UK to legislate for cryptoasset regulatory regime

In the UK, cryptoasset providers are currently subject to limited financial services regulation, specifically anti-money laundering requirements and recently introduced new rules regarding financial promotions. However, on Monday, the UK Treasury said (94-page / 880KB PDF) that firms wishing to undertake activities involving cryptoassets will, in future, be required to obtain an authorisation to do so from the Financial Conduct Authority (FCA), where those activities are by way of business and the firms are providing a service in or to the UK.

The government does not intend to create a bespoke regulatory regime for cryptoassets. Instead, it said it will regulate certain cryptoassets by bringing them within the definition of ‘specified investments’, which are considered regulated assets under existing rules. The detail of the regulatory requirements will be set by the FCA, using its rule-making powers. The government hopes to lay the secondary legislation needed to develop the new regulatory regime in 2024, subject to parliamentary time.

Jonathan Cavill of Pinsent Masons, who is an expert in financial regulation, said: “Recent regulation and scrutiny by the FCA of crypto marketing suggests the crypto industry may find it challenging to keep pace with the UK regulator’s expectations, and coupled with the consumer duty, crypto business investment may not be as forthcoming as Westminster may hope.”

“It is unlikely that crypto regulation will be easily shoe-horned into the existing regulatory framework. Time, money and thought will need to be given on how this can be achieved quickly. The reality is that as the market develops at pace, the UK runs the risk of being left behind if it fails to attract crypto businesses,” he said.

“The government and the FCA must work together to balance competing objectives. Regulatory relaxation will be required to genuinely entice businesses to the UK, but not so loose as to facilitate poor customer outcomes and, at worse, growing financial crime,” he added.

Hannah Ross, who also specialises in financial regulation at Pinsent Masons, said: “The government’s approach is broadly in sync with the EU’s, which already in June started deploying the world's first set of comprehensive rules specifically for cryptoasset markets. This has attracted crypto firms to set up bases within the EU, so there’s a question as to whether the UK’s slower start will be too late for some existing crypto firms.”

Before legislation is laid to provide for general regulation of cryptoassets in UK financial services, the Treasury has confirmed it will table regulations “as soon as possible and by early 2024, subject to available parliamentary time” to provide for a new regulatory framework for fiat currency-backed stablecoins (21-page / 142KB PDF).

Stablecoins are digital assets created with minimal price volatility in mind. They aim to achieve this either by backing the stablecoin with collateral, such as an asset or basket of assets or by using gold or a fiat currency, or doing so algorithmically so that issue and redemption of the token matches demand. 

The Treasury announced last year that it will update UK law to bring acts of issuing or facilitating the use of stablecoins as a means of payment within the UK financial services ‘regulatory perimeter’, citing the potential of stablecoins to “become a widespread means of payment including by retail customers” as the reason for the move.

In its latest paper, the Treasury said activities relating to other forms of stablecoin, such as so-called algorithmic stablecoins, and commodity-backed tokens, will be brought in scope of the UK’s new broader cryptoasset regulatory regime at a later date.

A further paper published by the Treasury on Monday confirmed its plans to legislate to address risks that could arise from the failure of systemic ‘digital settlement asset’ providers – including those issuing stablecoins.

Hannah Ross said: “Further FCA authorisation of crypto firms is only part of the puzzle and there is a lot of information in these three publications for crypto firms to digest. Whilst they do so, the FCA will likely be considering how best it will – following future legislative changes – apply its high-level principles and rules to cryptoassets, and potentially create a specific FCA rulebook for this industry.”

“Astute crypto firms should start thinking how the FCA’s Principles for Business, including the new consumer duty, might impact the products they design and introduce to the UK market,” she said.