On 30 October 2023, HM Treasury (HMT) published its final proposals for the future financial services regulatory regime for cryptoassets in the UK. These proposals are set out in HMT’s response to its February 2023 consultation and call for evidence (CfE) on the topic, its response to the May 2022 consultation on managing the failure of systemic digital settlement asset (including stablecoin) firms, and a policy paper giving an update on plans for the regulation of fiat-backed stablecoins.

Future of financial services regulatory regime for cryptoassets: Response to consultation and CfE

In the response to its February 2023 consultation paper and CfE, HMT confirms its final proposals for cryptoassets regulation in the UK, including its intention to bring a number of crypto activities into the regulatory perimeter for financial services for the first time.

The February 2023 consultation set out extensive proposals for a UK regime for cryptoassets, which included plans to regulate core activities such as custody and lending and to bring centralised crypto exchanges into the scope of financial services regulation. For more information on the consultation proposals, see our blog. HMT confirms in its response that most aspects of the proposals were well-received by the large majority of respondents, although it has modified certain features of the future framework to take onboard the evidence presented. It also sets out some actions that will be taken forward to provide further clarity on key areas of interest.

Points to note from HMT’s response include:

• Detail on the regulated activities and tokens which will be in scope for phase 1 of HMT’s approach to regulating cryptoassets, and how these will be demarcated from phase 2 activities and tokens, is set out in the separate ‘stablecoins update’ policy paper (covered in more detail below).
• HMT clarifies the intended outcomes for non-fungible tokens (NFTs), utility tokens, security tokens and other data objects or “things” which respondents were concerned could be captured unintentionally. It confirms that the proposed regime does not intend to capture activities relating to cryptoassets which are specified investments and so already regulated, e.g. security tokens, or activities relating to truly unique or non-fungible NFTs that are more akin to digital collectibles or artwork than a financial service (in the general sense) or product.
• HMT confirms that it “firmly disagrees” with suggestions that retail trading and investment activity in unbacked cryptoassets should be regulated as gambling rather than a financial service.
• FCA authorisation will not be automatically granted to firms that are registered with the FCA under the Money Laundering Regulations.
• The government is aiming to lay phase 2 secondary legislation for crypto activities in 2024 “subject to Parliamentary time”.
• HMT acknowledges the need to mitigate the fragmentation of cryptoasset liquidity that could arise from a restrictive location and market access policy. It plans to proceed with an approach that facilitates access to international liquidity pools under specific circumstances.
• On issuance and disclosures, HMT notes that recklessness and negligence liability standards will enable market participants to manage their liability provided they make reasonable enquiries. It also confirms its support for the use of publicly available information to compile appropriate parts of disclosure and admission documents.
• There will be a modified approach towards market abuse obligations on crypto exchanges, acknowledging the potential need for a staggered implementation for cross-venue data sharing obligations.
• HMT sets out its direction of travel and plan of action on staking, which is intended to inform the government’s view on a set of critical questions and provide regulatory clarity to industry in an accelerated way. HMT notes that an engagement programme has already been launched with external stakeholders to inform this work.

HMT notes that the UK remains committed to “creating a regulatory environment in which firms can innovate, while crucially maintaining financial stability and clear regulatory standards so that people can use new technologies both reliably and safely”.

Managing the failure of systemic DSA (including stablecoin) firms: Consultation response

HMT’s consultation on managing the failure of systemic digital settlement asset (DSA) (including stablecoin) firms, which ran from 31 May to 2 August 2022, set out details of proposed amendments to the Financial Market Infrastructure Special Administration Regime (FMI SAR) to apply it to such firms. Under the proposals, the amended FMI SAR would apply to systemic payment systems, and to service providers of systemic importance to those systems, which use DSAs (as defined in the Financial Services and Markets Act 2023). More information on the consultation is set out in our blog from June 2022.

In its response to the consultation, HMT confirms that overall, respondents were broadly supportive of the proposed approach. Some respondents sought clarity on how the FMI SAR would be applied in practice, especially with regard to the additional return or transfer of customer funds and custody assets objective.

In order to ensure a balance between clarity over how the FMI SAR will operate with respect to systemic DSA firms, whilst ensuring the Bank of England (BoE) has the tools it needs to respond to the potential failure of a systemic DSA firms as soon as is possible, the government plans to develop two core products:

• Initially, it will lay regulations “in due course” which implement the policy intent described in the initial consultation regarding the overarching framework – this will appoint the FMI SAR (with necessary amendments) as the primary regime for systemic DSA firms which are not banks, establish an additional objective for the FMI SAR focused on the return or transfer of customer funds and custody assets and supplementary necessary provisions, provide the BoE with the power to direct administrators as to the prioritisation of objectives, and include a requirement to consult the FCA where applicable.
• HMT will then provide further clarity on the operation of the modified FMI SAR by making insolvency rules – these will cover the detail and mechanisms underpinning how the regime is intended to operate.

The BoE will also consider whether further guidance on the operation of the FMI SAR is necessary in the context of its finalised going concern regime and update stakeholders at the appropriate time.

Update on plans for the regulation of fiat-backed stablecoins: Policy paper

In its policy paper, HMT gives an update on its legislative approach for bringing fiat-backed stablecoins into the UK’s regulatory perimeter for financial services (as part of phase 1 of its approach to crypto regulation). The paper provides additional detail following the UK regulatory approach to cryptoassets, stablecoins and distributed ledger technology in financial markets consultation response, which was published in April 2022.

HMT confirms its intention to put in place a regulatory framework for fiat-backed stablecoins including when used as a means of payment, which it notes it has already started to implement through the introduction of measures in the Financial Services and Markets Act 2023. In the next stage of implementation, HM Treasury intends to bring forward secondary legislation “as soon as possible and by early 2024, subject to available parliamentary time”. These legislative provisions will bring activities relating to fiat-backed stablecoins into the regulatory perimeter, enabling the FCA to regulate them. The policy update sets out further detail on the objectives of the proposed legislation to facilitate the FCA’s regime. It also provides further information relating to the BoE’s regime, the Payment Systems Regulator’s regime, and co-responsibility for supervision of systemic fiat-backed stablecoin firms.

The update is intended to inform the development of the FCA’s and BoE’s approaches for regulating stablecoin issuers and custodians, and systemic DSA payments systems and service providers respectively.