Reed Smith In-depth

On 1 February 2023, the UK Treasury published a consultation and call for evidence titled “Future financial services regulatory regime for cryptoassets” (the Consultation). The proposals outlined in the Consultation build on prior discussion papers, consultation papers, policy statements and guidance notes issued by various UK bodies in discrete areas of cryptoasset regulation. The Consultation is the most comprehensive set of proposals for the regulation of cryptoasset activities issued by the UK government to date, and seeks to achieve broad alignment with the UK’s approach to regulating traditional financial services.

The proposed new framework will supplement and build upon initial, more specifically targeted UK regulatory initiatives relating to cryptoassets, including the Financial Conduct Authority’s (FCA) anti-money laundering and counter-terrorist financing (AML/CTF) registration regime for cryptoasset businesses,1 the extension of the financial promotion regime to promotions of certain cryptoassets, and the proposed regulatory regime for fiat-backed stablecoins to be introduced via the Financial Services and Markets Bill 2022 (FS&M Bill), which is currently going through Parliament.

The Consultation acknowledges the need to introduce a risk-appropriate regulatory framework for cryptoasset activities, notably in light of recent events that have led to increased volatility in the cryptoasset sector and a decline in cryptoasset market capitalisation. However, the Consultation strikes a notably upbeat tone and emphasises the sector’s potential for technological innovation and growth. The proposals therefore represent a significant step in positioning the UK as a globally competitive cryptoasset hub.

The Consultation will close on 30 April 2023 at 9am. Taking account of the Consultation feedback, the Treasury is then expected to issue secondary legislation to formalise the cryptoasset regulatory framework under the Financial Services and Markets Act 2000 (FSMA) as amended by the FS&M Bill. This will be followed by FCA consultations on supplementary regulatory rules and guidance. In due course, depending on how the cryptoasset markets evolve, the UK government may launch a further phase of rulemaking to capture broader activities such as the trading of and investment in cryptoassets.

Scope of proposed regulation

Consistent with the definitions used in the FS&M Bill and other frameworks such as the European Union’s Markets in Crypto Assets Regulation and the Financial Action Task Force’s AML/CTF standards for virtual asset service providers, the Consultation proposes a broad and technology-neutral definition of “cryptoasset”. Specifically, a cryptoasset is defined as any cryptographically secured digital representation of value or contractual rights that (a) can be transferred, stored or traded electronically, and (b) uses technology supporting the recording or storage of data (which may include distributed ledger technology, although the definition is agnostic as to the technology used). Specific parts of the UK regulatory framework may use narrower definitions where required to capture or exclude certain subsets of asset (e.g., certain rules on payment systems may relate only to digital assets used for settlement of payments).

This broad definition may capture specified regulated activities relating to a range of asset types, including in particular exchange tokens, utility tokens, security tokens, non-fungible tokens (NFTs), stablecoins, asset-referenced tokens, commodity-linked tokens, crypto-backed tokens, algorithmic tokens, governance tokens and fan tokens. Relevant subsidiary legislation under FSMA will be amended to designate cryptoassets as a “specified investment”; correspondingly, persons carrying on specified activities in relation to cryptoassets by way of business will require authorisation under FSMA.