UK crypto regulation – update in light of HM Treasury’s Response

03 Nov 2023, 56 mins ago

On 30 October 2023, HM Treasury published its response to the 1 February 2023 consultation and call for evidence.

The UK crypto regulatory landscape is currently in a state of flux.

However, some stability could be on the horizon. On 1 February 2023, HM Treasury published a long-awaited consultation paper setting out plans for the UK to regulate crypto and protect consumers. 

Earlier in the year, we wrote a blog entitled “UK crypto regulation – what changes does the recent HM Treasury Consultation Paper suggest lie ahead for UK crypto regulation”.

On 30 October 2023, HM Treasury published its response to the 1 February 2023 consultation and call for evidence.

In this blog we examine the 30 October 2023 response.

Overview

Firms looking to launch cryptoassets, or products connected to cryptoassets, in the UK will need to continuously monitor the current UK regulatory landscape and consider the latest developments. 

This could include establishing whether Financial Conduct Authority (“FCA”) authorisation is required, as well as considering the potential applicability of anti-money laundering (“AML”) and data protection regulations, relating to intellectual property and consumer advertising.

Current UK regulatory position

In various previous blogs, including What is the current state of crypto regulation in the UK and What changes can we expect to UK crypto regulation, Gherson Solicitor LPP’s criminal litigation, investigations and regulatory team have outlined the current state of UK crypto regulation.

Gherson LLP’s criminal litigation, regulatory and investigations team have also previously written a blog entitled Non-fungible token (NFT) Regulation in the UK and a blog entitled Stablecoin regulation in the UK

However, there is also a potential new regulation to consider. 

13 key takeaways re-examined in light of the response

In our previous blog, we set out 13 key potential takeaways in light of the 1 February 2023 Consultation Paper.

We now re-examine some of these in light of the 30 October 2023 Response.

Broadly, it is not surprising to see that HM Treasury are planning to take forward their proposed approach.

However, there are some nuances that are worth noting.

1. A broad definition of cryptoassets will be used

The 1 February 2023 Consultation Paper

The cryptoassets that could be subject to financial services regulation in the future, where they are being used for financial services activities, include the following: exchange tokens, utility tokens, security tokens, non-fungible tokens, stable coins and asset-referenced tokens.

In fact, the proposed definition of cryptoassets is very similar to the definition of “cryptoasset” in the EU’s Markets in Cryptoassets legislation (“MiCA”).

The 30 October 2023 Response

As a general principle, the government’s intention is that cryptoassets not being used for one of the regulated activities (in Table 4A of the Consultation) within financial markets or used as financial services instruments should fall outside the future financial services regulatory regime.

Likewise, the government does not intend to capture cryptoassets which are specified investments that are already regulated (including but not limited to security tokens).

2.The regulation of cryptoassets will be established under the current UK framework

The 1 February 2023 Consultation Paper

The Government intends to include the financial services of cryptoassets within the regulatory framework established by the UK’s Financial Services and Markets Act 2000 (FSMA).

The Government plans to expand the list of “specified investments” in Part III of the Financial Services and Markets 2000 (Regulated Activities) Order 2001 (“RAO”) to include cryptoassets.

The 30 October 2023 Response

The Government intends to proceed as proposed in the Consultation. As such, the government will expand the list of “specified investments” in Part III of FSMA and will therefore require firms undertaking relevant activities, involving cryptoassets, to be authorised.

Likewise, the government does not plan to extend the definition of “financial instruments” in Part 1 to include presently unregulated cryptoassets.

However, regarding the FSMA authorisation process, the new regime will be broader in scope than the current MLR registration regime and will include new aspects of regulatory compliance. The FCA will provide more detail in due course.

As such, firms that are already licensed with the FCA under the Money Laundering Regulations will not automatically be granted FCA authorisation.

3. Ultimately, a simplified scheme is envisaged

The 1 February 2023 Consultation Paper

The consultation paper suggests that bringing crypto firms within the regulated perimeter of FSMA and amending the geographical scope would enable authorities to operate a single register and to align to better protect consumers. This would support supervisory and enforcement processes.

4. The territorial scope will be broad(er)

The 1 February 2023 Consultation Paper

As such, HM Treasury proposes to capture cryptoasset activities provided in, or to the United Kingdom.

Therefore, the geographic scope of cryptoasset activities carried out “in the United Kingdom” will include not just UK activities to UK customers but overseas activities carried out to UK customer (but not overseas activities to overseas customers).

This is, arguably, explicitly broader than the current scope and perhaps reflects the borderless nature of cryptoasset transactions and the underlying technology.

The 30 October 2023 Response

By and large, the government intends to implement the territorial scope of the future regulatory regime as proposed in the Consultation. As such, authorisation will generally be granted to those undertaking one of the regulated activities, by way of business, and are providing a service in or to the UK.

5. The financial crime regulatory standards will be broader

The 1 February 2023 Consultation Paper

When the broader cryptoasset regime becomes effective, HM Treasury expects firms undertaking regulated cryptoasset activities to adhere to the same financial crime standards and rules under FSMA that apply to equivalent or similar traditional financial services activities. 

