Three takeaways from the UK’s plans for crypto

The UK government has updated its plans for regulating cryptoassets. Here are our snapshot views on what we now know.

1. Few surprises on regulating cryptoassets but a significant compliance challenge to come

In a consultation on the future regime for cryptoassets, the government suggests bringing a wider range of crypto activities into the scope of regulation. As expected, these include activities such as exchange, custody and lending. The aim is that in the future firms that provide these regulated crypto activities in or to the UK will have to seek a licence under the Financial Services and Markets Act (FSMA).

Proposing to capture activities that are carried on “to” the UK (rather than just “in” the UK as with other regulated activities) would mark a broadening of the existing regulatory perimeter. HM Treasury says this is intended to discourage firms simply moving overseas to evade the requirements and so creating an unlevel playing field for UK firms.

The expectation is that crypto firms authorised under FSMA would then have to comply with rules similar or equivalent to traditional financial services. These include, for example, prudential requirements, data reporting, consumer protection, location policy and rules on operational resilience.

The current AML registration regime would fall away once this licensing regime takes effect. Cryptoasset businesses which have already obtained registration with the FCA would, in due course, need to go through another process to get a full regulatory licence. The government acknowledges that the process for these FCA-registered businesses should be made "proportionate" to allow for a smooth transition to the new regime.

2. Boldly going where no regulation has gone before

The UK’s plans will inevitably be compared to the EU’s MiCA legislation. Many of the outcomes are similar but they differ in approach. For example, the UK aims to insert cryptoassets into the existing regulatory framework rather than setting up a standalone area of crypto-specific legislation.

In a few areas, the UK is going beyond MiCA. For example, the UK regime will seek to regulate the lending and borrowing of cryptoassets, including operating a cryptoasset lending platform, which is not currently covered by MiCA. The government's paper also includes a call for evidence on decentralised finance, aiming for the objectives of wider cryptoasset regulation to apply to DeFi but acknowledging that how this will work in practice needs longer to clarify.

3. Good news for registered crypto businesses on financial promotions

The government has changed tack on its original plans to restrict promotions for qualifying cryptoassets. Financial promotions can only be made or approved by “authorised persons” unless there is an exemption available. Because most crypto firms are not required to be authorised, and few authorised persons would be willing to sign off crypto ads on their behalf, this proposal could have effectively banned crypto marketing to retail investors in the UK.

A government policy statement now says that an exemption will be made available to those firms which have registered with the FCA for AML supervision. This will mean that these crypto businesses can communicate their own financial promotions, at least on a temporary basis pending future changes to how cryptoassets are regulated. These firms will not have carte blanche, however. The FCA will be tasked with coming up with rules for them to make sure that, for example, their promotions are clear, fair and not misleading. The FCA has already indicated that they will treat crypto ads as high-risk investments.

For everyone else – including overseas businesses looking to market cryptoassets to individuals in the UK – the financial promotions restriction is still coming. It will also come sooner than expected: a mooted six-month implementation period has been shortened to four months.

Next steps

The consultation and call for evidence on the future financial services regulatory regime for cryptoassets closes on 30 April 2023. The relevant regulations making the changes to the financial promotions regime are expected to be introduced later this year. We will follow up with more thoughts in the coming days.