The second half of 2023 will bring most promotions concerning fungible cryptoassets into the scope of the UK financial promotions regime.
The financial regulatory environment in the UK in relation to cryptoassets is in the process of significant change. Some of these changes have already come into force whilst other proposed changes are planned to take effect gradually over the next couple of years.
The UK Government’s (the Government) view is that the technology underpinning crypto could bring benefits to the UK and in 2022 HM Treasury (the Treasury) set out the UK’s ambitions to become a cryptoasset technology hub. Alongside this, the Government is also working on building a smarter regulatory framework which is tailored to the UK. The new regulatory approach provides a vehicle for UK regulators to have the ability to put in place safeguards for certain cryptoassets and associated activities through the Financial Services and Markets Act 2023 (FSMA 2023). Currently, cryptoassets are only subject to a very limited degree of regulation in the UK:
The (ever) evolving regulatory landscape
In October 2023, amendments to the UK’s financial promotions regime will come into force. This regime restricts persons from promoting investments (such as shares or debt instruments) unless the person making the promotion is authorised by the FCA (or the promotion has been approved by such a person). The amendments will bring fungible cryptoassets into the scope of the financial promotion’s regime. Broadly, this means that most promotions concerning traditional cryptoassets (such as Bitcoin) can only be promoted in the UK by an FCA authorised firm (including a firm with a cryptoasset anti-money laundering registration).
In addition to changes around financial promotions for cryptoasset businesses FSMA 2023, which revokes retained EU law and creates modifications to better suit the UK market, introduces several regimes which will also impact cryptoasset regulation:
“Whether activities are regulated through the RAO or being added to the DAR, the Government expects to create a consistent regulatory framework across legislation that will follow a single set of principles[8]”.
The Future Financial Services Regulatory Regime for Cryptoassets: consultation and call for evidence (published in February 2023) provides proposals to address gaps in the current framework to regulate cryptoassets more broadly and introduced plans for a phased approach in which aspects of cryptoasset would become regulated at different stages.
Phase 1 is considered already in motion with the aim of regulating activities such as the issuance and custody of fiat-backed stablecoins. The Government’s plan for Phase 2 is to regulate cryptoasset activities such as the trading of and investing in cryptoassets in or to the UK. Phase 2 will be focused on targeting the activity areas associated with (i) a higher degree of risk from a consumer and overall market perspective and (ii) greater opportunities to support the UK’s growth agenda. As a consequence, not all cryptoasset activities are proposed to form part of Phase 2[9].
The Government and Treasury are expected to continue to assess developments in the market to determine future phases of work. The FCA will be reflecting in future iterations of the Regulatory Initiatives Grid the timings and impacts of any further changes under the Government’s reforms as they are confirmed[10].
Future activities outside of Phase 2 may be included in regulatory frameworks due to the evolving nature of the world of cryptoassets and in the spirit of “same risk same regulation”, which is the theme of HM Treasury’s (HMT) approach. Any of the following cryptoassets may be subject to future financial services regulation where they are used for financial related activities, such as; Exchange tokens, Utility tokens, Security tokens, Non-Fungible Tokens (NFTs), Stablecoins, Asset-referenced tokens, Commodity-linked tokens, Crypto-backed tokens, Algorithmic tokens, Governance tokens and Fan tokens.
At present a large proportion of cryptoassets fall outside or are likely to fall outside the UK regulatory perimeter. This means they may not be subject to the same consumer protections or safeguards found in other areas of financial services and payments. However, forthcoming changes in respect of financial promotion restrictions for fungible cryptoassets and wider changes to be introduced by FSMA 2023 will have the potential to bring a significant number of persons into the scope of UK cryptoassets regulation.
FSMA 2023 gives the FCA and the PRA a new secondary objective to facilitate the international competitiveness and growth of the UK economy. In addition, FSMA 2023 also creates new power for the Government to require regulators to have regard to particular matters when making rules.
An increased number of initiatives relating to cryptoassets will require significant collaboration between Government, the regulators and industry to be successful. This will be reflected in secondary legislation to meet Government objectives and we expect further timetabling of cryptosasset related regulatory activity towards the end of the year through the publishing of the final Regulatory Initiatives Grid for 2023.
Written by Gavin Punia, Tom Hepplewhite and Melissa Pentecost-Daley
*Information is accurate up to 27 November 2023
[1] Financial Services and Markets Act 2023 (s23(2))
[2] Payments Regulation and the Systemic Perimeter - Consultation Response, (para 1.8)
[3] Future Financial Services Regulatory Regime for Cryptoassets: Call for Evidence (Figure 3.A)
[4] Cryptoassets: What does the future hold? - House of Lords Library (parliament.uk)
[5] Financial Services and Markets Act 2023 (Part 5A, S71K)
[6] Building a Smarter Financial Services Regulatory Framework for the UK (para 3.7)
[7] Building a Smarter Financial Services Regulatory Framework for the UK (para 5.6)
[8] Building a Smarter Financial Services Regulatory Framework for the UK (para 3.8)
[9] Future Financial Services Regulatory Regime for Cryptoassets: Call for Evidence (para 1.16)