligence available to the public;
3. admission process: Based on its assessment of likelihood of consumer detriment and level of comfort from its due diligence, the CATP may decide whether to approve or reject the application for admission to trading; and
4. filing of admission documents: If the application is accepted, the admission documents would be filed on the National Storage Mechanism (NSM).

The FCA points out that the proposed regime aligns with much of the reformed prospectus regime consulted on in CP24/12 and CP24/13.

Disclosures: Admission documents

The Treasury’s response to its consultation and call for evidence on the future financial services regulatory regime for cryptoassets confirmed the intention to legislate for a high-level “necessary information test” in order to ensure an overall standard of preparation for disclosure/admission documents.  This may cover, at a minimum, disclosure requirements on features and risks of the cryptoasset, an outline of the underlying technology, and details of the person seeking admission to trading.

The FCA is considering introducing further disclosure rules in the FCA Handbook, which could require a level of detail that is sufficient to enable a consumer to make an “informed decision” based on a range of factors relating to the cryptoasset (as applicable or relevant), including its track record, number of tokens in circulation and backing assets (e.g. in case of stablecoins that are not already regulated under the future fiat-referenced stablecoins regime), governance mechanisms, legal status, operational and cyber resilience, potential changes to the underlying protocol, financial information where relevant to its price, impact on particular sustainability related factors, and more. 

Under the FCA’s proposals, CATPs would assume the responsibility of setting and implementing their own detailed requirements for the content of admission documents—the FCA would not be involved in assessing or approving specific admission documents. To avoid variation in standards across CATPs (even for the same cryptoasset), the FCA has suggested the option of allowing the industry to take the lead in developing the relevant standards, such as standardized disclosure templates.

Liability

Under the Treasury’s proposals, the persons responsible for cryptoasset admission documents (including, in some cases, the CATP itself) should be liable for their accuracy. The relevant liability standard would be the “negligence” standard under FSMA 2000, in line with the standards in the traditional securities market. However, certain forward-looking statements may qualify as protected forward-looking statements (PFLS) and would be subject to the “recklessness” standard of liability under FSMA 2000, which represents a lower liability risk (i.e. the burden of proof would rest on a consumer to establish that an issuer or offeror knew that a PFLS was untrue or misleading).

The FCA notes that it expects the Treasury to delegate the power to the FCA to specify which types of statements should qualify as PFLS. This is likely to include projections, intentions (e.g. plans to upgrade the cryptoasset’s underlying technology), and opinions on future events or circumstances.

Due diligence

The Discussion Paper proposes that CATPs should be required to conduct a sufficient level of due diligence to assess whether a cryptoasset should be admitted to trading, and that associated disclosures are accurate and complete. (The FCA notes that if there is any overlap between any due diligence required under the Financial Promotions regime and the A&D regime, the CATP should not be required to duplicate the due diligence.)

In terms of conducting due diligence, the FCA proposes that the required due diligence should:

-    establish “a reasonable level of certainty that the offeror is legitimate, and disclosures are true and not misleading”—what constitutes a reasonable level of certainty will need to be further defined in the relevant rules, and the FCA welcomes input on this; 

-    cover the cryptoasset’s underlying technology (e.g. the use of distributed ledger technology (DLT) or smart contracts) as part of the due diligence, and CATPs should review any third-party code audits that have been conducted; and

-    cover the persons involved with the offer such as the issuer, offeror or person seeking admission (where applicable and possible), and—where appropriate—key individuals associated with the cryptoasset, such as members of the project team or foundation.

The FCA also proposes that CATPs should be required to disclose in admission documents a summary of the scope and key findings of due diligence conducted on the cryptoasset. CATPs would have some discretion in determining the information included in the summary.

Admission process: rejection of admission to trading

The FCA is considering a requirement on CATPs to have processes for rejecting admissions to trading, which would be informed by the due diligence carried out by the CATPs. Additionally, the FCA is considering requiring CATPs to publicly disclose their standards for admission and criteria for rejection.

In particular, the FCA proposes that CATPs should be required to reject an admission if they consider that “there is a significant risk this may result in consumer detriment”. This requirement would take the form of outcomes-based rules, specifying a non-exhaustive list of factors that CATPs would have to assess as part of their admission process. CATPs will then need to satisfy themselves that they understand any significant risks of consumer detriment based on such factors (e.g. material flaws in the design or underlying technology).  The focus on outcomes is consistent with the FCA’s approach under the Consumer Duty, but the Discussion Paper also suggests that there should be specific A&D requirements beyond the baseline of the Consumer Duty.

While CATPs are responsible for making admission decisions, the FCA intends to be able to take supervisory or enforcement action where a CATP fails to comply with the proposed requirements, or if there is evidence of negligence or misconduct by the CATP.

