The government has confirmed its proposals for cryptoasset regulation in the UK, including its intention to bring a number of cryptoasset activities into the regulatory perimeter for financial services. Legislation setting out the new proposed regulations are due to be laid in 2024.
The key takeaways from the government’s plan (link) include:
1. Expansion of Regulatory Perimeter:
- Digital assets activities will be regulated within the scope of the Financial Services Markets Act 2023 (FSMA), expanding the list of “specified investments” in Part III of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2011 (ROA).
- Firms undertaking relevant activities involving cryptoassets are to be authorised by the FCA under Part 4A of the FSMA.
- Registration with the FCA under Money Laundering regulations (MLR) alone will not suffice and crypto firms already registered as part of the MLR process will need to be assessed against the wider range of measures.
2. Broad definition of cryptoasset
The broad definition of a cryptoasset (set out in the FSMA) captures all current types of cryptoassets and seeks to ensure the government has the power to regulate even cryptoassets that may exist in the future.
3. Regulated activities
Regulations require a person or business to be authorised by the FCA under Part 4A of the FSMA if: (1) they are undertaking one of the regulated activities; (2) by way of business; and (3) they are providing a service in or to the UK. As such, the territorial scope of the proposed regulations is far reaching and it captures regulated activities of crypto businesses both in and to the UK.
Regulated activities are:
- Issuance activities - admitting a cryptoasset to a cryptoasset trading venue or making a public offer of a cryptoasset.
- Exchange activities - operating a cryptoasset trading venue which supports: (i) the exchange of cryptoassets for other cryptoassets (ii) the exchange of cryptoassets for fiat currency (iii) the exchange of cryptoassets for other assets (e.g. commodities).
- Investment and risk management activities - dealing in cryptoassets as principal or agent, arranging (bringing about) deals in cryptoassets, making arrangements with a view to transactions in cryptoassets, making arrangements with a view to transactions in cryptoassets.
- Lending, borrowing and leverage activities - operating a cryptoasset lending platform.
- Safeguarding or custody activities - safeguarding or administering (or arranging the same) a cryptoasset other than a fiat-backed stablecoin and/or means of access to the cryptoasset (custody) (e.g., a wallet or private key).
The new proposed regime will not capture activities relating to cryptoassets which are specified investments that are already regulated, such as security tokens. These assets will remain regulated by their existing regulatory regimes.
Non-Fungible Tokens (NFTs) are considered more akin to digital collectibles or artwork than a financial services product. Regulation will depend on whether a token is used for one of the regulated activities.
4. Disclosure Regime to be established for cryptoassets
Disclosure documents should be in place for all cryptoassets which are made for trading on a UK trading venue. This will ensure a consistent, minimum standard of information to consumers for all tokens used from activities within the regulatory perimeter. Exemptions are expected to include such things as offers of free cryptoassets (such as via an airdrop).
5. Intermediation activities regulations to be adapted for cryptoassets
- Requirements applying to analogous regulated activities, including arranging deals in investments, would be used and adapted for cryptoasset market intermediation activities.
- A new set of regulated activities will also be set out relating to the intermediation of cryptoassets drawing on analogous activities in the existing regulatory perimeter.
6. Market Abuse Regulations for cryptoassets
The Market Abuse Regulations (MAR) applicable to financial instruments will form the basis of a MAR regime for cryptoassets and it will include prohibitions on insider dealing, market manipulation and unlawful disclosure of inside information.
The creation of cryptoassets regulations regime within the financial services regulatory perimeter will provide greater protection and transparency to end users and will impact crypto businesses carrying out activities both in and to the UK. By embracing innovation while implementing robust oversight, the government seeks to position the UK as a crypto-friendly jurisdiction. As technology advances expand at a rapid rate, time will tell to what extent any new regulations foster innovation and are able to adapt to future technological advances in digital assets.
Further information
For more information about the topics raised in this blog, please contact Felicity Potter.
