Introduction
The beginning of April 2022 saw a flurry of announcements regarding the regulation of cryptoassets in the UK. On 4 April 2022, John Glen, Economic Secretary to the Treasury, gave a keynote speech setting out the government's plans to make the UK a "world-leading regime" for cryptoasset businesses, and Rishi Sunak, Chancellor of the Exchequer, declared his ambition to make the UK a "global hub for cryptoasset technology", as well as commissioning the Royal Mint to produce a non-fungible token ("NFT").
On the same day, HM Treasury published a response to its consultation on the UK regulatory approach to cryptoassets, stablecoins, and distributed ledger technology ("DLT") in financial services. The announcements follow the Treasury's January announcement that financial promotions that refer to certain cryptoassets will be regulated, and the FCA's consultation on the rules that will apply to such promotions (which closed on 23 March 2022).
In this article, we examine what these announcements say about the direction of travel for the UK regulation of cryptoassets and why it's a crucial time for the industry to be involved in the discussion.
A detailed plan of approach
The government wants the UK to be a "global hub" and "the very best place in the world to start and scale crypto-companies". This does not mean that the UK will lower regulatory standards when it comes to cryptoasset business, rather that the UK will seek to boost innovation through implementing "robust and effective regulation".
The UK government's plan to support the development of a "world-best crypto ecosystem", of which HM Treasury's approach (see below) is part, will take into account:
- The need for a dynamic way of regulating all financial activities and products, including those utilising crypto-technologies, which is "tailored and proportionate", but also "nimble and tech-neutral".
- Regulation, or a "regulatory code", which will be shaped by the input and advice of industry participants, as well as the Treasury and regulators, working through the Cryptoassets Taskforce.
- The importance of facilitating safe, sustainable, and rapid innovation.
Mr Glen noted that English law, world-leading legal services, and courts are a huge asset. The Law Commission, which has already produced work on key subjects in the crypto space, including digital assets and smart contracts, is now asked to consider the legal status of Decentralised Autonomous Organisations ("DAOs").
Alongside financial services regulation, the UK's tax system will be examined to work out resolutions for issues such as the treatment of Decentralised Finance ("DeFi") loans, and staking protocols. Additionally, disincentives to UK fund managers including cryptoassets in their portfolios will, Mr Glen said, be removed (although we note that in March 2022 the Financial Conduct Authority ("FCA") published a reminder for regulated firms of the risks of exposures to cryptoassets).
A commitment to engage with, and learn from, industry
Mr Glen spoke about the UK government's ability and determination to learn quickly, highlighting the UK's track record of facilitating regulatory sandboxes. He announced the FCA's CryptoSprint, which will take place in May 2022, and is focused on "informing regulatory policy changes based on evolving technologies". The CryptoSprint will consider three "problem statements", which the FCA says cover some of the key stages in the lifecycle of cryptoassets:
- How should information relating to the issuance of cryptoassets be disclosed to investors?
- How do we identify (and test) where regulatory obligations on centralised and decentralised cryptoasset models should be placed? These should enable regulators to balance capturing relevant activity that poses a risk to UK consumers and markets now and as the sector evolves, while still enabling beneficial innovation.
- What gaps need to be addressed in the UK's existing custody regulatory framework for custody of cryptoassets to help protect UK consumers and markets?
Mr Glen highlighted the joint work of the Treasury, FCA and Bank of England in implementing a Financial Market Infrastructure Sandbox, as announced by Chancellor Rishi Sunak in his 2021 FinTech Week speech and to be in place by 2023. This sandbox will allow firms to explore the use of DLT in financial markets infrastructure. He noted that the use of DLT in this way could "transform financial markets by delivering greater efficiency, improved liquidity, enhanced transparency, and greater security". This sandbox will build on the Treasury's call for evidence (see below).
The government will also be establishing a high-level industry group, the Cryptoasset Engagement Group which will be chaired at ministerial level and involve senior representatives from the FCA, Bank of England and business.