National storage mechanism (NSM)

The FCA is considering a requirement on CATPs to file admission documents (for all cryptoassets admitted to trading on their platforms) on the NSM, the free-to-use online repository for regulated information required from issuers (e.g. information about securities and issuers under the Listing Rules, transparency rules and the UK Market Abuse Regulation (UK MAR)). 

Market abuse regime

Overview

The Discussion Paper outlines a framework and approach for preventing, detecting, and disrupting cryptoasset market abuse (in other words, the Market Abuse Regime for Cryptoassets, or MARC). MARC is based on parts of the UK MAR, but would be tailored to the cryptoasset markets. 

Under the Treasury’s proposals, the government is expected to legislate (in relation to cryptoassets traded on a regulated CATP) for prohibitions on insider dealing, disclosures of inside information, and prohibitions on market manipulation. In line with this, the FCA proposes a principles-based market abuse regime, which should cover:

1.    offences / prohibitions under MARC; 

2.    requirements relating to disclosure of inside information (e.g. by the issuer);

3.    safe harbours and exceptions for legitimate behaviours;

4.    requirements on market participants for prevention, detection, and disruption of market abuse;

5.    requirements for market abuse related systems and controls; and

6.    a requirement for trading platforms to engage in information sharing to aid in deterring and disrupting cross-platform market abuse.

The FCA expects that the activity of operating a CATP will be brought within the scope of the RAO. This classification would enable the FCA to require CATPs that are regulated entities to take prescribed actions to limit market abuse. 

Offences / prohibitions under MARC

The FCA expects the market abuse prohibitions for cryptoassets in future legislation to be introduced by the Treasury to mirror those in UK MAR, and that the FCA will be granted powers to take action against such behaviours, including:

-    insider dealing; 

-    unlawful disclosure of inside information; and 

-    market manipulation.

The FCA also expects the government to base the definitions of such activities on the definitions used in the existing market abuse regime.

Inside information

The Discussion Paper notes that in traditional finance, the responsibility to publicly disclose inside information (i.e. information which is precise, non-public, relating directly or indirectly to one or more issuers or financial instruments and which, if it were made public, would be likely to have a significant effect on the prices of those instruments) typically falls to the issuer. 

However, the FCA highlights three key challenges to adopting this approach for cryptoasset markets:

1.    some cryptoassets have no easily identifiable issuer (e.g. Bitcoin);

2.    the likely nature of inside information relating to cryptoassets would differ from that relating to traditional financial instruments; and

3.    a non-issuer (e.g. a CATP) may admit a cryptoasset to trading without the issuer’s request or consent—such non-issuer may not have access to the same level of information as the issuer themselves. 

In light of such issues, the FCA proposes that, as a starting point, issuers who request admission to a CATP for their cryptoasset will be responsible for publicly disclosing relevant inside information.  Where the issuer is not identifiable or where a cryptoasset is admitted in the absence of the issuer’s request or consent, the responsibility will fall to the person who had sought admission to trading of the cryptoasset – the FCA considers that such person is likely to be the CATP itself. In such cases, the responsibility should be limited to inside information (i) which directly concerns the relevant person, and (ii) which the person is reasonably aware of.

The FCA further proposes that guidance can be issued to clarify what constitutes “inside information” in cryptoasset markets, and what information requires public dissemination. 

Additional disclosure requirements

The requirement in MARC to disseminate inside information is intended to complement the A&D regime relating to the production of admission documents, in order to provide consumers with sufficient disclosure to make informed decisions. The FCA notes that it would consider whether ongoing disclosures are required after a cryptoasset is admitted to trading. In particular, it welcomes feedback on further types of regulated information (i.e. beyond admission documents and inside information) which may need to be disclosed on an ongoing basis. This would be similar to the requirement for disclosure of financial reports under the FCA’s existing regime for securities.

Channels for disseminating inside information

In the Discussion Paper, the FCA notes that it welcomes industry views on the most effective industry-led method for disseminating inside information to the public in a manner that will reach “as wide a public as possible, and as close to simultaneously as possible”. Specifically, the FCA is considering the following approaches:

1.    Creating bespoke crypto PIP(s): This option involves the creation of a centralized body to coordinate the effort to set up and operate crypto primary information provider(s) (PIP(s)). Such crypto PIP(s) would be developed and maintained by industry, and could function on a 24/7 basis to accommodate the nature of cryptoasset markets. In contrast with traditional finance PIPs, crypto PIP(s) would not involve central regulatory oversight but would be industry-led instead (i.e. industry participants would be responsible for verifying and disseminating relevant information). 

2.    Using existing PIP(s): This option involves using PIPs designed for traditional finance markets which are currently required by the FCA to operate during set hours (7am to 6:30pm). The industry could explore whether the existing infrastructure could accommodate the cryptoasset market’s 24/7 operation and trading. 

