Plans to regulate cryptoassets and protect consumers

Under plans set out by the Government on 1 February, it will seek to regulate a broad suite of cryptoasset activities, consistent with its approach to traditional finance.

There is no universal definition of a cryptoasset or related terms such as a digital asset or virtual asset, but there is increasing consensus on the basic elements of the definition in UK and overseas legislation, and in global standards. The Financial Services and Markets Bill 2022 (FS&M Bill) includes the following definition of cryptoasset for the UK’s financial services regulatory framework, to be introduced into FSMA:

“Cryptoasset” means 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 new rules, which are now subject to consultation, will place responsibility on cryptoasset trading venues for defining the detailed content requirements for admission and disclosure documents.

The proposals will strengthen the rules around financial intermediaries and custodians – which have responsibility for facilitating transactions and safely storing customer assets.

As part of this approach, the consultation will seek views on improving market integrity and consumer protection by setting out a proposed cryptoasset market abuse regime.

Proposals are centred around a number of important cryptoasset activities – including exchange activities, custody activities and lending activities, which the Government is intending to bring into the regulatory perimeter for financial services.

For each activity, the consultation sets out key design features of the regime covering themes such as prudential requirements, data reporting, consumer protection, location policy and operational resilience.

The consultation paper also proposes regimes for a range of cross-cutting issues which apply across cryptoasset activities and business models, including market abuse and cryptoasset issuance and disclosures.

In addition, to address industry concerns about the small number of Financial Conduct Authority (FCA) authorised cryptoasset firms who can issue their own promotions, HM Treasury is also introducing a time limited exemption. Cryptoasset businesses that are registered with the FCA for anti-money laundering purposes will be allowed to issue their own promotions, while the broader cryptoasset regulatory regime is being introduced.

The consultation will close on 30 April 2023, after which, the Government will consider feedback and work to set out its consultation response. Once legislation is laid, the FCA will consult on its detailed rules for the sector.

Note that the Government is also currently legislating in the FS&M Bill to introduce a regime that will allow for the regulation of fiat-backed stablecoins which are used for payments, similar to that for other payment methods given that these stablecoins have the potential to become widely used as a form of payment.

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