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UK publishes crypto framework covering ICOs, stablecoins, exchanges and regulators
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(Kitco News) -
The United Kingdom published their long-awaited regulatory framework for crypto regulation on Wednesday, outlining the government’s choice of regulator to oversee the sector, as well as detailed direction on stablecoin classification, rules for ICOs, exchanges, custody, and other key regulations for digital assets.
“Our objective is to establish a proportionate, clear regulatory framework which enables firms to innovate at pace, while maintaining financial stability and clear regulatory standards,” wrote Andrew Griffith, Economic Secretary to the Treasury. “This includes a proposal to bring centralised cryptoasset exchanges into financial services regulation for the first time, as well as other core activities like custody and lending.”
The regulatory framework outlined in the report aims to achieve four overarching policy objectives: Encourage growth, innovation, and competition in the UK; enable consumers to make well-informed decisions, with a clear understanding of the risks involved; protect UK financial stability; protect UK market integrity.
The Treasury said the framework also adheres to a set of core design principles:
“Same risk, same regulatory outcome,” meaning the government will remain “technology agnostic” when deciding if digital assets increase or mitigate risks, “but the aim is to achieve the same or a very similar regulatory outcome” whenever possible.
“Proportionate and focused,” meaning they will focus attention on “where the risks and opportunities are most urgent or acute” and will do their best to avoid “disproportionate or overly burdensome regulation” to crypto entities.
“Agile and flexible,” meaning any regulation should “accommodate evolving markets and products” and should “enable regulators to adapt to changes in the market and developments in international standards.” The regulatory framework is also intended to be “consistent” with the Future Regulatory Framework (FRF) to be established by the Financial Services and Markets Bill 2022 (FS&M Bill), and should also be harmonizable with regulations in other jurisdictions.
The fundamental legislative approach will be to place the financial services regulation of cryptoassets “within the regulatory framework established by the UK’s Financial Services and Markets Act 2000 (FSMA), taking advantage of the confidence, credibility and regulatory clarity that this existing system affords, and as it is intended to be updated by the FS&M Bill.”
The report said that “developing a fully bespoke regime outside of the FSMA framework was also considered,” but they decided against it as this would create a “level playing field” between crypto and traditional financial services firms, would violate the “same risk, same regulatory outcome” principle, and would likely create “overlapping regulatory regimes and confusion for market participants.”
This means that when the new crypto regime under the FSMA (as amended by the FS&M Bill) becomes law, crypto firms will move from the temporary Financial Conduct Authority (FCA) rules they’ve operated under since January 2020 to rules that more closely resemble those governing traditional finance, including those pertaining to Anti-Money Laundering / Countering the Financing of Terrorism (AML/CFT).
“HM Treasury expects firms undertaking regulated cryptoasset activities to adhere to the same financial crime standards and rules under FSMA that apply to equivalent or similar traditional financial services activities,” the report stated.
A key provision in the report is a new distinction between “stablecoins,” which under the new regime would include only those tokens fully backed by their underlying fiat currency, and so-called “algorithmic stablecoins” which, while not illegal as in many other jurisdictions, would not be classified as stablecoins and would be forbidden from using “stable” in their marketing or documentation.
The new cryptoasset regulatory regime divides various crypto products and activities into two expected phases of implementation. Phase one will include rules for Issuance, Payment and Custody activities for only fiat-backed stablecoins, while phase two will include rules for all activities related to Issuance (ICOs, listing), Exchange (CEX and other crypto exchanges), Investment and Risk Management (principals and agents, arranging deals), Lending, Borrowing and Leverage (cryptoasset lending platforms), and Custody (other than fiat-backed stablecoins).
Rules governing activities related to Validation and Governance (Mining or validating transactions, operating a node on a blockchain) will not be a part of the first two phases and will be left to future phases of implementation. Some Investment and Risk Management activities such as managing cryptoassets and advising could be excluded from the regulatory regime altogether.
The report also includes “Calls for Evidence” for Decentralised Finance (DeFi), Sustainability, and other cryptoasset activities, as well as a broader invitation for consultation on the new regulatory framework: “Responses are welcome from all stakeholders, including cryptoasset firms, technology firms, financial institutions, other businesses impacted by cryptoasset regulation, trade associations, representative bodies, academics, legal firms, and consumer groups.”
The report said that interested parties have until April 30, 2023 to submit their evidence, recommendations and feedback for consideration.
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