HM Treasury has proposed a comprehensive regulatory regime for firms engaging in certain cryptoasset activities. It is enabled by the addition of a new Clause 65 into the Financial Services and Markets Bill (FSMB), which will allow HM Treasury to expand the UK's regulated activities framework to encompass cryptoasset related activities.  This latest consultation on wider (non-stablecoin) cryptoassets builds on previous discussion papers and consultations, and complements other proposals in the FSMB to introduce a regime that will allow for the regulation of fiat-backed stablecoins which are used for payments (termed "Digital Settlement Assets").

Asset scope

Whilst there is still no universal definition of cryptoassets, consensus is gathering internationally on the basic elements for defining these novel assets. The UK's definition of cryptoasset has been drafted broadly so as to capture all current types of cryptoasset. The definition, which will be adaptable in future, is very similar to the definition of “cryptoasset” in the EU’s Markets in Cryptoassets legislation (“MiCA”), and also shares some features with the definition of “virtual asset” in the FATF’s recommendations. The consultation is not clear on the final scope of cryptoassets to be regulated. It says that a subset of cryptoassets will be in scope of different parts of the regulatory framework depending on the matter being regulated. For example NFTs may not be subject to financial promotion restrictions.

In any case, HM Treasury indicates it intends to add cryptoassets to the list of "specified investments" under the Financial Services and Markets Act 2000 (Regulated Activities Order) 2001 (the RAO). HM Treasury's consultation provides an indicative list of cryptoassets that would be in scope. Notably this covers among others: Exchange Tokens (e.g. BTC or ETH); Utility Tokens (cryptoassets which provide digital access to a specific service or application); certain Non-Fungible Tokens; Stablecoins; Governance Tokens, Fan Tokens.

To illustrate the widest possible scope of the cryptoassets definition, we have set out a comparison with other current definitions below.

Scope of Activities covered by the proposed UK regime

HM Treasury intends to create various new regulated activities or designated activities (under the new designated activities regime introduced under the FSMB) relating to cryptoassets. Many of these proposed activities mirror, or closely resemble, regulated activities under the existing FSMA regime, though are also some novel cryptoasset activities proposed.

The proposals include a regime for the issuance, offering and admission to trading of in-scope cryptoassets. The UK will establish an issuance and disclosures regime for cryptoassets grounded in the intended reform of the UK prospectus regime – the Public Offer and Admissions to Trading Regime – and tailored to the specific attributes of cryptoassets.

With respect to the risks of market manipulation and other forms of abuse, the government is proposing a cryptoassets market abuse regime based on elements of the Market Abuse Regulation for financial instruments, similar to the EU's approach in MiCA,.

Unlike MiCA, the UK's proposals also cover the operation of a platform that facilitates cryptoasset lending. Cryptoasset lending and borrowing activities conducted by lending platforms typically fall outside the current UK regulatory perimeter, so the government proposes to define a new regulated activity of ‘operating a cryptoasset lending platform’ to introduce a new regulatory regime around this activity. The UK already regulated electronic systems in relation to lending (so called peer to peer lending platforms) and so the inclusion of this activity would not be particularly novel.

With respect to cryptoasset services such as trading, brokerage, platform operation and custody, like MiCA, the UK will create an adapted version of the MiFID II regime for financial instruments. We have set out a comparison in the table below.

Cryptoasset promotions

On the promotion of cryptoassets, HM Treasury proposes to bring certain qualifying cryptoassets into the scope of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2005/1529) (the "FPO").  The effect of the rules would be that, unless they are exempt, businesses that intend to make financial promotions in relation to qualifying cryptoassets would need to have their promotions approved by an authorised person under the Financial Services and Markets Act 2000 (FSMA). Due to industry feedback, HM Treasury proposes to introduce a temporary exemption to Section 21 of FSMA, which will enable cryptoasset businesses such as cryptoasset exchange providers or custodian wallet provider, registered with the FCA (under Regulation 54(1A) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017), who are not otherwise FSMA-authorised persons, to communicate their own financial promotions in relation to qualifying cryptoassets.

Next steps

This consultation forms part of Phase 2 of the governments phased approach to cryptoasset regulation (Phase 1 being implementation of the Digital Settlement Assets proposals in the FSMB). Once the FSMB gains Royal Assent (expected in Q2 2023) HM Treasury will lay secondary legislation covering the detail of the regime. The FCA will then need to consult and make the wide range of relevant rules under its general rule making powers to bring the regulatory regime into operation. For example, the FCA may include principles in its rule book for admission and disclosure requirements that cryptoasset trading venues would then be responsible for administering. The FCA will also need to set minimum capital, liquidity and other relevant prudential requirements for firms within the new regime.

When the broader cryptoasset regulatory regime being consulted on becomes effective, HM Treasury will expect 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. The FCA will consider whether to update the Senior Management Arrangements, Systems and Controls sourcebook and other financial crime rules to apply to new cryptoasset activities.

Where the new cryptoasset regime involves the introduction of new regulated activities into the RAO, HM Treasury notes in the consultation that regulatory permissions would not be automatically granted for firms which are already authorised. This means that firms which are already FSMA-authorised and intend to undertake the activity will generally need to apply for a variation of their permission from the FCA (and the PRA for dual-regulated firms).

Whether firms carrying out these activities would be required to have a physical presence in the UK in order to obtain authorisation will be for the FCA to determine at the point at which firms apply for authorisation. This is expected to be informed by the FCA’s existing framework for international firms and based on the nature and scale of the firm’s activities and the risks of harms the activities could cause.

Once phases 1 and 2 of the government's approach to cryptoasset regulation are in place, future phases may cover further aspects to the extent they are not already covered. This includes post-trade activities, aspects of advising and managing, safeguarding and administration services for stablecoins, and validation and governance activities.

Authors: Diego Ballon Ossio, Monicah Sah, Laura Douglas and Sara Evans