The United Kingdom, until now, has been slower than the European Union in formulating a robust regulatory framework for crypto assets. Nonetheless, with the forthcoming Financial Services and Markets Bill (FSMB), which is expected to be passed into law by spring, the UK is making concerted efforts to bridge this gap.
The new legislation will significantly enhance the regulatory powers of the HM Treasury (HMT) by extending the scope of financial services regulations to include crypto assets. In early February, the HMT released its much-anticipated consultation paper discussing an extensive regulatory framework for crypto assets, excluding fiat-referenced stablecoins.
Crypto Asset Activities Regulation
This recent consultation forms a crucial part of the UK’s regulatory strategy, aiming to broaden the regulatory perspective beyond stablecoins, which were the primary focus of a previous January 2021 consultation. The current consultation also aligns with other proposals included in the FSMB, especially the introduction of a regime to regulate “digital settlement assets.” These are defined as fiat-supported stablecoins used for payment purposes, highlighting the government’s intent to streamline and strengthen the regulatory environment for digital currencies.
Lately, HMT has proposed a variety of new regulated activities related to crypto assets. This means firms engaging in these activities will have to seek authorization (or exemption) under the Financial Services and Markets Act 2000 (FSMA) to operate legally in (or into) the UK.
The proposed activities bear a strong resemblance to the regulated activities under the existing FSMA framework, but the inclusion of unique crypto asset activities demonstrates the proactive approach of the UK regulatory bodies in keeping up with the dynamic nature of the crypto asset market.
HMT is also considering employing the new “designated activities regime” (DAR), to be introduced under the FSMB, as a regulatory tool for certain crypto asset activities, especially where licensing requirements may not necessarily be applicable. HMT’s proposals, in many ways similar to MiCA, include a comprehensive system for the issuance, offering, and admission to trading of crypto assets. The definition of a “crypto asset,” as provided by the FSMB, is very broad. HMT might introduce specific exclusions from this definition for the purposes of the new regulatory framework, but it has yet to provide detailed information on this.
Phase 2 of Crypto Asset Regulation
The implementation of this new regulatory framework forms part of the “Phase 2” of the UK’s phased approach to crypto asset regulation. Phase 1 involved the implementation of the digital settlement assets system for regulating fiat-backed stablecoins. Once the FSMB receives Royal Assent (expected in Q2 2023), HMT will be able to enact secondary legislation detailing the system.
The regulatory changes include new rules for financial promotions related to crypto assets, and ongoing discussions about the introduction of a central bank digital currency (CBDC) in both the UK and EU. Both jurisdictions are also implementing FATF (Financial Action Task Force) Recommendation 16, also known as the “travel rule,” which necessitates that crypto asset transfers must be accompanied by certain identifiable information on the sender and recipient.
