Blog

What has happened?

In February 2023, the UK government committed itself to introducing a new regulatory regime for cryptoassets that will reflect the risks and opportunities that they present.

The FCA has also produced additional details for cryptoasset firms publishing financial promotions to consumers, including the ability for firms registered under the MLRs to publish their own promotional material. 

What are the key points of this consultation?

The consultation paper sets out proposals for a future regime and marks the next phase of the government’s approach to regulating cryptoassets. It builds on previous HM Treasury proposals which focused on stablecoins and the financial promotion of cryptoassets.

The proposals seek to deliver on the ambition to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation and to create the conditions for cryptoasset service providers to operate and grow in the UK, whilst managing potential consumer and stability risks. They have been informed by recent market events, including the failure of Sam Bankman-Fried’s FTX, which reinforce the case for effective regulation and sector engagement.

The key issues are; 

• The definition of “cryptoasset” in the new Financial Services and Markets Bill will capture all current types of cryptoasset. In terms of scope and legislative approach,  HM Treasury lists those cryptoassets that could in future be subject to financial services regulation where they are being used for financial services activities. These include exchange tokens, utility tokens, security tokens, stablecoins, crypto-backed tokens and algorithmic tokens.
  
  
• HM Treasury has set out an illustrative list of cryptoasset activities that it proposes to bring into the regulatory perimeter. These are issuance activities, payment activities, exchange activities, investment and risk management activities, lending, borrowing and leverage activities, safeguarding and/or administration (custody) activities, and validation and governance activities.
  
  
• The perimeter would capture activities provided by UK firms to persons (natural and legal) based in the UK or overseas as well as those provided by overseas firms to UK persons (natural or legal).
  
  
• HM Treasury is proposing to establish a regulatory framework which is based on the existing Regulated Activities Order (RAO) activities of regulated trading venues, including the operation of a Multilateral Trading Facility (MTF).
  
  
• The government proposes that requirements applying to analogous regulated activities, such as “arranging deals in investments” and “making arrangements with a view to transactions in investments” set out in article 25 of the RAO, would be used and adapted for cryptoasset market intermediation activities.
  
  
• The government is proposing to apply and adapt existing frameworks for traditional finance custodians under Article 40 of the RAO for cryptoasset custody activities, making suitable modifications to accommodate unique cryptoasset features or putting in place new provisions where appropriate. The FCA expects to run a separate consultation on this.
  
  
• The government is proposing a cryptoassets market abuse regime based on elements of the Market Abuse Regime (MAR) for financial instruments. The offences would apply to all persons committing market abuse on a cryptoasset that is requested to be admitted to trading on a UK trading venue. This will apply regardless of where the person is based or where the trading takes place. 
  
  
• For the regulation of cryptoasset lending and borrowing activities the government is proposing to apply and adapt existing RAO activities while making suitable modifications to accommodate unique cryptoasset features.

This consultation will close on 30 April 2023. The government is inviting stakeholders to provide responses to the questions set out above and to share any other views on the proposed approach to regulating cryptoassets.
This consultation sets out a proposed policy approach to bringing cryptoasset activities into the UK regulatory perimeter. The government will consider the responses received and use these to inform a response. If taken forward, further technical consultations will be issued by UK authorities on specific firm rules.

The government is also proposing a bespoke exemption to section 21 of FSMA to enable cryptoasset businesses registered with the FCA under the MLRs 2017, which are not otherwise authorised persons, to communicate their own financial promotions relating to qualifying cryptoassets. The exemption is intended to ensure that a cryptoasset business that is registered with the FCA for anti-money laundering purposes is able to issue its own promotions while the broader cryptoasset regulatory regime is being introduced.

The exemption was initially publicised on 6th February 2023, with the unequivocal words “All cryptoasset firms marketing to UK consumers, including firms based overseas, will soon need to comply with the new UK financial promotions regime. Firms must start preparing now for this regime. We will take robust action against firms breaching these requirements”. The implementation period is expected to be reduced to four months.

Subject to Parliamentary approval, when the regime comes into force, there will be four routes to communicating cryptoasset promotions to UK consumers:

1. The promotion is communicated by an FCA authorised person,
2. The promotion is made by an unauthorised person but approved by an FCA authorised person. Legislation is currently making its way through Parliament which, if made, would introduce a regulatory gateway that authorised firms will need to pass through in order to approve financial promotions for unauthorised persons,
3. The promotion is communicated by a cryptoasset business registered under the MLRs with the FCA, or
4. The promotion otherwise complies with the conditions of an exemption in the Financial Promotion Order.

Moreover, the FCA expects to take an approach to cryptoassets consistent with that taken in the new rules, in place since1 February 2023, for other high-risk investments. This will mean firms being required to use specific risk warnings and positive frictions (such as a 24-hour cooling off period) in their consumer journeys, in addition to the overarching requirement that their promotions are clear, fair and not misleading.

Insight from the team 

“Will more and more cryptoasset firms need to consider getting registered here in the UK, given that this seems the simplest route to compliantly publish financial promotions to consumers based here? In which case, the FCA’s recent guidance on good and bad practises for AML cryptoasset applications is very timely indeed…”

Read our latest blog on the FCA’s recent guidance on good and bad practices for AML cryptoasset applications.

How can we help you?

Thistle Initiatives has supported firms for over 10 years as a trusted compliance and regulatory advisor. In addition to assisting you as-and-when, our team of specialists can serve as your right hand in meeting and complying with regulations. We understand the importance of staying up-to-date and compliant and are dedicated to providing the guidance and support needed to do so.

Has anything discussed in the article raised questions you want answered? Contact our specialist cryptoasset team now to schedule a free consultation. Get in touch with us by calling 0207 436 0630 or sending an email to info@thistleinitiatives.co.uk.

Thistle Initiatives will continue to monitor and report on the development of the regulatory regime for cryptoassets