- The UK Treasury has published a report on a new regime for regulating crypto assets.
- It’s the next step to lawmakers writing up a framework that they hope will rival the EU’s MiCA.
- The government says in the report that it wants to regulate crypto assets like traditional financial instruments and services.
- In the report, the government tackles DeFi, NFTs, stablecoins, and staking.
His Majesty’s Treasury has published its hotly-anticipated report on a regime for regulating crypto assets, in hopes of achieving a global hub for the nascent industry that Prime Minister Rishi Sunak promised.
In the report, the Treasury says that in 2024, it wants to regulate crypto assets like traditional financial instruments and services.
With a clear regulatory pathway taking shape, Treasury Minister Andrew Griffith deems the UK as “the obvious choice for starting and scaling a crypto asset business,” according to the Monday announcement.
Since the Treasury published proposals in February for experts to comment on, industry has been keen for clarity to prepare for a new framework.
The proposed framework will complement the Financial Services and Markets Act, which was enforced earlier this year. FSMA brought crypto into the scope of financial regulation.
The Treasury’s new proposed rules bring activities such as issuance, exchange, investment, custody, and lending into scope.
The government also published its final take on what stablecoin rules should look like, bringing them under the aegis of the Financial Conduct Authority.
The UK’s regime is set to compete with the European Union’s crypto rulebook, known as Markets in Crypto-Assets Regulation, or MiCA.
While European member states are already busy implementing the new laws, the UK is hoping it might be able to overtake the 27-nation bloc before firms will need to comply with MiCA by the end of 2024.
The report shows that HM Treasury dropped any previously adversarial approach to crypto regulation.
For instance, the government emphasised it would not ban decentralised finance, as that could hamper innovation and fail at protecting consumers.
A proposal to regulate unbacked crypto assets like gambling — which the Treasury committee put forward in May — was also ruled out.
Treating crypto like gambling would diverge from frameworks like MiCA, as well as from recommendations from standard setting bodies.
CryptoUK, a major trade association, said it was pleased to see a coherent framework from Treasury, as well as acknowledgement that it would be “‘premature and ineffective to regulate DeFi activities currently.”
But there is still a long way to go.
Parliament will need to see through the legislative process of turning the proposals into a bill and then debating it before it can become law.
“There remain many unknowns,” Albert Weatherill, financial services regulatory partner at law firm Norton Rose Fulbright, said in a statement shared with DL News.
Those unknowns include when new rules would go live, how crypto entities can be approved, and many of the specific details of the provisions.
‘The key challenge for the regulators is to provide this certainty as soon as possible’— Albert Weatherill, Norton Rose Fulbright
“The key challenge for the regulators is to provide this certainty as soon as possible, such that the industry can begin to adapt to its new regulatory reality,” Weatherill added.
NFTs and staking
NFTs were a major point of interest for the 131 respondents to the government consultations.
Just as art sales are not supervised like financial services, officials concluded that “in general, activities in connection with NFTs are not appropriate for regulation as a financial service.”
“The proposed regime does not intend to capture activities relating to crypto assets which are specified investments that are already regulated,” like security tokens, the report said.
But if NFTs are used for one of the proposed activities to be regulated, such as exchange, it could still fall within the future regulation’s scope.
Similarly, respondents said they urgently wanted the government to address staking, and for the Treasury to ramp up its work to understand this area.
Among other work, the report said, the Treasury wants to develop a clear definition of staking on a proof-of-stake blockchain, identify what kinds of staking models are out there, and identify how to mitigate associated risks.
The report says that the government currently views operating a validator node using on-chain stake crypto assets as a technical, operational function rather than a financial services activity.
But while it doesn’t intend to ban staking, it does believe that certain staking activities such as issuing liquid tokens present risks for consumers.
“However, there is potentially a case for these activities to be appropriately captured by other regimes — including financial promotions, custody, lending, and intermediation, without needing further regulation,” the report says.
The registration process
Firms offering crypto services to the UK’s 68-million strong population need to comply with rules against laundering and terrorism financing for FCA approval.
This registration process “is a meaningful regulatory bar,” Crypto Council for Innovation’s Laura Navaratnam told DL News.
“It should be explicitly taken into account during the authorisation process to reduce unnecessary process time and cost.”
The new report suggests that once a new regime is in place, firms that are already registered will not automatically be granted approval. The FCA will follow up with a consultation to fill in the gaps.
The UK is also planning for regulated foreign firms to be able to apply for UK authorisation of a UK branch.
Alongside the consultation,the government published a policy update that sets out how the government is planning to bring fiat-backed stablecoins under existing regulation.
“The focus on stablecoins is a sensible step forward given they are often seen as a building block for wider crypto engagement, providing a means for traditional finance to bridge to digital assets,” Andrew Whitworth, EMEA policy director at Ripple, said.
The Bank of England and the payments regulator already have powers over stablecoins, under updated provisions in the FSMA.
According to the policy update, the Treasury plans to write secondary legislation that will also bring in the FCA, giving the regulator oversight over stablecoin issuers and custody providers.
With all three regulators on the beat, the risks to consumers and the broader financial system will be mitigated, the report said.
The government also wants to accommodate international stablecoin issuers.
This is all dependent on the secondary regulation, though, which hasn’t been written yet.
The Treasury is aiming to have that done by early 2024, it said, but that depends on parliamentary bandwidth.
The stablecoin industry welcomed the rules, but some said they were too high-level.
“The supporting provisions around fiat-backed stablecoins are helpful, as we are seeing increasingly our clients use dollar-backed stablecoins for efficiency in cross-border payments,” said Sean Kiernan, CEO of digital finance firm Greengage.
Akash Mahendra, director at the Haven1 Foundation and portfolio manager at Yield App, said the decision to give the FCA authority over issuance and custody of stablecoins under FSMA made sense as it puts these assets on a par with traditional financial instruments in the UK.
“This is significant as it guarantees that the entire financial system will remain robust amid potential future volatility in the crypto space,” he said.
But Jon Egilsson, chairman and co-founder of e-money provider Monerium and a former chairman of the supervisory board of the Icelandic Central Bank, said the update, while “well-intentioned effort to pave the way for future rule and regulations,” lacked concrete regulatory proposals.
“Intentions instead of regulatory proposals are perplexing, in particular to the BoE’s initial lead in this area,” he said.
He cited the example of former Treasury governor Mark Carney, who said in 2021 that he believed stablecoins should have access to the central bank’s balance sheet.
“Despite the HM Treasury’s commendable aspirations to propel finance into the future, they seem to be stuck in good intentions, lacking clear actions and regulations, and thus lost in orbit,” Egilsson said.
Whitworth conceded that it “was not a case of job done. We still need greater clarity on a workable transitional authorisation regime, for instance, but the UK is heading in the right direction,” he said.
“The UK now needs to pin down secondary legislation to allow regulators to develop their final rules,” Whitworth added.