HM Treasury: Government unveils new approach to cryptocurrency

The story so far…

In April 2022, the then Economic Secretary to the Treasury, John Glen MP, set out plans for the UK to become a global hub for cryptoasset technology. Since then, rapid developments in the sector – climaxing in the collapse of FTX – have resulted in a significant stock take on the direction of UK crypto regulation. The upshot of recent market turbulence has seen the UK Government dialling up efforts to regulate the industry, supported by an eagerness to strike the right balance between facilitating technological innovation, upholding consumer protection and ensuring market integrity. The link between cryptocurreny and economic growth has also been severed following recent turbulence.

The publications of the government’s long-awaited proposals to regulate a broad suite of cryptoasset activities marks the latest stage in the development of regulation in the sector. The measures – which build on previous HM Treasury proposals regarding stablecoins and the financial promotions of cryptoassets – are aimed at delivering a framework that will mitigate the most significant risks of cryptoassets, while harnessing their  contribution to economic growth.  This will build on the legislative foundations to bring fiat-backed stablecoins into financial services regulation under the Financial Services and Markets Bill.

Most recently, the Law Commission was asked by the government to make recommendations on legal reform to accommodate crypto tokens, which is expected to significantly shape government thinking on crypto alongside the latest consultation. After months of industry calls on the government to deliver clarity for business and consumers, demands have been met to an extent. But, there remains a long way to go before regulation sets in and many an opportunity to raise concerns with the government’s existing plans before reaching that point.

So what’s new?

Overall, the government has confirmed that regulation of cryptoasset activities will be consistent with the existing regulatory approach to traditional finance. This means rules for crypto regulation will likely be subject to prudential, consumer protection, operational resilience and disclosure requirements, among others. The government will temporarily backtrack on a previous pledge to align crypto regulation with standards applied to stocks, shares and insurance products.

The regulatory parameters will be extended to cover assets including stablecoins, crypto-backed tokens and fan tokens. The plans are designed to target misleading cryptoasset promotions, enhance data-reporting requirements and attempt to stamp out ‘pump and dump’ where an individual intentionally inflate the value of a cryptoasset before selling it.

The clear impetus behind many of the policy levers detailed is safeguarding consumers. Similarly, HM Treasury accepts that there is a need to prioritise operational resilience and market conduct in the wake of recent events and in order to position the UK as a leader in crypto on the global stage.

There is also a marked shift in responsibilities under the proposals. Much of the burden appears to be placed on crypto trading platforms themselves. Under the proposals, crypto traders will need to define the demands that a currency must meet before being admitted for trading and they will also, among other detail, have to keep customers’ assets secure.

The government intends to include the financial services regulation of cryptoassets within the regulatory framework established by the UK’s Financial Services

and Markets Act 2000 (FSMA). This will allow HM Treasury to provide secondary legislation to bring activities within the regulator perimeter.

In terms of issuance and distribution of cryptoassets, the consultation proposes to follow a similar approach to that for securities, and apply regulation when the asset is being admitted to trading on a regulated cryptoasset trading venue.

Separately, in a continued effort to brand itself as the custodian of environmental safety, the government is seeking views on energy intensity information that should be made available to consumers, clearly setting out the environmental impact of their investment.

What comes next?

Ahead of the consultation deadline on 30th April 2023, implicated firms will need to mull over the expected impact of the proposals before taking a view on whether to submit. Due to the vast scope of the consultation questions, we are expecting to see a number of joint consultation responses put forward. After that point, the government will consider feedback and work to set out its consultation response.

Once legislation is laid, the Financial Conduct Authority (FCA) will consult on its detailed rules for the sector and businesses should consider this upcoming regulatory focus ahead of future engagement.

With seismic regulatory change in the pipeline, Grayling can support clients in getting cut through among key political circles, positioning your business as a trusted partner to policymakers and regulators as you navigate new waters ahead. We offer a range of skills and expertise that enable us to determine the best course of action, develop insightful strategies and orchestrate effective campaigns.

The team at Grayling has a wealth of experience helping financial services companies understand and navigate the regulatory landscape. If you would like to better understand the political landscape and what this means for your business, please contact Alan Boyd-Hall, Head of Public Affairs, at alan.boyd-hall@grayling.com.