Shearman & Sterling LLP | FinReg | HM Treasury Publishes Response to Cryptoasset Regulatory Regime Consultation
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  • HM Treasury Publishes Response to Cryptoasset Regulatory Regime Consultation

    HM Treasury has published a response to its consultation on cryptoasset regulation, setting out its final proposals for the U.K.'s cryptoasset regulatory regime. The U.K. plans to make cryptoassets a new category of "specified investment" under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and regulate certain activities conducted in relation to them. Under the new regime:
    • Firms conducting relevant activities and offering their services in or to the U.K. by way of business would need to apply for authorization by the U.K. Financial Conduct Authority. The relevant activities are: issuing or admitting cryptoassets to trading; operating cryptoasset trading venues; dealing as principal or arranging deals in cryptoassets; operating a cryptoasset lending platform; and safeguarding or safeguarding and administering cryptoassets (or arranging the same). Overseas firms offering their services into the U.K. may need to obtain FCA permission (although HM Treasury envisages equivalence/deference-type arrangements in the future and is considering alternative approaches to full authorization in the interim).
    • Firms that are already authorized to conduct other activities will need to apply for a Variation of Permission if they wish to conduct regulated cryptoasset activities.
    • Authorization under the new regime will not be automatically granted to cryptoasset firms registered with the U.K. Financial Conduct Authority for money laundering purposes, although the FCA will consider applicants' regulatory history when determining authorization applications.

    The definition of "cryptoassets" for the purposes of the new regime is taken from the Financial Services and Markets Act 2023. It is intentionally broad, and will remain so, to account for future types of cryptoasset that may emerge in the future (though HM Treasury noted that future financial services regulation of cryptoassets is likely to apply to a specific subset of cryptoassets, with a narrower definition, depending on the topic). Cryptoassets which already qualify as specified investments for the purposes of the RAO (e.g., security tokens) will not be captured by the new regime. Non-fungible tokens which are more similar to artwork or digital collectibles than a financial services asset class are also not intended to be caught.

    The consultation response discusses the proposed approach to supervising the relevant regulated activities and notes that some aspects of the regime will be set out in regulatory rulebooks. It also sets out proposals for other areas e.g., a market abuse regime for the cryptoasset industry and the potential future regulation of decentralized finance, staking and sustainability reporting requirements.

    The new regime will constitute "phase 2" of the U.K.'s digital assets regulatory regime, with secondary legislation expected to be laid in 2024. Phase 1 of the U.K.'s digital assets regime relates to the regulation of fiat-backed stablecoins, upon which HM Treasury has published a separate response. HM Treasury expects to lay secondary legislation on the fiat-backed stablecoins regime before Parliament by early 2024, subject to Parliamentary time.

    Cryptoasset financial promotions have been brought within the revised financial promotions regime since October 8, 2023. The Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services) empowered HM Treasury to bring digital settlement asset activities within the regulatory perimeter, to designate payment systems using DSAs for supervision by the Payment Systems Regulator and to recognize systemic DSA payment systems or service providers for supervision by the Bank of England. HM Treasury has separately published a response to its consultation on application of the special administration regime for financial market infrastructure providers to recognized DSA payment systems.

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