These rules are broader than the rules currently applicable in certain circumstances under the relevant Money Laundering Regulations and include other aspects of financial crime (such as bribery, corruption and fraud).

6. A disclosure regime will established

The 1 February 2023 Consultation Paper

The Government proposes to establish an issuance and disclosure regime for cryptoassets grounded in the intended reform of the UK prospectus regime.

The 30 October 2023 Response

In general, the government intends to take forward the proposed approach and is of the view that there should be disclosure documents in place for all cryptoassets which are made available for trading on a UK cryptoasset trading venue, which would include well established tokens.

7. A market abuse regulation is proposed

The 1 February 2023 Consultation Paper

The Government is proposing a cryptoasset market abuse regulation based on elements of the regulatory regimes for financial instruments. 

The offence of market abuse would apply to all persons committing market abuse in respect of a cryptoasset that is requested to be admitted to a UK trading venue. This will apply regardless of where the person is based, or where the trading takes place. 

Obligations would be imposed on certain market participants, in particular, cryptoasset trading venues, to detect, deter and disrupt market abuse behaviour.

The 30 October 2023 Response

The Government intends to take forward most aspects of the approach set out previously, including the suggested scope of the regime, the regulated trigger points, and the use of MAR as the basis for the regime, and the prohibitions (covering insider dealing, market manipulation and unlawful disclosure of insider information).  The obligations will apply to cryptoasset trading venues and other regulated market participants.

8. The Government proposes to bring an extensive list of cryptoasset activities into the regulatory perimeter

These include issuance activities, payment activities, exchange activities, investment and risk management activities, lending borrowing and leveraging, safeguarding and/or administration (custody) activities as well as validation and governance activities.

Therefore:

9. Public offerings of cryptoassets will be regulated

The 1 February 2023 Consultation Paper

The Government considers that public offerings of cryptoassets (including ICOs), where a fund raises new token and sells them to investors, may meet the definition of a security offering.

The 30 October 2023 Response

The Government intends to take forward the proposed approach, including the basis for the regime and trigger points. The government’s view is that there should be disclosure documents in place for all cryptoassets which are made available for trading on a UK cryptoasset trading venue.

10. Cryptoasset trading venue operation will be regulated

The 1 February 2023 Consultation Paper

The Government is proposing to establish a regulatory framework based on existing activities of regulated trading venues.

The 30 October 2023 Response

The Government intends to take forward the proposed approach but reiterates the need to take into consideration specific characteristics and risks.

11. Cryptoasset intermediation activities will be regulated

The 1 February 2023 Consultation Paper

The Government proposes that requirements applying to analogous regulated activities – such as “arranging deals in investments” and “making arrangements with a view to transactions in investments” set out in article 25 of the RAO – would be used and adopted for cryptoasset market intermediation activities.

The 30 October 2023 Response

The Government intends to define a set of new regulated activities relating to the intermediation of cryptoassets.

12. Providing custodian services will be regulated

The 1 February 2023 Consultation Paper

The Government is proposing to apply and adapt existing frameworks for traditional finance custodians under Article 40 of the RAO for cryptoasset custody activities, making suitable modifications to accommodate unique cryptoasset features, or putting in place new provisions.

The 30 October 2023 Response

The Government will legislate to define a new regulated activity for custody covering the safeguarding, safeguarding and administration, or the arranging of safeguarding or safeguarding and administration, of a cryptoasset.

13. Crypto lending will be regulated

The 1 February 2023 Consultation Paper

Regarding the regulation of cryptoasset lending and borrowing activities, the Government is proposing to apply and adopt existing RAO activities, while making suitable modifications to accommodate unique cryptoasset features.

The 30 October 2023 Response

The Government intends to take forward the approach outlined in the Consultation, including the proposal to establish a newly defined regulated activity of “operating a cryptoasset lending platform”.   

How Gherson can assist

Gherson LLP’s white-collar crime and regulatory team are able to provide advice and assistance with AML, regulatory and sanctions compliance, including in situations involving cryptoassets

Additionally, the team has recently started a series of blogs on the regulation of crypto, with the aim of advising those who work in the compliance domain of this sector. In addition, for those who would like advice on relevant issues, including those who have had issues with the FCA registration process, our specialist regulatory and compliance team can guide individuals and companies through the process.

Please do not hesitate to contact us for further advice, send us an e-mail, or, alternatively, follow us on Twitter, Facebook, or LinkedIn to stay up-to-date.

The information in this blog is for general information purposes only and does not purport to be comprehensive or to provide legal advice. Whilst every effort is made to ensure the information and law is current as of the date of publication it should be stressed that, due to the passage of time, this does not necessarily reflect the present legal position. Gherson accepts no responsibility for loss which may arise from accessing or reliance on information contained in this blog. For formal advice on the current law please do not hesitate to contact Gherson. Legal advice is only provided pursuant to a written agreement, identified as such, and signed by the client and by or on behalf of Gherson.

©Gherson 2023