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On 1 February 2023, HM Treasury (HMT) launched its consultation and call for evidence, which included a proposal for a wider regulatory framework for cryptoassets – expanding the UK framework beyond just current financial crime regulation. The consultation – which ends on 30 April 2023 – is a very welcome step by the UK Government.
The news came on the same day that HMT announced an update to its approach to the crypto-asset financial promotion regime. You can read the full analysis of it here.
To understand more about what the proposals could mean for financial services and crypto businesses in the UK, Elliptic’s Mark Aruliah sat down with two legal experts to get their views.
Charles Kerrigan & Christine Deng, CMS
The proposals seek to deliver on the ambition to put the UK financial services sector at the forefront of digital asset technology and innovation and create the conditions for cryptoasset services to operate and grow in the UK, while managing potential consumer and stability risks.
Some key takeaway suggestions include:
- The government’s intention to include the regulation of cryptoasset financial services in the regulatory framework established by the Financial Services and Markets Act (FSMA) (paragraph 2.6).
- Placing funds for digital settlement – ​​i.e. stablecoins such as Tether and USD Coin – to the jurisdiction of the Bank of England (paragraph 3.12).
- The Financial Conduct Authority (FCA) regime that will apply to fiat-backed stablecoins, which will be defined in a statutory instrument expected to be in place in the first half of 2023 (paragraph 3.13).
- For the issuance and publication of cryptoassets, follow a similar approach to that for securities, i.e. apply the regulation when the asset is accepted for trading at a regulated crypto asset trading venue (paragraph 5.2). Under securities law, this could mean that cryptoassets issued to the public must have an approved prospectus and meet certain disclosure requirements (paragraph 5.1).
- In terms of investor protection, it is not the government’s intention that FSCS protections apply to investor losses arising from exposure to cryptoassets (paragraph 2.5).
- Greater responsibility on trading venues – such as crypto exchanges – to define and detail document requirements for receipt and disclosure (paragraph 5.11).
- Regarding decentralized finance (DeFi), it is noted that typical systems of regulation of financial services – which usually rely on the authorization and supervision of individuals and firms undertaking certain activities – can be difficult to implement. In this area, the help of international organizations is suggested (Chapter 11).
- Contrary to earlier speculations, the Government has decided no to propose a complete ban on algorithmic stablecoins (paragraph 4.24).
- Once the crypto regulations come into force, crypto market players will be required to re-register, even if they have previously done so under the FCA licensing regime (paragraph 3.9).
The rules will cover crypto firms UK or those providing services in the UK. It would be for the FCA to decide whether a foreign operator needs a physical presence in the UK (paragraph 4.8).
Separately, the Treasury introduced a “time-limited exemption” that will allow crypto-asset businesses registered with the UK financial regulator under its anti-money laundering regime to issue their own promotions while the industry waits for new rules.
https://cms.law/en/gbr/
James Burnie, gunnercook
HM Treasury’s “Future Financial Services Regulatory Regime for Cryptoassets: Consultation and Call for Evidence” is a welcome step forward for the cryptoasset industry, in terms of creating a defined framework for the ecosystem.
Importantly, it sees UK regulators starting to get the right tools to do their role properly, rather than being constrained by a framework designed primarily to fight money laundering rather than to ensure high standards of business.
The consultation addresses a range of specific activities, including cryptoasset issuance and disclosure, cryptoasset trading venues, cryptoasset brokerage activities, cryptoasset custody and cryptoasset lending platforms, as well as addressing more general topics such as market abuse, DeFi and sustainability.
As expected, the proposals are influenced by traditional financial (TradFi) principles, and that in itself is not a bad thing – many of the issues surrounding FTX would have been avoided if it had been run according to traditional financial principles.
However, the complexity will be in relation to cryptoasset models that challenge the assumptions of TradFi. For example, client asset and client money rules assume multiple record-keeping, and this may be redundant in a cryptoasset setting.
Considering this dynamic, the starting point “same risk, same regulatory outcome” raises an interesting question whether the web3 solution creates a better regulatory outcome than traditional finance, whether it should lead to greater control and change in traditional regulatory methods.
What will be important to the success of any new regime in the UK will be debated by those involved in the industry on a day-to-day basis, and those wishing to take part should note that there is a deadline to respond to the consultation in April. 30. 2023.
https://gunnercooke.com/
We at Elliptic’s GPRG team are always happy to communicate with clients about our understanding of these and other crypto-related regulations. Email mark.aruliah@elliptic.co.
Financial Services EMEA Regulators and Government
