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On 1 February 2023, HM Treasury published a consultation and call for evidence on the future regulatory regime for cryptocurrencies or, as the Treasury and FCA call them, cryptoassets.
This represents the next step in a phased approach adopted by the Government to the regulation of this sector. Phase 1 relates to stablecoins used as a means of payment. The Treasury consulted on this topic in 2021 and published its response in April 2022. In short, using new powers due to be introduced in the Financial Services Bill, it will bring stablecoins used as payment within the scope of regulation through amendments to the Electronic Money Regulations 2011 and Payment Services Regulations 2017, and widen the application of the Banking Act 2009 and Financial Services (Banking Reform Act) 2013 in certain ways. It will also extend the Financial Market Infrastructure special administration regime to systemic stablecoin arrangements and introduce a new custodial activity to cover wallet providers and exchanges.
In Phase 2, as described in the February consultation, the Treasury turns to other cryptoassets (that is, those that are not stablecoins under Phase 1 or already regulated as security tokens or e-money). It intends to create a number of new regulated activities tailored to the crypto sector, mirroring existing FSMA ones. This would include operating an exchange, dealing in cryptoassets as principal or agent and arranging deals in cryptoassets, as well as custody and operating a cryptoasset lending platform. Post-trade activities, advising and managing would be considered in future phases, and a tailored market abuse regime is proposed. Importantly, crypto activities would be caught if they are made in or to the UK, catching firms servicing UK customers from overseas.
In parallel, the Treasury confirmed as early as January 2022 its proposal to expand the financial promotions regime to certain cryptoassets, and the FCA has consulted on rules for their promotion, such as risk warnings and consumer frictions. More recently, the Treasury has confirmed there will be a temporary exemption from the general promotion restriction for crypto businesses registered with the FCA for money-laundering purposes, while the ‘activity’ side of the law catches up.
The Treasury’s consultation closes on 30 April 2023. While the UK appears somewhat behind the EU on this topic, in a piecemeal way the UK’s crypto regime is taking shape and shifting from a patchwork landscape where the sector is largely unregulated except for money laundering to a more rigorous approach, aiming for ‘same risk, same regulatory outcome’ as against traditional financial services. Following repeated high-profile troubles in the crypto markets and developments in the EU, this is arguably both necessary and overdue.
On 7 February 2023, the Treasury and the Bank of England (BoE) published a joint consultation on whether the UK should have a central bank digital currency (CBDC), and what this might look like. The BoE also published a technical working paper on the subject.
While the Treasury and BoE have not decided to introduce a ‘digital pound’ yet, they do believe preparatory work is worthwhile and that such a currency may be needed in future.
As proposed, the digital pound would be a new form of sterling issued by the BoE. The BoE would also provide a platform or ledger for regulated firms to use. Those firms could then offer digital wallets accessible through smartphones or smartcards to households and businesses for payments.
Initially, there would be limits on how much customers could hold, between £10,000 and £20,000. The idea is that a digital pound would interact with commercial bank deposits, not compete with them, and that access to unlimited digital sterling could make runs more likely in a crisis.
The BoE and Treasury are keen to ensure interoperability to avoid a ‘walled garden’, so that in practice paying with a digital pound will look and feel a lot like paying with smartphones or PayPal today.
This raises a more fundamental concern – what would the point of the digital pound be?
In a speech given the day of the consultation’s release, Jon Cunliffe, BoE Deputy Governor, Financial Stability, suggested this was essentially future-proofing: if new forms of money emerge, a digital pound could act as a bridging asset between platforms and encourage the continued dominance of sterling in UK transactions. In any case, he added, the research and development output could prove useful even the authorities decide not to introduce a CBDC after all.
The consultation closes on 7 June 2023. We will continue tracking the developments in our future updates.
Co-authors: Alex Williamson, Edward Thomson, Elizabeth Maloney
30 March 2023