In brief

Following its February 2023 consultation and call for evidence on a future financial services regulatory regime for cryptoassets, HM Treasury issued its policy statement on the wider cryptoasset regulatory regime on 30 October 2023. The policy update was published alongside a flurry of publications on the regulation of cryptoasset services, including interlinked policy documents covering regulation of fiat-backed stablecoins and the failure of systemic digital settlement asset (DSA) firms. This briefing covers the so-called “Phase 2” regulation of wider cryptoasset activities.

For more information on the stablecoin regime and the failure of systemic DSA firms, see our dedicated alert issued alongside this one: United Kingdom: The future of UK stablecoin regulation – Treasury and regulators provide more detail on approach.

Key takeaways

• The Treasury’s policy statement largely confirms that it intends to implement the proposals consulted on in February 2023 – moving to a FSMA-style authorisation regime of crypto activities and bringing a significant proportion of crypto related activities fully in-scope of FCA authorisation requirements. For background and detail on the Treasury’s initial proposals in its consultation, see our client alert from earlier this year.
• It is helpful that there is further clarity on the intended outcomes for non-fungible tokens (NFTs), utility tokens, security tokens and other data objects or ‘things’ that were previously thought could be unintentionally captured by the new regime. However, there remains some uncertainty as to how NFTs and utility tokens will be treated, as their regulatory treatment will ultimately depend on how they are used, and ultimately firms will still need to analyse their characteristics given that they have not been entirely excluded from the future regulatory regime.
• No grandfathering is expected to be available for FCA-authorised firms or firms registered for money laundering requirements under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs). In particular, FSMA authorised firms will need to submit a Variation of Permission (VoP) application to include the relevant cryptoasset services in their scope of permissions, while MLR-registered firms will need to go through the full authorisation process.
• It is important to note that the Treasury has confirmed that it does not intend to extend the overseas persons exclusion (OPE) to cryptoasset activities – therefore imposing stricter territoriality requirements on cryptoasset firms. The current policy position as articulated by the government is that firms providing cryptoasset services directly to retail customers in the UK should be subject to regulation, wherever they are located. The position is currently unclear as to whether any exemptions may be applicable in relation to non-retail customers. Overseas firms that rely on the cross-border provision of services to remain out of scope of the regulatory perimeter should take note of developments in this regard and consider whether to reassess their business models.
• There will, however, be an equivalence regime for market access in the future and some time-limited ability to access overseas liquidity pools before this regime is in place – what this access looks like and whether it will require e.g., authorised branches in the UK remains unclear.
• Disclosure requirements will apply to offers of cryptoassets to the public and when cryptoassets are admitted to trading venues. The content of these disclosures is to be determined by the trading venues themselves, although some centralisation and agreement are encouraged.
• It is clear that the final regime and applicable rules will require significant work from the FCA to map across existing concepts to cryptoasset rules. The government seems to envisage relying heavily on FCA rulemaking and guidance as part of the regime – in line with the post-Brexit regulatory trajectory toward requirements being set out in more agile regulatory rules as part of the Smarter Regulatory Framework.
• Finally, market abuse rules will apply to cryptoassets. Whilst the FCA acknowledges that an implementation/transition period will be needed to lay out and effect these requirements, it intends to take forward the proposals to apply rules based on the Market Abuse Regulations (MAR) to cryptoassets, which will apply to cryptoasset trading venues and other regulated market participants.

We consider these issues in our briefing.

Click here to access the full alert.