The United Kingdom aims to bring clarity and oversight to the rapidly expanding cryptoasset market via a comprehensive regulatory regime. These regulations, once implemented, will represent a significant step towards ensuring the integrity and stability of the financial system, whilst also encouraging innovation in the digital asset space.
Regulating Fiat-Backed Stablecoins
The initial phase of the regulatory rollout, as outlined in the HMRC “Update on Plans for the Regulation of Fiat-backed Stablecoins”, focuses on fiat-backed stablecoins which are a form of digital currency tied to traditional fiat currencies such as the British Pound or the US Dollar. Under the proposed regulations, firms issuing and holding fiat-backed stablecoins within or from the UK will have to obtain regulatory authorisation under the Financial Services and Markets Act 2023 (FSMA). This move aims to enhance transparency and accountability in the issuance and custody of stablecoins, mitigating potential risks to consumers and the financial system.
Firms offering payment services related to fiat-backed stablecoins or engaging in transactions involving the UK will also fall under the scope of the Payment Services Regulations 2017 (PSRs). This inclusion within the regulatory framework ensures that activities involving stablecoins are conducted in compliance with established financial regulations, safeguarding the interests of users and investors.
Additionally, in the Government’s response to the ‘Managing the failure of systemic Digital Settlement Asset (including stablecoin)’ Consultation Paper published in October 2023, it was specified that the new regulations will mandate that assets backing fiat-backed stablecoins must have enough liquidity to facilitate prompt redemption. These assets will be held in a statutory trust, providing an added layer of security for users. Furthermore, stringent client asset rules will govern the management and custody of these backing assets, ensuring their safekeeping and proper utilisation.
Managing Systemic Risks
Recognising the systemic importance of certain digital settlement asset firms, the planned regulatory framework will also introduce measures to effectively manage the potential failure of these firms. Systemic payment systems utilising digital settlement assets, along with service providers deemed crucial to these systems (DSA Firms), will be subject to an amended Financial Market Infrastructure Special Administration Regime (FMI SAR). These provisions are designed to enhance the resilience of critical financial infrastructure and minimise disruptions in the event of a firm’s insolvency.
Expansion and Inclusion
Building on the foundation laid for stablecoins, the second phase of the regulatory framework will extend its scope to encompass additional categories of cryptoassets.
Foreign firms providing cryptoasset services to UK customers from outside the UK will also be required to comply with the regulatory authorisation regime. This ensures a level playing field for all market participants while upholding standards of consumer protection and market integrity.
Moreover, cryptoassets available for trading on UK trading venues will be subject to a comprehensive issuance and disclosure regime.
As stated in the FCA’s Discussion Paper 23/4, firms currently registered under the UK Money Laundering Regulations (MLRs) will not automatically receive authorisation for cryptoasset activities under the proposed new regulatory framework. Instead, they will need to either seek authorisation under the Financial Services and Markets Act (FSMA) and/or adhere to the Payment Services Regulations (PSRs), as applicable. The HM Treasury expects the next stage of implementation through secondary legislation by early 2024.
The planned robust regulatory framework for cryptoassets signals the UK’s commitment to fostering innovation whilst safeguarding the integrity of its financial system. By providing clarity, oversight and consumer protection measures, these regulations aim to instil confidence in the growing digital asset market. As the cryptoasset landscape continues to evolve, proactive regulatory interventions will play a crucial role in balancing innovation with systemic stability and investor protection.
How Complyport can help?
At Complyport, we leverage our knowledge in compliance, regulation and due diligence to aid cryptoasset firms in navigating the increasingly intricate regulatory landscape.
Our specialised team of financial crime and digital assets consultants diligently monitors regulatory developments, ensuring our clients maintain the highest levels of compliance in the realm of Cryptoassets, and can support your firm in the following ways:
- Compliance Support: Ensure the FCA’s new financial promotion rules for crypto assets are adhered to, through comprehensive regulatory compliance audits, risk assessment services and personalised guidance on implementing necessary controls and disclosures.
- FCA Authorisation and Registration Management: Prepare and oversee your firm’s FCA authorisation and registration process. This involves assisting with the preparation of the application and supporting documentation and engaging with your firm and the FCA throughout the application. We also provide continued support post-registration, including compliance monitoring.
- Regulatory Policies and Procedures Development: Create bespoke policies and procedures and supporting the implementation of existing policies and procedures.
- Regulatory Guidance: Offer regulatory guidance to clients involved in crypto trading, clarifying the required permissions and registrations.
- AML and KYC Frameworks: Develop anti-money laundering (AML) and know your customer (KYC) and know your transaction (KYT) frameworks, including mandatory annual business-wide risk assessments as required by regulations.
