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Crypto Assets on the Regulatory Net

Crypto Assets on the Regulatory Net

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Following the EU, the UK is also trying to provide a safer environment for investors with regulations.

Cryptocurrencies were largely created to exist outside of institutional intermediaries. Indeed, Bitcoin's founding document describes it as an electronic payment system based on cryptographic proof rather than trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party. However, many people still interact with cryptocurrency through institutions, not peer-to-peer. This intersection of cryptocurrencies and financial services companies is also attracting the attention of regulatory authorities, as traditional finance companies are also increasingly interested in crypto. The role of governments in this story is an ongoing philosophical debate within the cryptocurrency markets. A common question for many investors is: "To what extent will crypto exchanges be regulated and what will be done about it?"

In particular, the liquidity problem at the FTX exchange and the company's bankruptcy filing further fueled the crisis of confidence among investors. Naturally, the collapses in cryptocurrency exchanges caused great concern among investors. Especially in the crypto market, a lot of manipulative behavior, information pollution and irregularities have been and continue to be to the detriment of investors. Investors who entered the crypto market with the desire to make quick-easy money started to look for ways to protect their earnings as a result of the increasing risks.

In order to prevent victimization on cryptocurrency exchanges, regulatory authorities have started preparing a series of reports and bills in favor of investors. In October, the Financial Stability Board (FSB), an international organization established by the G20 member states to monitor and advise the global financial system, published a detailed report on the Regulation, Supervision and Oversight of Crypto Asset Activities and Markets. The report underlines the need for the existence of a global crypto regulation, underlining the need to envision a model for decentralized finance by renewing old policies or creating a completely new system. The report includes proposals to the group's financial officials and central bankers, digital currencies, stablecoins and a set of rules for companies serving the new financial sector.

UK Accelerates the Process

UK's new Prime Minister Rishi Sunak's recent statements about the cryptocurrency market and how countries should approach these markets made a lot of noise. Soon after the statements, news started to come from the UK about the regulations and their purposes. These state-imposed regulations seem to be a beacon of hope for investors in the hazy atmosphere caused by the successive collapses in cryptocurrency exchanges in recent days.

One of the new regulations was made regarding the advertisements prepared by cryptocurrency exchanges to attract investors to their exchanges. The "Financial Services and Markets Bill", enacted on October 4, 2022, will potentially expand existing rules that prevent the promotion or provision of financial services by unauthorized intermediaries. This power will now extend to cryptographically secured representations of value and rights using distributed ledger technology, such as Bitcoin.

According to Sarah Pritchard, Chief Markets Officer of the Financial Conduct Authority (FCA), the biggest indication that regulation is necessary is the need for plain information, free from misleading statements about sectoral risks, so that investors can invest in a safe environment. Thus, investors will be able to make the best decisions on their behalf and shape their investments in an informed environment. Pritchard emphasizes that in order to create this atmosphere of trust, it is necessary to restrict crypto advertisements and prevent financial services provided by unauthorized intermediaries.

EU Paves the Way for Crypto Assets

In parallel with the UK, the European Union (EU) has also issued new regulations on this issue. On June 30, the Markets in Crypto Assets (MICA) Regulation, the draft of which was adopted by the EU Parliament, will soon be put to a vote in the parliament, while the final law will be implemented 12 to 18 months after its publication in the EU Official Journal. This regulation, which will facilitate the crypto asset market, will strengthen the supervision mechanism and provide a safer environment for investors. Crypto service providers (including wallet providers, crypto asset trading platforms, crypto exchanges, price currencies, etc.) will now need a license and will be monitored by a financial regulator from one of the EU members states. Just to apply for a license (which will require authorization from national regulators), it will be necessary to have an EU-based legal entity, such as a company or a formal partnership.

MICA also imposes certain rules on the obligation to prepare and publish whitepapers. Crypto asset issuers will be required to prepare a clear and fair crypto assets whitepaper containing all the information about a particular crypto asset. The governing body will be required to meet the members' integrity standards and misleading market communications by crypto asset issuers will be prohibited.

This new regulation will cover all crypto assets that are not currently covered by existing financial services legislation. These range from stablecoins issued for payments to utility tokens that provide access to a service. It divides these crypto assets into three categories: asset referenced tokens (ARTs), e-money tokens (EMTs) and other crypto assets (the "catch-all" category). As a result, with this regulation, the EU has joined the ranks of regulators aiming for a regulatory framework that supports the crypto asset market. Thus, while benefiting from the potential of innovation and crypto assets, at the same time, financial stability and investor protection will be ensured and a direct contribution will be made to the creation of an environment of trust. It is eagerly awaited to see how other countries will follow this path and what kind of regulations they will make.

By Onur Kucuk, Managing Partner, Ezgi Anasiz, Associate, Berk Recber and Selen Torun Trainees, KP Law

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