It looks like Crypto is here to stay
By Michelle Bailey
The UK government has published a consultation paper for cryptoasset regulation. Its aim is to strengthen consumers’ confidence, meaning more will invest in the UK for the long term and stimulate growth and innovation in the sector.
HM Treasury expect than when this consultation becomes policy, the current Financial Services and Markets Act 2000 (FSMA) rules and financial crime standards that apply to traditional financial activities will also apply to firms who undertake regulated cryptoasset activities. The government’s intention is to include the regulation of cryptoassets under the existing FSMA framework (certain types of cryptoassets may already fall under this regulatory perimeter).
FSMA defines cryptoassets as:
“cryptoasset” means any cryptographically secured digital representation of value or contractual rights that—
(a) can be transferred, stored or traded electronically, and
(b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology).”
This definition is very similar to EU’s Markets in Cryptoassets legislation (“MiCA”) (click here for previous blog)
There are four main policy objectives.
1. Encourage growth, innovation, and competition in the UK.
2. Enable consumers to make well-informed decisions, with a clear understanding of the risks involved.
3. Protect UK financial stability.
4. Protect UK market integrity.
Whats in scope?- High level
‘Issuance activities- (Chapter 5)
Admitting a cryptoasset to a cryptoasset trading venue.
Making a public offer of a cryptoasset.’
The venue will be responsible for creating more detailed document disclosure documents. Liability for the documents will lay with the trading venue or issuer.
‘Exchange activities- (Chapter 6)
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).’
Cryptoasset trading venues will be regulated under the Regulated Activities Order (RAO) therefore authorisation will be required. Firms and Individuals carrying out these activities would be subject to prudential and conduct rules, and various other requirements. This venue should be treated much the same as and in line with the operation of an MTF, where at a minimum, venues should have clear fee schedules and be open and fair.
The consultation is quite clear:
“FTX’s failure has underscored important questions around conflicts of interest, market conduct and operational resilience. It has also demonstrated that integrated business models – currently prevalent across the ecosystem – can result in complex and sometimes reinforcing risk profiles. Mitigating these risks will require a combination of robust prudential safeguards, operational risk controls, transparency and data reporting, arrangements, measures to manage conflicts of interest, good, governance and adequate record keeping.”
Sound familiar?
‘Investment and risk management activities- (Chapter 7)
Dealing in cryptoassets as principal or agent.
Arranging (bringing about) deals in cryptoassets.
Making arrangements with a view to transactions in cryptoassets.’
In line with traditional financial markets, again conditions must be clear and fair for all with processes and systems in place to detect market abuse. A market abuse regime is also a part of the consultation process as with traditional finance. As such, primary responsibility would be on the trading venues, including maintaining insider lists and submitting STORs.
‘Lending, borrowing and leverage activities- (Chapter 10)
Operating a cryptoasset lending platform.’
Platforms must operate risk warnings that are adequate for consumers so that they are aware that they could lose money. There must be adequate wind-down processes and they must have sufficient financial capital and liquidity.
‘Safeguarding and/or administration (custody) activities- (Chapter 8)
Safeguarding or safeguarding and administering (or arranging the same) a cryptoasset other than a fiat backed stablecoin and/or means of access to the cryptoasset (custody).’
Should insolvency occur, custodians must have adequate arrangements to ensure funds can be returned to consumers and that significant harm will not occur.
Who does it apply to?
HM Treasury’s proposal will capture cryptoasset activities provided in or to the United Kingdom. This includes activities provided from UK firms to overseas persons. It also includes overseas firms’ activities provided to UK persons.
The FSMA-based review will look at a broader range of measures, therefore firms already registered under the Money Laundering Regime will also need to seek authorisation under the new FSMA regime.
When will this come in effect?
Consultation closes in April 2023, after which HM Treasury intends to implement a phased approach, prioritising the areas of greatest risk and opportunity.
As it stands right now the government will be shortly issuing legislation for the regulation by the FCA of promotions of cryptoassets. Furthermore, the Financial Services and Markets Bill 2022 (FS&M Bill) introduces a regime that will allow for the regulation of fiat-backed stablecoins the scope of which is expected to cover, at a minimum, GBP and other fiat-backed stablecoins which are issued in the UK. In addition, a range of specific amendments will be made to the Electronic Money Regulations (EMRs) and Payment Services Regulations 2017 (PSRs). Digital Settlement Assets (DSAs) will also have a regulatory remit under The Bank of England and the Payment Systems Regulator (PSR). The cryptocurrency market has remained broadly unregulated and inconsistent; however, we can see that this is rapidly about to change.
We would encourage firms operating in this field to start considering their obligations and any submission of authorisation applications that may be to come.
*Click here for full consultation paper
Whatever your view on crypto, like the internet it’s probably not going anywhere for a while. Shapes First has experience with supporting clients in the Crypto sector to achieve registration with the FCA under the money laundering regulations and has experience with the full authorisation processes. If you need help, get in touch.
