UK Treasury Unveils Latest Plans To Regulate Cryptoassets

The latest proposals, published on 1 February 2023, mark the next stage in the government’s plans to regulate digital assets and lay out its vision to put UK financial services centre stage of cryptoasset innovation. So, what is the government proposing and how will its plans affect crypto firms and aspiring traders?

Current Landscape

HM Treasury wants the UK’s financial services sector to lead innovation in the cryptoasset space while proactively managing the risks to end-users and market stability. The proposals also consider recent events, including the collapse of FTX, which the government argue highlights the need for effective regulatory oversight.

After a roller-coaster year, the global market capitalization of cryptocurrencies is now less than $1 trillion, a 75% fall from its $3 trillion valuation in November 2021. Yet participation in the crypto space continues to grow. 5%-10% of British adults now own cryptocurrencies, representing a 100% increase over the last two years. There has also been an uptick among traditional financial services firms and large banks, with an increase in execution, brokerage, market making, and custody activities, among others.

Ultimately, the view of the UK government “is that cryptoassets and the activities underpinning their use should follow the standards expected of other similar financial services activities, commensurate to the risks they pose, while harnessing potential benefits of the technology behind them.”

Objectives

HM Treasury has four key objectives in its efforts to develop an effective regulatory framework for cryptoassets in the UK:

  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

Underpinning these objectives are several core design principles: “same risk, same regulatory outcome”, “proportionate and focused”, and “agile and flexible”.

Approach

The UK’s economic and finance ministry is taking a phased approach to regulating the cryptoasset industry:

  1. Phase 1 will see the introduction of a regime that will enable the regulation of fiat-backed stablecoins to facilitate payments, covering GBP as a minimum, and following earlier announcements made in 2022.
  2. Phase 2 will encompass a wider range of activities, including online trading and investing.

Essentially, the plan is to bring cryptoassets within the remit of the UK financial services regulatory regime. To do so, the UK government will amend the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) – identifying several activities that will be regulated in the future.

Activities that will fall within regulatory crosshairs include investment, lending through leverage, issuance, payment, and exchange. Governance activities, validation, and safeguarding processes will also be covered.

The government also plans to bring in new rules that will oversee the promotions of crypto products, including ensuring that adverts are “clear, fair and not misleading”. Until this happens, HM Treasury is providing a temporary exemption that allows firms to approve their own promotions.

Importantly, trading firms, including crypto exchanges, will take on more responsibility for defining admission requirements and disclosure documents.

The Consultation will close on 30 April 2023. The government will then review the feedback received.

Scope

The Consultation is primarily concerned with the regulatory framework for cryptoassets within financial services, not the use of distributed ledger technology more broadly or the application of cryptoassets outside of financial services.

Portfolio management and cryptoasset investment advice will not fall within the planned scope of the regulation.

It is also worth highlighting that the proposals will cover activities provided “in or to the United Kingdom”. So firms based abroad may still be subject to the requirements if they offer services to British consumers.

Looking Ahead

The proposals follows in the footsteps of similar actions taken elsewhere, including the EU Markets in Crypto-Assets (MiCA) regulation introduced in 2022. Several global organizations, including the Financial Stability Board (FSB), the International Organization of Securities Commissions (IOSCO), and the Financial Action Task Force (FATF), are also building international standards for various elements of crypto regulations.

The UK government and its chief regulators are taking other steps to tackle the challenges and risks posed by the crypto market too. In January 2020, the Anti-Money Laundering and Counter Terrorist Finance (AML/CTF) registration regime was established for firms engaged in cryptoasset exchange or custody wallet activities.

Yet whether these initiatives will foster an environment where cryptoasset providers can prosper while giving consumers sufficient visibility of the risks remains unclear.

In the interim, we expect retail investors will remain wary about buying and storing cryptos on centralized exchanges like FTX. Instead, aspiring traders may turn to crypto brokers, which have a track record of serving retail investors and offer derivative products like CFD crypto trading.

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