3.    Publication on website and “active” dissemination: The FCA is considering whether it is possible to achieve a method of disseminating inside information via market participants’ publishing inside information on websites, as well as actively disseminating information via the media (including social media) to ensure widespread circulation of such information.

The FCA highlights its role in supporting industry development of solutions to facilitate the timely dissemination of inside information, and welcomes feedback from industry on which approach outlined above may be preferred, or if there are alternative solutions that the FCA should be considering.

Safe harbours and exceptions for legitimate behaviour

The FCA proposes that, in terms of the key principles that safe harbours should meet, safe harbours should be:

-    only considered if the outcome of the application of the safe harbour would support market function or financial stability;

-    designed to minimize harm to consumers; and

-    specific to a well-defined activity and, ideally, be time-limited.

The FCA further proposes that some existing concepts under the UK MAR may be adapted for the purposes of MARC. For example, there are parallels between share buybacks (which are exempt from market abuse prohibitions) and legitimate coin burning practices. Another example of an existing safe harbour that could conceptually be transferred from UK MAR is that of delaying inside information about liquidity issues by a credit or financial institution, where such disclosure would pose financial stability risks. In the context of regulated stablecoins, a safe harbour may be developed for delaying disclosures of shortfalls in backing asset.

The Discussion Paper further mentions other novel issues being examined by the FCA in relation to cryptoasset markets, including Maximal Extractable Value (MEV), and where non-issuer persons seek admission of cryptoassets (e.g. how such persons may use the safe harbours).

Systems and controls

The proposed MARC would introduce obligations on CATPs and intermediaries to implement systems and controls in order to prevent, detect, and disrupt market abuse on their platforms. The FCA proposes an outcome-based approach, accounting for the size and scale of the CATPs and intermediaries’ activities. The types of systems and controls expected to be implemented by a firm would depend on whether the firm is a CATP or an intermediary, and would also depend on the business model of the particular firm.

Crucially, the FCA’s approach puts a particular emphasis on firm-level systems and controls as the primary method for addressing cryptoasset market abuse. In contrast with the existing market abuse regulatory framework for financial instruments, the FCA does not envision playing a central role in the receipt and assessment of Suspicious Transactions and Orders Reports (STORs). Instead, as suggested in the government consultation, CATPs will be responsible for determining whether STORs (or an equivalent reporting regime) can be deployed for their platform and then used by intermediaries to report instances of suspicious transactions to the relevant CATPs. CATPs would then investigate suspected instances of market abuse and take action under their own rules. 

This approach does not preclude authorised CATPs and intermediaries from reporting major incidents to the FCA, or for the FCA to take direct action where appropriate. The FCA also reminds firms of the obligations under Principle 11 of the FCA Handbook to disclose information relating to the firm of which the FCA would reasonably expect notice, as well as other reporting obligations (e.g. under money laundering rules).

Further areas which the FCA is seeking input on in relation to systems and controls include:

-    Insider lists: The FCA considers that in some cases where there is a concentration of insider dealing risk, it may be appropriate to require implementation of higher controls (in the form of insider lists) to allow for better management and controlled access to inside information, and tracking of individuals with access to inside information.

-    Managers’ transactions: The FCA considers that persons discharging managerial responsibilities (PDMRs) for an issuer or person seeking admission of cryptoassets to a regulated CATP would likely have access to inside information, which may be exploited for unfair market gains. Under MARC, a requirement (similar to existing rules under UK MAR) may be introduced in relation to recording and publicly disclosing PDMR transactions.

-    On-chain monitoring: The Discussion Paper highlights the importance of monitoring on-chain activity in relation to cryptoasset markets. While it would be disproportionate to expect firms to scan all on-chain activity relating to a cryptoasset, the FCA notes its intention to ensure supervised firms can and do rely on on-chain monitoring where appropriate (e.g. where suspicious user activity involves transfers to private wallet addresses). This would involve high-level rules that set out an expectation for CATPs and intermediaries to maintain on-chain monitoring capabilities and be able to show that such capabilities are proportionate to their business activities.

Information sharing

The Discussion Paper highlights how cross-platform information sharing can be used to address market abuse occurring across CATPs, as well as help the UK align with international standards (i.e. the IOSCO Policy Recommendations). 

While the FCA does not propose to establish an FCA-operated cross-platform information sharing mechanism for CATPs, it encourages information sharing through private-to-private, industry-led mechanisms (which may include adopting RegTech solutions).

The Discussion Paper further describes a number of different operating models for cross-platform information sharing mechanisms, which vary in levels of centralization, and how much industry-wide coordination would be required—the FCA welcomes feedback on such proposals.