By now you may have had the chance to review in greater detail the proposals published by HM Treasury on 1 February 2023 setting out the future direction of the UK’s regulatory framework for cryptoassets. If you haven’t you can read our summary here and our online briefing note here.
Many in the industry are now starting to look ahead and we set out below those actions that we expect industry participants to take in the coming weeks and months.
Conduct an impact assessment
The general consensus across the industry is that the measures are broader than was first anticipated, and the breadth of those measures means it is key for firms to conduct an initial impact assessment to see how their activities stack up against this newly defined regulatory framework. Firms will already have some experience of assessing where the regulatory perimeter stood with respect to activities relating to cryptoassets, particularly the need to seek registration under the UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 as amended (the MLRs). Under these proposals the perimeter will, however, be much extended. Firms who deal in cryptoassets – either on a proprietary basis or to execute orders for clients – will likely be in scope, as will those who custody cryptoassets for others. Operators of a centralised cryptoassets trading venue will fall in scope, and admitting cryptoassets to trading on a cryptoasset venue will also be caught. The perimeter then impacts market participants, intermediaries and market infrastructure providers.
Whilst the perimeter has shifted significantly, mining activities, validation activities, portfolio management and advisory services in relation to cryptoassets remain outside of scope, for now at least.
An important point to note is that the proposed measures would apply to firms undertaking these activities from the UK as well as those who aren’t based here but service UK-based clients. The geography of these measures then is significantly broader than the existing scope of the cryptoasset service provider regime under the MLRs, meaning firms need to assess the geographic implications of their client base and react accordingly.
Practically speaking, we recommend that firms begin examining their respective business lines now and tracking what those business lines do against the suite of proposed regulated activities, as well as examining what clients they serve here in the UK, such that they can determine if this new framework would apply to them.
Consider authorisation / registration plans
A consequence of the measures is that the existing cryptoassets service provider registration regime under the MLRs will fall away. As published, the measures do not have any grandfathering mechanisms – meaning firms registered as cryptoasset service providers will not automatically get to roll those registrations into an authorisation. There is also currently no mention of any transitional regime that would allow firms registered as cryptoasset service providers at a certain date to have their own deadline for transitioning to become fully authorised firms. There are also questions as to the scope of the proposed equivalence measures that may allow non-UK firms to service UK-based clients without seeking authorisation with the FCA. At this stage, we don’t have any clarity as to whether those equivalence measures will come to fruition or, if they do, what regimes would be deemed equivalent.
All of this is relevant because it impacts decisions to be taken by firms about what registrations or authorisations they seek in the short term with the prospect of a new regulatory regime on the horizon in the UK. Firms are considering whether to pursue registration applications under the MLRs or to wait until there is greater clarity on the timing of these measures, such that they are not duplicating efforts and resources unnecessarily. Others are considering whether MiCA might be deemed an equivalent regime, whereby seeking authorisation in the EU might give that firm the ability to service UK clients without maintaining a separate authorisation here. Whilst it would not be wise to make any fixed decisions at this early stage of the process, it is right that firms appropriately scope their relevant options and what impact these measures have on their original plans, such that strategic decisions can be taken in full knowledge of what we now know lies ahead.
Decide whether to respond
The proposals create an opportunity for the industry and other interested parties to share their views and help shape the direction of travel of regulatory policy in this space. Whilst it is clear that a lot of thought has been given to these proposals and it is now fairly certain that the base premise is that the UK’s financial services regulatory framework will be broadly extended to cryptoassets-related activities, there is still a lot to play for. We do not yet have a clear steer on timing or any possible transitional period, the proposals do not envisage any grandfathering of existing registrations or authorisations into the new regime, and we do not have a defined proposal on market abuse or the new client assets regime. Certain of the proposals are also at a more formative and exploratory stage, such as those relating to DeFi, and are pitched as a call for evidence, rather than a consultation, thereby inviting industry to help HMT determine next steps in those areas.
Responding to a consultation of this size in a meaningful way can be a burdensome exercise, but numerous trade associations are likely to reply and have created working groups to coordinate views from their members and this can often prove a more efficient way for industry participants to put their point across. [Norton Rose Fulbright LLP is plugged into several of these and is happy to make introductions.]