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    HMT Consults on Future Regulatory Regime for Cryptoassets

    February 01, 2023

    The HM Treasury (HMT) is seeking comments, until April 30, 2023, on the proposals for a future financial services regulatory regime for crypto-assets. In addition, HMT published a policy statement on the government approach to crypto-asset financial promotions.

    The consultation on regulatory regime for cryptoassets sets out a proposed policy approach to bringing crypto-asset activities into the UK regulatory perimeter. The consultation focuses on the future UK regulatory framework for crypto-assets used within financial services, rather than the wider application of distributed ledger technology (DLT) in financial services or the use of crypto-assets outside financial services. The proposals are centered around a number of important crypto-asset activities—including exchange activities, custody activities and lending activities—which the government is intending to bring into the regulatory perimeter for financial services. For each activity, the consultation sets out key design features of the regime, covering themes such as prudential requirements, data reporting, consumer protection, location policy, and operational resilience. The consultation marks the next—but not the final—phase of the government’s approach to regulating crypto-assets and delivers on the government’s commitment to set out proposals for the financial services regulation of crypto-asset investment and trading activities. The consultation builds on the previous HMT publications that focused on stablecoins and the financial promotion of crypto-assets.

    The proposals seek to deliver on the ambition to place the UK’s financial services sector at the forefront of crypto-asset technology and innovation and create the conditions for crypto-asset service providers to operate and grow in the UK, while managing potential consumer and stability risks. The proposals will also strengthen the rules around financial intermediaries and custodians—which have responsibility for facilitating transactions and safely storing customer assets. These steps will help to deliver a robust world-first regime strengthening rules around the lending of crypto-assets, while enhancing consumer protection and the operational resilience of firms. The consultation also proposes regimes for a range of cross-cutting issues that apply across crypto-asset activities and business models, including market abuse and crypto-asset issuance and disclosures.

    The policy statement on crypto-asset financial promotions sets out government response following the feedback received with regard to the implementation of the measure for qualifying crypto-assets and potential unintended consequences for industry. Based on the industry feedback and a range of mitigating options, the government has decided to introduce a bespoke exemption from the financial promotion restriction in section 21 of Financial Services and Markets Act (FSMA) for certain financial promotions relating to qualifying crypto-assets. The exemption will ensure that crypto-asset exchange providers or custodian wallet providers registered under Regulation 54(1A) of the Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT) regulations will be able to communicate their own promotions in relation to qualifying crypto-assets. This exemption will not apply to registered crypto-asset exchange providers or custodian wallet providers that are also authorized persons. The government expects that this exemption will significantly widen the pool of crypto-asset businesses that can communicate their own promotions, incentivize crypto-asset businesses to be based in the UK and be AML regime compliant, and, crucially, fulfill the objective of the planned regulatory regime to promote innovation, enhance consumer protection, and ensure that crypto-asset promotions can be held to equivalent standards as promotions of financial services products with similar risk profiles. The government intends this exemption to be temporary. The government is also preparing to bring stablecoins with propensity to be used for payments into the scope of regulation and is preparing to consult on its future regulatory approach to unbacked crypto-assets. Going forward, the government will review its approach to the exemption alongside the future regulatory approach to crypto-assets.

     

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    Keywords: Europe, UK, Banking, Securities, Regtech, Distributed Ledger Technology, Lending, Credit Risk, Reporting, Operational Resilience, Stablecoins, AML CFT, FSMA, Crypto-Assets, HM Treasury

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