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Article United Kingdom: Government Publishes Regulation of Cryptoassets Consultation

As part of its continued moves to regulate cryptoassets, the government of the United Kingdom (U.K.) has published an 82-page consultation paper seeking public opinion on its plans to regulate cryptoasset activities. The consultation paper states that it “focuses specifically on the future UK regulatory framework for cryptoassets used within financial services, rather than the wider application of distributed ledger technology (DLT) in financial services or the use of cryptoassets outside financial services.”

The Financial Services and Markets Bill, which is currently progressing through Parliament, would define the term cryptoasset broadly 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).”

The consultation presents key features of the proposed regimes, with the cryptoasset activities the government proposes to regulate set out in seven different categories: issuance, payment, exchange and custody activities, investment and risk management activities, lending, borrowing and leverage activities, and validation and governance activities. The government intends to regulate these in phases. Phase one, which is contained in the Financial Services and Markets Bill, includes:

  • The issuance and redemption of fiat-backed stablecoins.
  • The use of fiat-backed stablecoins as payment transactions or remittances.
  • Safeguarding or safeguarding and administering a fiat-backed stablecoin. (Consultation Paper Table 4.A.)

Phase 2 includes:

  • The admission of cryptoassets to cryptoasset trading venues.
  • Public offers of cryptoassets.
  • The operation of a cryptoasset trading venue using existing activities specified in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).
  • The operations of a crypto lending venue.
  • Dealing in cryptoassets as a principal or agency.
  • Arranging deals involving cryptoassets.
  • Making arrangements for transactions in cryptoassets.
  • Safeguarding or safeguarding and administering a cryptoasset that is not a fiat-backed stablecoin. (Table 4.A.)

Mining or validating transactions and operating a node on a blockchain will be included in a future phase of regulation. (Table 4.A.)

HM Treasury has stated that it intends to regulate these activities by including cryptoassets within the list of specified investments in the RAO. It does not intend to expand the definition of “financial instrument” in the RAO to include cryptoassets “due to the limitations of retrofitting an existing regime to a new asset class with unique features and risks.” It would require firms that are already authorized under the Financial Services and Markets Act 2000 to apply for a variation of their regulatory permission for newly regulated cryptoasset activity. (Consultation Paper para. 4.4.)

The proposed safeguards for cryptoassets are similar or equivalent to traditional financial instruments, such as market manipulation practices. The government has also proposed that cryptoasset disclosures and issuance be regulated on a similar basis to that currently in place for securities where regulations are applied “when the asset is admitted to trading on a regulated cryptoasset trading venue and therefore becomes exchangeable for fiat currency, or subject to a public offer.” (Para. 5.2.) These will be “tailored to the specific attributes of cryptoassets.” (Para. 5.5.)

As currently proposed, phase two would apply the regulatory perimeter to “cryptoasset activities provided in or to the United Kingdom.” This broad jurisdictional application was proposed due to the frequency that U.K. consumers access cryptoasset products and services from overseas companies and to prevent U.K. companies from moving offshore to avoid the U.K. regulations while continuing to serve customers located there. (Para. 4.5.)

The aim of the government in regulating these assets is to provide confidence, clarity, and regulatory certainty to both consumers and businesses, stimulate growth and innovation in the industry and the U.K. economy, and protect the financial stability of the U.K. and the integrity of its markets. The government has noted that its approach intends to mitigate the most significant risks posed by cryptoassets while taking advantage of the benefits these assets provide. The government has stated that while cryptoassets are an emerging new asset class for investment, they, along with the underlying technology “have the potential to disrupt various parts of traditional finance. Further, this continues to be a very volatile sector, with cryptoasset price volatility significantly exceeding that of many traditional asset classes, such as equities or commodities. However; both retail and institutional participation in the sector continues to grow.”

The consultation paper notes that

[the government’s] objective is to establish a proportionate, clear regulatory framework which enables firms to innovate at pace, while maintaining financial stability and clear regulatory standards. This includes a proposal to bring centralised cryptoasset exchanges into financial services regulation for the first time, as well as other core activities like custody and lending.

The government also plans to introduce legislation in response to a previous consultation to address the “significant risk of misleading cryptoasset promotions.”

Clare Feikert-Ahalt, Law Library of Congress
February 23, 2023

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Chicago citation style:

Feikert-Ahalt, Clare. United Kingdom: Government Publishes Regulation of Cryptoassets Consultation. 2023. Web Page. https://www.loc.gov/item/global-legal-monitor/2023-02-22/united-kingdom-government-publishes-regulation-of-cryptoassets-consultation/.

APA citation style:

Feikert-Ahalt, C. (2023) United Kingdom: Government Publishes Regulation of Cryptoassets Consultation. [Web Page] Retrieved from the Library of Congress, https://www.loc.gov/item/global-legal-monitor/2023-02-22/united-kingdom-government-publishes-regulation-of-cryptoassets-consultation/.

MLA citation style:

Feikert-Ahalt, Clare. United Kingdom: Government Publishes Regulation of Cryptoassets Consultation. 2023. Web Page. Retrieved from the Library of Congress, <www.loc.gov/item/global-legal-monitor/2023-02-22/united-kingdom-government-publishes-regulation-of-cryptoassets-consultation/>.