If 2020 was the year that crypto spurred investment action, then 2022 will be remembered for triggering the “equal but opposite” regulatory reaction. And for good reason. With several high-profile insolvencies and an across-the-board fall in cryptoasset prices, regulators have been reminded of the risks that can accompany financial innovation.
The Financial Conduct Authority (FCA), alongside HM Treasury and various other government and enforcement actors, have been monitoring developments in crypto markets and considering the regulatory approach to dealing with crypto service providers. The FCA has consistently sought to take a “technology neutral” approach to regulation and has been keen to ensure that any regulatory intervention is measured and proportionate so as to avoid stifling innovation in crypto finance or impeding the development of the UK as a hub for crypto finance. To this end, both the FCA and the Treasury have launched numerous consultations around expanding the regulatory perimeter, regulating cryptoasset promotions and establishing frameworks for the dissolution and wind down of systemic digital settlement asset firms. This “slow and steady” approach was met with a rude awakening with the sudden insolvencies of late 2022 and spurned a more proactive regulatory approach.
The Financial Services and Markets Bill (FSM Bill), published in July 2022, will introduce powers for the Treasury to produce regulations relating to “digital settlement assets” (DSAs), following consultations earlier in 2022 on stablecoin regulation. The FSM Bill will introduce amendments to the current regulatory regime to address the supervision and insolvency/administration of certain DSA service providers and systems that utilise DSAs. The Treasury will also be granted broad powers to introduce new regulations relating to DSAs. These rules are intended to address the systemic risks that may result from the collapse of large stablecoin issuers or systems using or backed by such assets. To read more about the forthcoming stablecoin regulation, see our related alert.
While the Treasury’s original consultation had focused only on the regulation of stablecoins and certain providers, the government’s recent amendments to the FSB Bill suggest that the Treasury will be given substantial freedom to amend the regulatory perimeter to include a wide array of cryptoassets beyond solely stablecoins. True to form, on 1 February 2023 the Treasury published its much anticipated consultation and call for evidence on a future financial services regulatory regime for cryptoassets. Building on the forthcoming stablecoin regulatory regime, the Treasury’s consultation sets out proposals which will result in a fundamental change in the way that cryptoasset businesses operate in the UK: the key outcomes of the consultation are that (a) cryptoasset service providers will require full FCA authorisation to operate where they do so in the UK (or have customers in the UK), and (b) a new bespoke regime will be brought in governing public offers of cryptoassets and admission to trading of those assets on platforms. For more detail on the proposals, see our related alert.
With these amendments to the FSM Bill, and the Treasury’s wide-ranging consultation proposing to cover a much broader range of cryptoassets, it is likely that 2023 will be a period of significant regulatory upheaval for cryptoasset service providers. With the FCA appearing to have rejected more than 80% of requests by crypto firms for approval under the money laundering registration regime, cryptoasset service providers could face an uphill battle in bringing their systems and controls as well as governance structures in line with regulatory expectations before obtaining any regulatory approval for their activities in the UK.
With the Treasury confirming in January 2022 that cryptoassets will be brought within the scope of the financial promotions regime, it is likely that 2023 will also see new rules relating to the promotion and advertising of cryptoassets being introduced. These new rules are expected to be introduced alongside a financial promotions gateway that limits the ability of authorised firms to approve financial promotions. The combined effect of the expansion of the regulatory perimeter and the introduction of the financial promotions gateway (as well as ongoing efforts by the FCA and bodies such as the Advertising Standards Authority to crack down on misleading crypto promotions) are expected to have a chilling effect on the range and number of cryptoasset promotions. Importantly, in welcome news for the industry, the Treasury’s policy statement of 1 February 2023 confirms that crypto businesses with current money laundering registrations will be permitted to issue financial promotions relating to their own services, at least on a temporary basis, pending any authorisation under the proposed new regulatory regime. Further, with the events of late 2022 and media reporting on the multiple roles fulfilled by certain crypto providers, it will be interesting to see if the Treasury reconsiders its initial suggestions that crypto custody promotions will remain outside the promotions regime. For more detail on the changing UK regulatory landscape for crypto advertising, see our related alert.
UK crypto service providers conducting business into the EU will also need to keep abreast of European developments. In the EU, the EU Parliament is expected to vote in plenary in April 2023 on the proposed EU Regulation on markets in cryptoassets (MiCA), which will establish a harmonised regime for the regulation of cryptoassets across the EU adapted from the current MiFID II regime. Provisional political agreement was reached in June 2022. To learn more about MiCA, see our related alert.
Finally, the Treasury and Bank of England are continuing to progress with the proposed central bank digital currency (CBDC), with a consultation published on 7 February 2023 setting out their assessment of the case for a retail CBDC. The consultation considers some key design and operation principles. The UK CBDC would be intended for payments, online, in-store, and to friends and family, operating just as traditional cash would operate and accessed through digital wallets offered to consumers by the private sector through smartphones or smartcards. Wallets would be used in the same way as current contactless payments and use the same merchant infrastructure. Importantly, while the Treasury and Bank of England have concluded that a digital pound will likely be needed in the future, no decision has yet been taken to introduce a UK CBDC. The earliest stage at which the digital pound could be launched would be the second half of the decade – so no earlier than 2025.
To delve further into the details on crypto, check out Crypto Boot Camp 2022, our virtual seminar series providing insights on how the regulatory landscape is changing and the future of crypto within the financial services sector.
For further reading on the year ahead in crypto, fintech and the wider financial services sector, our annual briefing looking at UK financial services regulation and enforcement in 2023, What does 2023 hold? Key upcoming developments and enforcement trends, explores the key developments and trends expected to dominate the UK regulatory landscape this year.