Clifford Chance

The UK Treasury has today released its consultation on the future financial services regime for cryptoassets, including a proposal for a cryptoasset market abuse regime.

The key elements of the resulting proposal are:

-Civil market abuse offences similar to those under MAR.

-Trading venues are required to establish systems and controls to prevent, detect and "disrupt" market abuse as well as to investigate and sanction market abuse, subject to FCA supervision.

-Persons professionally arranging or executing transactions required to establish systems and controls to prevent and detect abuse, subject to FCA supervision.

-All regulated firms undertaking cryptoasset activities are required to disclose inside information and maintain insider lists.

Whilst the Treasury acknowledges that abusive practices are widespread in cryptoasset markets (including significant evidence of manipulative practices including pump and dump, trash and cash, wash trading, spoofing and front running) the consultation paper is very realistic about the challenges of effectively policing that conduct. In particular, the Treasury concedes that the "highly globalised, fragmented, and borderless nature of cryptoasset markets" makes it difficult for any single jurisdiction to effectively address the risks and that there is, at present, no agreement between international regulators on how to divide up oversight.

The challenges are seen to be so great that the Treasury doesn't consider it possible, in the foreseeable future, to implement measures that would achieve market integrity or protect consumers to the same degree as in traditional markets for financial instruments. Whilst the Treasury's longer-term aspiration is that market prices should reflect genuine forces and should not be manipulated and that market participants should be able to trade in a fair and orderly environment, "even in the long run, it is unclear whether the same outcomes for market integrity and consumer protection that exist in traditional securities markets could realistically be achieved." Instead, Treasury aims for more modest objectives: in summary, markets should be structured in such a way as to prevent abuse, market participants should have a shared understanding of what constitutes unfair and abusive practices, and those practices should be capable of being sanctioned.

Notably, the proposal does not envisage the FCA taking enforcement action for cryptoasset market abuse in the same way as it does in traditional markets, apparently because the challenges of identifying, locating, and sanctioning market participants are considered to be too great. Instead, trading venues would be required to investigate suspected abuse on their markets and to sanction individuals, for example through the use of public blacklists. As is the case for traditional markets, the FCA would supervise systems and controls, with the possibility of enforcement action where those systems fall below-required standards. It is not clear, however, how trading venues will be expected, in carrying out their investigations, to deal with the same challenges which make it impractical for the FCA to investigate the offences itself.

The obligation on trading venues to "disrupt" market abuse appears to go beyond the equivalent obligation under MAR to prevent and detect abuse although it is not clear how disruption differs from prevention. The consultation indicates that it would be for venues to determine the appropriate methods of "disruption", subject to FCA supervision, but it is suggested that these could include Know Your Customer (KYC) requirements, public blacklists, order book surveillance, STORs, information sharing between trading venues, use of blockchain analytics and providing the means for ongoing disclosures of information to the market.

The proposed requirement that regulated firms identify and disclose cryptoasset inside information is also a departure from the MAR regime, which places the obligation on the issuer to identify and disclose inside information to the market. The Treasury's proposal reflects the concern that, in relation to cryptoassets, there may not be a clearly identifiable issuer that can be made responsible for controlling and disclosing inside information and that inside information may be more likely to be held and created by a wide range of entities other than an issuer. The proposed requirement is likely to present significant practical and conceptual challenges for the firms that would be required to comply with the disclosure obligation, both in terms of identifying and collating information which may constitute inside information and in forming judgments about whether the inside information definition is satisfied (and it remains to be seen whether the definition of inside information would be materially altered under this regime).

The consultation closes on 30 April 2023.