UK Cryptoasset Regulation – 2023 developments and what’s to come in 2024 (Part 1)

2023 will be remembered as the year the cogs of the UK legislative and regulatory machine finally began to crank meaningfully into gear in relation to cryptoassets, with a raft of legislation, consultations and discussion papers published. Through these initiatives, the UK is paving the way for a comprehensive regulatory regime to rival those in other jurisdictions with early-mover advantage, such as the European Union, Dubai, Singapore and Hong Kong.

With a range of critical frameworks and rules set to be enacted in 2024, the pace of this legislative and regulatory development shows no sign of letting up.

For market participants, it is easy to lose track.

In Part 1 of this two-part series, we highlight the key developments in 2023 and the first two months of 2024, and look ahead to what is still to come.

What happened in 2023?

2023 saw a number of significant legislative and regulatory developments in relation to cryptoassets in the UK, with:

• the so-called ‘travel rule’ coming into effect, requiring cryptoasset businesses to collect, verify and share information about cryptoasset transfers (September);
• legislation introduced to bring qualifying cryptoassets within scope of the scope of the financial promotions regime (October); and
• the government launching, considering responses to, and setting out its conclusions on a consultation on a comprehensive regulatory regime for cryptoassets (February – October).

The year also saw:

• the Bank of England (“BoE”) and HM Treasury (“HMT”) consult on a digital pound (February);
• the Law Commission publish its long-awaited final report on Digital Assets (June);
• the enactment of the Financial Services and Markets Act 2023, providing for the establishment of regulatory regimes for fiat-backed stablecoins and related payment systems, and a financial promotions approval gateway (June); and
• the enactment of legislation to give effect to the Digital Securities Sandbox (December),

as well as the following in relation to stablecoins and other digital settlement assets:

• HMT launch, consider responses to, and set out its conclusions on a consultation on managing the failure of systemic digital settlement asset (including stablecoin) firms (May – October);
• the Financial Conduct Authority (“FCA”) publish a discussion paper on regulating stablecoins, under Phase 1 of the proposed comprehensive regulatory regime for cryptoassets (November);
• the BoE publish a discussion paper on a regulatory regime for systemic payment systems using stablecoins and related service providers (November);
• the BoE and the Prudential Regulation Authority (“PRA”) publish a 'Dear CEO' letter on innovations in the use by deposit-takers of deposits, e-money and regulated stablecoins (November); and
• the BoE, the FCA and the PRA publish a cross-authority roadmap on innovation in payments (November).

2024 – what’s happened so far and what’s to come?

What’s happened so far?

During the first two months of 2024:

• the legislation giving effect to the Digital Securities Sandbox came into effect (8 January);
• the extended deadline for compliance with certain cryptoasset financial promotion rules (e.g. 24-hour cooling off period) for firms who applied for extension ended (8 January);
• the application window for the new financial promotions approval gateway closed and the accompanying legislation came into effect, meaning firms who have not applied are no longer permitted to approve financial promotions of unauthorised persons (6-7 February);
• the window for responding to the FCA’s discussion paper on regulating stablecoins under Phase 1 of the proposed comprehensive regulatory regime for cryptoassets closed (6 February); and
• the window for responding to the BoE’s discussion paper on a regulatory regime for systemic payment systems using stablecoins and related service providers closed (6 February).

What’s to come?

The following is still to be legislated for in 2024:

• the establishment of a regulatory regime for fiat-backed stablecoins which are used for payments, under ‘Phase 1’ of the government’s proposed comprehensive regulatory regime for cryptoassets;
• the introduction of rules to clarify the regulatory treatment of staking; and
• the establishment of the other aspects of the comprehensive regulatory regime for cryptoassets, under ‘Phase 2’ of the government’s proposals.

Finally, the government’s Spring Budget hinted at the possibility of a sovereign debt issuance, noting that: “The government will also continue to examine, and will be engaging with firms on, the possible applications and benefits of applying Distributed Ledger Technology to a sovereign debt instrument.”

Comment

Stay tuned for Part 2, where we take a closer look and unpack the developments listed above and what they mean for the existing and future regulatory landscape for cryptoassets and related activities in the UK.

CMS has a market-leading, cross-practice Crypto & Digital Assets Group, comprising former regulators as well as former in-house heads of legal and other functions at some of the leading businesses in the industry. Please don't hesitate to get in touch if you would like to discuss anything in this article or the broader ecosystem in more detail.

Article co-authored by Anna Burdzy, Trainee Solicitor at CMS.