Thought for the Week - Five things to know about crypto

The high-profile failures of crypto businesses, such as FTX, has drawn further attention to the need for regulation to protect investors.

The UK Government has published a series of papers addressing its approach to the regulation of cryptoassets, as it seeks to create a balanced, benign environment for crypto-related investment activity in the UK.

In this thought for the week, we set out five key messages about the way that the UK regime is taking shape:

1. The UK is regulating in stages

The UK Government intends to legislate on the issuance and services connected to fiat-backed stablecoins (i.e. cryptoassets that seek to maintain a stable value by reference to real-world currencies) before moving on to other cryptoassets. Primary legislation was passed in the summer of 2023 to empower the Treasury and regulators to develop detailed rules. Secondary legislation is expected for fiat-backed stablecoins in early 2024, with further legislation on other assets and intermediary services following. The Bank of England and the Financial Conduct Authority have both released discussion papers, seeking comments on their intended approaches for stablecoin issuance and related services.

The Government has also proposed making “operating a cryptoasset lending platform” a regulated activity and requiring the publication of clear contractual terms. These proposals received strong support, and rules on retail-level activity are expected in due course.

2. The UK isn’t reinventing the wheel for cryptoassets

The UK Government intends to use the existing regulatory framework for cryptoassets. In the EU, the Markets in CryptoAssets Regulation (MiCAR) is a bespoke arrangement drawing on several legislative sources. The UK approach is to regulate services for cryptoassets used as investments under the well-established Financial Services and Markets Act 2000 and related financial services legislation. The Government is sensitive to the need to address the peculiar features of cryptoassets, so adjustments are expected where appropriate.

3. Crypto investing is not gambling

The Treasury Select Committee took aim at investments in unbacked cryptoassets earlier this year. The Committee proposed that the Government treat such activity as gambling, but that approach was rejected. The Government thinks it would be better for consumers to treat investments in different asset classes in similar ways, even if their risk profiles remain different.

4. Not all cryptoassets are the same

The definition of cryptoassets included in the Financial Services and Markets Act 2023 is very wide, and it can potentially include digital objects traded for gaming, artistic, or other purposes. 

The Government, however, does not intend to regulate all cryptoassets, as such, but only those being used for investment and payment purposes. 

5. Authorised firms will need to obtain new permissions

The Government intends to create new regulated activities for cryptoasset service providers. Firms with Part 4A permissions will need to apply for variations of permissions to undertake these services. Unauthorised firms, including those registered under the UK’s anti-money laundering regime, will need to seek authorisation.

Authors: James Levy, Simon Helm, and Andrew Sims