Government to take a leading role
In his speech, Mr Glen noted the structural advantage that the UK has, with a regulatory framework set by central government, and a small number of regulators (in contrast to the European Union and United States). He described the UK government as being "determined, unified", "single-minded", and ready to lead by example. The UK government is already developing opportunities for the use of DLT for Customs and International Trade, and will explore the possibility of issuing debt instruments using the technology.
Mr Glen announced that Chancellor Rishi Sunak had asked the Royal Mint to create an NFT, by summer 2022, as an emblem of the UK's "forward-looking approach".
Regulatory approach to cryptoassets, stablecoins and DLT in financial markets
Stablecoin payments systems to be regulated
Stablecoins have been in the regulatory spotlight for some time, as having the potential to pose risks to consumers and markets alike. In January 2021, the Treasury launched a consultation and call for evidence on the regulation of stablecoins and cryptoassets, and the use of DLT in financial markets (see our summary). This concern was reiterated in March 2022 in the Financial Policy Committee of the Bank of England's report on cryptoassets and DeFi, focussing on market stability. On 4 April 2022, the response to the January 2021 consultation was published. This response:
- Confirms that the UK government will legislate to bring stablecoins inside the UK regulatory perimeter, where those stablecoins are used as a means of payment. This will be achieved through amendments to the Electronic Money Regulations 2011 and Payment Services Regulations 2017 (which provide a "robust foundation" for payments regulation in the UK).
- Sets out plans to extend the applicability of part of the Banking Act 2009 to include certain stablecoin activities, where risks posed have the potential to be systemic. In such cases, the Bank of England will be the lead prudential authority for businesses that are authorised by the FCA and recognised under the Banking Act.
- Tackles competition concerns, by acknowledging the need to extend the relevant legislation so that relevant stablecoin-based payment systems are subject to appropriate competition regulation by the Payment Systems Regulator.
These measures aim to create an environment in which payment systems which use stablecoins can operate and grow, which the Treasury says will "deliver a world-leading regulatory regime for stablecoins".
DLT use in financial markets
As noted above, the government has been investigating the potential uses of DLT in financial markets for some time and has plans in place for a Financial Market Infrastructure Sandbox in 2023. In its response, the Treasury noted that current financial services regulation and legislation were drafted without DLT in mind and that the government intends to "support industry in ensuring that legislation and regulation can accommodate tokenisation" (for example, of securities) and DLT in financial market infrastructures. Lessons learned in the Sandbox are expected to feed into legislative change.
Extending regulation to unregulated tokens
HM Treasury confirmed that it is continuing to assess the appropriate regulatory response to broader cryptoassets, and will consult later in 2022 on its proposed approach. DeFi has the potential to reinvent and disrupt existing financial services business models, but comes with its own specific risks (such as theft through security breaches, financial crime, governance, and liability considerations). The government intends to work collaboratively to shape appropriate future regulation; this presents opportunities for industry to help shape the future of the UK as a leader in the nascent and fast-evolving DeFi market.
What's next - key things to look out for
- The legislative process regarding the extension of the existing financial promotions regime to qualifying cryptoassets (see our earlier briefing here), the extension of the regulatory perimeter to stablecoins used as a means of payment and the establishment of the Financial Market Infrastructure Sandbox, and secondary legislation regarding its operation.
- The results of the FCA's consultation into the financial promotion rules which will apply to qualifying cryptoassets.
- HM Treasury's consultation into the broader regulation of cryptoassets (later in 2022).
- The Law Commission project on conflicting laws and emerging technology, which is expected to start in the first half of 2022.
- The results of the FCA's CryptoSprint, which will take place on 10 – 11 May 2022 and is likely to feed into the FCA's regulatory approach to the sector.
- The implementation of the Treasury, FCA and Bank of England's Financial Market Infrastructure Sandbox which is due to be in place by 2023.
- The Royal Mint's NFT programme, to be created by summer 2022.
