Future financial services regulatory regime for cryptoassets

The HM Treasury has launched a new consultation on a proposed new regulatory regime for cryptoassets. The consultation is high level in nature in that it does NOT propose specific regulatory amendments or new regulations; instead, it describes a regulatory framework for cryptoassets that the Treasury seeks to implement to ensure the protection of investors, the UK financial market, and financial stability as a whole.
The proposed new framework would capture all cryptoassets meeting the following definition – as quoted:
““cryptoasset” means any cryptographically secured digital representation of value or contractual rights that —
(a) can be transferred, stored or traded electronically, and
(b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology).”
A phased-in approach is thereby envisioned with fiat-backed stablecoins being the first type of cryptoassets to whom the new regulatory regime would apply. Fiat-backed stablecoins are digital coins or currencies whose value is tied to the value of another currency such as the British Pound Sterling or the US Dollar.
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The consultation covers all related services and activities in the cryptoassets field including the following:
1. The issuance of cryptoassets including related services such as – in the case of stablecoins – the redemption of the „coins“ or the admission to trading on a cryptoasset trading venue;
2. The operation of a trading venue for cryptoassets;
3. Dealing with, advising on, or facilitating transactions in cryptoassets;
4. The operation of a crytoasset lending platform;
5. The custody of cryptoassets; and
6. „Validation and governance activities“ such as mining or the operation of a network node.
For each of the above noted activities, the Treasury proposes regulatory requirements in order to meet the above noted objectives, namely the maintenance of financial market stability and the protection of investors. Below, we point out some requirements as far as point (3) – the dealing with, advising on, or facilitating transactions in crypotassets – is concerned as we assume this area to be of greatest interest to our clients. For the other proposed obligations, please refer to the original document for more information.
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#### Proposed regulatory requirements in the field of the dealing with, advising on, or facilitating transactions in crypotassets
– Any of the noted activities would have to be registered.
– In order to become registered, applicants would have to submit a number of documents specifying or verifying the type of activity / activities they seek to conduct, their governance policies, their risk management and cybersecurity policies, any (planned) outsourcing arrangements, and their financial capabilities.
– Registered dealers, advisers, or intermediaters would have to adhere to stringent conduct rules including the requirement to act fairly and in the best interest of customers.
– Registered dealers, advisers, or intermediaters would also have ensure that conflicts of interest are properly identified and managed and that trading-related issues are transparent and disclosed to clients (e.g. fee arrangements, execution methodology, etc.).
– Registrants would also have to take protective measures to prevent market abuse.
– Firms offering intermediation services would be subject to prudential requirements which would be set out by the Financial Conduct Authority (FCA).
– Registered dealers, advisers, or intermediaters would be subject to operational resilience requirements (e.g. the requirement to adopt policies and procedures to efficiently monitor and mitigate any potential risks in this context).
– Firms would finally have to adopt adequate policies and procedures for the establishment, maintenance, monitoring, and wind-down of outsourcing arrangements.
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To conclude, the Treasury has also included a number of issues on which it seeks further input (call for evidence) such as the inclusion of sustainability and sustainability-related obligations in the regulatory framework or the inclusion of other „cryptoassets“ within the scope of the new framework.