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  • L Higgins and S Pettigrove

UK responds to consultation on crypto-assets regulation

His Majesty's Treasury (HMT) has further detailed its proposals for a future financial services regulatory regime for cryptoassets in the UK. The "Future financial services regulatory regime for cryptoassets" consultation paper response represents a forward-thinking approach to the regulation of this rapidly evolving sector. HMT has stated that firms wishing to undertake activities involving cryptoassets will, in future, be required to obtain an authorisation from the Financial Conduct Authority (FCA) where firms are providing a service in or to the UK.

HMT's commitment to furthering regulatory clarity is apparent from its detailed response to the February 2023 consultation paper and call for evidence. The majority of submissions in response to the initial consultation paper in February expressed support for its proposals, signaling a widespread consensus on the need for a well-regulated cryptoasset sector in the UK.

Key points from HMT's response include:

  1. Regulated Activities and Tokens: HMT provides a clear demarcation between "phase 1" and "phase 2" activities and tokens, as outlined in the separate Stablecoins Update policy paper. "Phase 1" of HMT's regulatory action plan will deal with the regulation of fiat-backed stablecoins, whereas "phase 2" will deal the other activities related to cryptoassets.

  2. Non-Fungible Tokens (NFTs): HMT acknowledges the unique nature of NFTs and non-fungible assets, ensuring that they are not inadvertently included in the regulatory framework. The response affirms that the intended regulatory framework is not designed to encompass activities involving cryptoassets categorised as specified investments, which are already subject to regulation, such as security tokens. Similarly, it excludes activities connected to genuinely unique NFTs or NFTs that bear greater resemblance to digital collectibles or artwork rather than conventional financial services or products.

  3. Retail Trading and Investment: HMT firmly rejected the idea of categorising retail trading of unbacked cryptoassets as gambling.

  4. Facilitating Liquidity: HMT acknowledges the need to mitigate potential fragmentation of cryptoasset liquidity and aims to enable access to international liquidity pools under specific circumstances, with the intention of promoting a more liquid and efficient market.

  5. Issuance and Disclosures: HMT notes that recklessness and negligence liability standards will enable market participants to manage their liability provided they make reasonable enquiries.

  6. Market Abuse Obligations: HMT acknowledges the complexity of market abuse obligations on crypto exchanges and is considering a staggered implementation to ensure a smooth transition, benefiting both market participants and regulators.

  7. Staking: HMT outlines its strategic direction and the roadmap for addressing staking, aiming to shape the government's perspective on essential queries and deliver regulatory transparency to the industry in a swift manner. HMT highlights the initiation of an engagement initiative with external stakeholders, aimed at providing valuable insights and input for this endeavour.

Unlike the EU's MiCA regime, the world's first set of comprehensive cryptoasset market rules, HMT does not intend to create a bespoke regulatory regime for cryptoassets, instead opting to regulate cryptoassets and cryptoasset activities by bringing them within the definition of "specified investments" which are considered regulated assets under existing financial services laws in the UK. It will then seek to tailor existing regulations to the unique features of digital assets.

HMT also published two stablecoins-related papers in late-October. The "Managing the failure of systemic digital settlement asset (including stablecoin) firms" paper confirmed the UK's plans to legislate to address risks that may arise from the failure of "digital settlement assets" such as stablecoins. On the other hand, the "Update on Plans for the Regulation of Fiat-backed Stablecoins" paper provided an update on the HMT's legislative approach for bringing fiat-backed stablecoins into the UK's regulatory perimeter for financial services (as part of its phase 1 regulatory plan).

The thorough and thoughtful approach to blockchain regulation proposed by HMT is another positive step toward establishing a robust regulatory framework for crypto-assets in the UK, aimed at fostering innovation and safeguarding financial stability. The importance of striking the right balance cannot be overstated as we navigate this transformative era of digital finance. With a focus on clarity, responsibility, and consumer protection, the UK is blazing a trail for other jurisdictions to follow by seeking to harness the benefits of Web3 while mitigating consumer harms.

Written by Michael Bacina, Steven Pettigrove and Luke Higgins


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