With the UK government launching a second phase consultation on the future of cryptoassets, Max Savoie and Martin Dowdall of Sidley Austin examine what this means for firms.
HM Treasury (HMT) published its consultation on the future financial services regulatory regime for cryptoassets on 1 February. This follows the April 2022 consultation on the regulation of fiat-linked stablecoins, referred to as phase one. The latest consultation proposes rules to regulate other categories of cryptoassets, referred to as phase two. This includes:
The UK is taking an iterative approach to the regulation of cryptoassets. This contrasts with the EU’s regulatory regime for cryptoassets under the Markets in Cryptoassets Regulation (MiCA), expected to be adopted during 2023. Although the UK proposals and MiCA overlap significantly, there are important differences.
Apart from authorisation requirements, in-scope firms would be subject to regulatory requirements on, among others, own funds, liquidity management, governance, operational resilience, data reporting, consumer protection, and conduct of business.
Firms already authorised under FSMA (such as banks and investment firms) intending to undertake cryptoasset activities would need to apply for a variation of permission, which will not be granted automatically. MiCA allows certain authorised firms, like banks, to conduct cryptoasset activities under their existing authorisations – albeit subject to other requirements.
Firms will need to carefully consider the impact of these proposals on their businesses. Those that provide services in the UK and the EU will need to consider how they will structure their organisation to comply with both the UK regime and MiCA.
The treasury’s consultation document notes that there is no universal definition of a cryptoasset, digital asset or virtual asset. However, to avoid future ambiguity, the treasury has proposed its own definition of a crypto asset.
As such, the consultation defines a cryptoasset as: “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 is a broad definition and means that a large range of cryptoassets that are currently unregulated will be brought within the scope of regulation for the first time.
The consultation provides the following non-exhaustive list of cryptoassets that could fall within regulation under phase two:
The scope of MiCA and the proposed UK regime differ.
MiCA imposes unique requirements on asset-referenced tokens (such as, in relation to establishing and managing reserves), whereas the UK proposal does not.
NFTs in principle fall within phase two, whereas they generally fall outside of MiCA.
Firms providing services in both the UK and EU will need to carefully consider whether they are in scope of both or just one of these regimes; and some may need to obtain UK and EU licences going forward.
The consultation proposes imposing authorisation requirements under phase two on, among others, the following types of activities relating to cryptoassets:
This will likely bring a broad range of currently unregulated businesses within the scope of regulation meaning such firms will need to be authorised to continue to provide these services.
The UK does not currently propose to regulate portfolio management or investment advice in relation to cryptoassets under phase one or two. This differs from the approach under MiCA which will regulate these services. Firms providing services in the UK and the EU will need to carefully consider which requirements apply to them in each jurisdiction.
The UK proposes to regulate cryptoasset activities provided “in or to” the UK. On this basis, non-UK providers would generally be subject to the new requirements where they provide services to UK customers from outside the UK.
HMT proposes an exemption for non-UK firms providing services to UK customers from outside the country on a reverse solicitation basis. However, it notes that any such exemption would be defined so as to prevent misuse and regulatory arbitrage, which suggests the exemption will be narrow.
The Treasury intends to pursue equivalence arrangements whereby firms authorised in other jurisdictions could provide services in the UK if the other jurisdictions have equivalent standards and cooperation mechanisms with the country.
HMT is also proposing to include other cryptoasset activities under the Designated Activity Regime (DAR). As such, and despite falling outside the authorisation regime, direct requirements, or even bans, could be imposed on firms conducting activities such as requiring that certain public offers of cryptoassets be conducted via a regulated trading platform.
On the same day as the consultation opened, HMT proposed to introduce an exemption to the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, which would allow some cryptoasset businesses to promote their own services. This would only apply to firms registered with the FCA under the UK Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (but not authorised under FSMA).
This exemption will apply until the UK’s broader cryptoasset regulatory regime is introduced.
The consultation on cryptoassets closes on 30 April. The Payment Association will be submitting a response and member firms can get involved by sharing their views with the head of policy, Riccardo Tordera.
Max Savoie is a partner and Martin Dowdall is a senior managing associate at Sidley Austin.
Log in to access complimentary passes or discounts and access exclusive content as part of your membership. An auto-login link will be sent directly to your email.
We use an auto-login link to ensure optimum security for your members hub. Simply enter your professional work e-mail address into the input area and you’ll receive a link to directly access your account.
Instead of using passwords, we e-mail you a link to log in to the site. This allows us to automatically verify you and apply member benefits based on your e-mail domain name.
Please click the button below which relates to the issue you’re having.
Sometimes our e-mails end up in spam. Make sure to check your spam folder for e-mails from The Payments Association
Most modern e-mail clients now separate e-mails into different tabs. For example, Outlook has an “Other” tab, and Gmail has tabs for different types of e-mails, such as promotional.
For security reasons the link will expire after 60 minutes. Try submitting the login form again and wait a few seconds for the e-mail to arrive.
The link will only work one time – once it’s been clicked, the link won’t log you in again. Instead, you’ll need to go back to the login screen and generate a new link.
Make sure you’re clicking the link on the most recent e-mail that’s been sent to you. We recommend deleting the e-mail once you’ve clicked the link.
Some security systems will automatically click on links in e-mails to check for phishing, malware, viruses and other malicious threats. If these have been clicked, it won’t work when you try to click on the link.
For security reasons, e-mail address changes can only be complete by your Member Engagement Manager. Please contact the team directly for further help.
