What changes does the recent HM Treasury Consultation Paper suggest lie ahead for UK crypto regulation.
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.
The consultation closed on 30 April 2023.
This insight examines the potential indications this gives for the future of UK crypto regulation.
Overview
Firms looking to launch cryptoassets, or products connected to cryptoassets, in the UK will need to continuously consider the current UK regulatory landscape.
This could include whether Financial Conduct Authority (“FCA”) authorisation is required and a potential consideration of anti-money laundering (“AML”) regulations, data protection regulations, intellectual property issues and the rules relating to 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 LPP’s criminal litigation, investigations and regulatory team outlined the current state of UK crypto regulation.
Gherson’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 potential new regulation to consider.
1 February 2023 Consultation and call for evidence – 13 key takeaways
On 1 February 2023, HM Treasury launched a consultation paper with the aim of ultimately setting regulation going forwards.
With an eye on incoming regulation, this latest blog will examine what this consultation paper tells us about the future of UK crypto regulation and what the 13 key potential takeaways are.
1. A broad definition of cryptoassets will be used
The cryptoassets that could in the future be subject to financial services regulation (where being used for financial services activities), including 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”).
2. The regulation of cryptoassets will be established under the current UK framework
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.
3. Ultimately, a simplified scheme is envisaged
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 would align to better protect consumers. This would support supervisory and enforcement processes.
4. The territorial scope will be broad(er)
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.
5. The financial crime regulatory standards will be broader
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 and corruption and fraud).
6. A disclosure regime will be established
The Government proposes to establish an issuance and disclosure regime for cryptoassets grounded in the intended reform of the UK prospectus regime.
7. A market abuse regime is proposed
The Government is proposing a cryptoasset market abuse regime based on elements of the regimes for financial instruments.
The offence of market abuse would apply to all persons committing market abuse on a cryptoasset that is requested to be admitted on 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.
8. The Government proposes to bring a wide 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 and validation and governance activities.
Therefore:
9. Public offerings of cryptoassets will be regulated
The Government considers that public offerings of cryptoassets (including ICOs), where a fund raises new tokens and sells them to investors, may meet the definition of a security offering.
10. Operating a cryptoasset trading venue will be regulated
The Government is proposing to establish a regulatory framework based on existing activities of regulated trading venues.
11. Cryptoasset intermediation activities will be regulated
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.
12. Providing custodian services will be regulated
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 cryptoasses feature, or putting in place new provisions.
13. Crypto lending will be regulated
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.
Gherson’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 on the regulation of crypto, with the aim of advising those who work in the compliance 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.
If you would like to discuss any of the above with a qualified expert, please contact us or send us an e-mail or, alternatively, follow us on Twitter, Facebook, Instagram, 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