Last month, HM Treasury (HMT) published a consultation and call for evidence regarding the future financial services regulatory regime for cryptoassets (the Consultation) which closes on 30 April. By seeking to establish a regulatory framework for cryptoassets in the UK, HMT is pursuing four overarching policy objectives:
- encourage growth, innovation, and competition in the UK,
- enable consumers to make well-informed decisions, with a clear understanding of the risks involved,
- protect UK financial stability, and
- protect UK market integrity.
Some types of cryptoassets already fall within the UK regulatory regime as they qualify as “specified investments”. Security tokens which provide rights and obligations akin to shares, debt instruments or other securities are specified investments under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Security tokens are already within scope of the UK regulatory regime and firms carrying on specified activities involving security tokens need to ensure they have correct permissions and follow the relevant rules and requirements. In addition, the government will shortly introduce legislation providing for the regulation of promotions of cryptoassets by the FCA to ensure promotions are clear, fair and not misleading.
HMT intends to continue to pursue a phased approach to regulating cryptoassets, prioritised according to the areas of greatest risk and opportunity.
This briefing provides a high-level summary of the Consultation.
Phase 1: Stablecoins used for payments
The Financial Services & Markets Bill (FSMB) will introduce a regime that will allow for the regulation of fiat-backed stablecoins which are used for payments, similar to that for other payment methods. “Fiat-backed stablecoins” are expected to include stablecoins that seek to maintain a stabilised value of the cryptoasset by reference to, and which may include the holding of, one or more specified fiat currencies.
The regime will:
- Bring Digital Settlement Assets (DSA) into the regulatory perimeter for systemic payment systems and service providers (to fall under BoE remit where they are systemically important). There are currently no systemically important DSA systems so this would only be triggered were the system or service provider to meet relevant thresholds.
- Enable HMT to bring activities such as issuance and custody of fiat-backed stablecoins into reg permitter via a statutory instrument (this will fall under the FCA’s remit).
- Enable HMT to establish via statutory instrument a mechanism for facilitating dual regulation to fall under the remit of the FCA, BoE and PSR.
- Make a range of specific amendments to the Electronic Money Regulations 2011 and Payment Services Regulations 2017 to ensure the regime can be applied effectively (including when fiat-backed stablecoins are used in retail payments activities).
The intention of this legislation is to focus on the regulation of issuers, custodians and payment service providers for fiat-backed stablecoins, reflecting their specific risks, benefits and potential use cases. It does not capture exchange or trading activities in respect of stablecoins (which are not covered in the Consultation).
Phase 2: Cryptoassets (high priority)
Phase 2 will focus on targeting the areas of cryptoasset activity associated with (i) a higher degree of risk from a consumer and overall market perspective and (ii) greater opportunities to support the UK’s growth agenda. Not all cryptoasset activities will form part of Phase 2.
For the purpose of activities in Phase 2 and subsequent phases, HMT proposes to capture cryptoasset activities provided in or into the United Kingdom. This would capture activities provided by UK firms to persons based in the UK or overseas, as well as those provided by overseas firms to UK persons. Whether overseas firms will need to have a physical presence in the UK is being considered and their decision will be informed by the FCA’s existing framework for international firms and based on the nature and scale of the firm’s activities and the risks of harms the activities could cause.
The scope of activities that are to be regulated in Phase 2 include, for example:
- making a public offer of a cryptoassets;
- operating a cryptoasset trading venue that supports:
- the exchange of cryptoassets for other cryptoassets,
- the exchange of cryptoassets for fiat currency, and
- the exchange of cryptoassets for other assets (eg commodities);
- certain investment management services such as dealing in cryptoassets, arranging (bringing about) deals in cryptoassets and making arrangements with a view to transactions in cryptoassets;
- operating a cryptoasset lending platform; and
- safeguarding or safeguarding and administering (or arranging the same) a cryptoasset other than a fiatbacked stablecoin and / or means of access to the cryptoasset (eg a wallet or cryptographic key) (custody).
Future phases: Cryptoassets (medium priority)
The future phases of the work that HMT proposes will depend on market evolution. Some of the activities the Consultation proposes to regulate in the future phase include, for example:
- advising on and managing cryptoassets, to the extent this is not already covered,
- post-trade activities in cryptoassets, to the extent this is not already covered, and
- mining or validating transactions, or operating a node on a blockchain.
The government is proposing a cryptoasset market abuse regime based on elements of the existing Market Abuse Regime. The offences under this new regime would apply to all persons committing market abuse in respect of a cryptoasset that is admitted to trading on a UK trading venue. This will apply regardless of where the person is based or where the trading takes place. It would entail obligations for certain market participations, in particular cryptoasset trading venues who would be expected to detect, deter, and disrupt market abusive behaviours.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, March 2023