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On 1 February, HM Treasury (HMT) published its proposals for the future financial services regulatory regime for cryptoassets. It comes after recent major collapses of some of the world’s biggest digital asset exchanges.
While work has begun to regulate certain types of cryptoassets – namely stablecoins – recent failures and associated crypto market turbulence have reinforced the government’s view that it needs to go further and establish a proportionate, clear regulatory framework that will allow firms to innovate at a rapid pace, while maintaining financial stability and consumer protection.
As part of its proposals, the HMT therefore intends to create a range of new regulated or dedicated activities tailored to the cryptoasset market where these activities seek to mirror – or closely resemble – the regulated activities carried out in traditional financial services, for example by including a centralized cryptoasset exchange under financial services regulation , as well as activities such as custodianship, lending, trading in cryptoassets as principal or agent, and contracting cryptoasset deals.
Regulatory activity
Moreover, it is activity carried out by cryptoasset companies that will be regulated, not just cryptoassets. Therefore, tokens that are currently outside the regulatory perimeter – such as NFTs and utility tokens – would have the potential to be included in the future regulatory perimeter, depending on the nature of the activity conducted in relation to them.
When a person engages in these newly regulated activities in a business sense, they are expected to be authorized by the FCA before carrying out those activities. In particular, the HMT recognizes that many crypto-asset businesses are located offshore and therefore the proposals include capturing “crypto-asset activities provided in the United Kingdom or in the UK” to cover those activities provided by UK firms to persons based in the UK or abroad, as well as those provided by overseas firms to persons from the United Kingdom.
This would likely fill a gap that would otherwise exist if only those activities carried out in the UK were in scope, and helps avoid a situation where firms move offshore to avoid UK regulation.
Vertically integrated business models offering multiple cryptoasset services would be expected to be authorized for each regulated activity and to follow the rules relevant to each activity. HMT emphasized that some business models can combine a number of regulated activities that can present conflicts of interest as well as complex risk profiles, citing the recent collapses of cryptoasset exchanges as examples. As with traditional financial institutions with multiple services and lines of business, HMT is considering subjecting vertically integrated business models to similar prudential and conduct regulation that may require firms to ensure certain functions are segregated.
Data sharing
Given the lack of transparency in cryptoasset markets, HMT also proposes requiring venues to keep – and make available at all times – accurate and comprehensive data related to trading on their exchanges that could be valuable for both market abuse and monitoring of systemic risk.
The proposals also include the establishment of an issue and disclosure regime for cryptoassets, broadly following the principles of the intended reform of the UK prospectus regime – The Public Offer and Admission to Trading Regime.
In relation to cryptoasset exchanges, the HMT proposes to establish a regulatory framework based on existing regulated activities in respect of regulated trading venues, including the operation of the Multilateral Trading Facility, to ensure orderly, open and resilient trading conditions for cryptoasset trading. places that have transparent operating rules and adequate systems and controls to minimize the risk of further cryptoasset exchange collapses.
Although the government maintains its strong ambitions to strengthen the UK’s position as a world leader in FinTech, through the announced proposals, it is clear that the UK will only welcome those companies that can meet high regulatory standards.
If cryptoasset companies are to thrive, they need to secure the trust of institutional investors and consumers, and as such, the government’s announcement is a welcome move in an attempt to bring order to the cryptoasset sector and encourage innovation, while protecting consumers and securing the market. stability.
Sushil Kuner, Gowling WLG
For a more detailed analysis of the United Kingdom’s proposal, see Analysis by Mark Arulia here.
Regulatory Financial Services EMEA
