On 4 April 2022, key announcements were made regarding the development of the UK cryptoasset sector with the aim of making it a global hub for cryptoassets.
HM Treasury (“HMT”) published a response to its January 2021 consultation and call for evidence confirming HMT’s intention to take steps in this sphere. Additionally, the terms of reference for the Centre for Finance, Innovation and Technology (“CFIT”) Steering Committee were published. CFIT, a result of the Kalifa Review, is an organisation focused on driving financial innovation by identifying and addressing challenges and opportunities for UK FinTech. Finally, John Glen made a keynote speech in which he outlined plans to ensure UK financial services remain competitive in technology and the UK a tech hub.
Below, we discuss the main features of each development.
1. Legislating to bring certain stablecoins within the regulatory perimeter and introducing a new custodial activity with respect to stablecoins
The government proposes to bring stablecoins where used as a means of payment within the UK regulatory scope. The government’s proposed regulatory approach will entail changes to the regulatory regimes to provide the Financial Conduct Authority (“FCA”) and Bank of England (“BOE”) with the appropriate powers over stablecoin issuers and other entities, including the customer facing entity (i.e exchanges) and wallet providers.
Such proposed changes include:
amending the definition of ‘e-money’ and developing a definition for ‘payment cryptoasset’ (or something similar) that brings into scope any cryptographically secured digital representation of monetary value;
extending the application of Part 5 of the Banking Act 2009 to include stablecoin activities in cases where the risks posed have the potential to be systemic and so the threshold for the BOE supervision is met; and
extending the scope of the Financial Service (Banking Reform) Act 2013 to make stablecoin–based payment systems subject to appropriate competition regulation by the Payment Services Regulator.
The proposed changes above are intended to capture all stablecoins that reference fiat currencies, including single currency stablecoin or stablecoin based on a basket of currencies as they have the capacity to potentially develop into widespread means of payment.
Additionally, due to the role of the wallet provider being a key feature of cryptoassets, the government considers that regulation is required to ensure that the custody or the arranging body of the token is subject to the appropriate regulation. The government will set out in legislation how the new activity will be brought within regulation and the scope of the FCA’s powers and further details for which are expected in due course.
2. Financial market infrastructure sandbox
The government has recognised the benefits of using Distributed Ledger Technology (“DLT”) in financial markets infrastructure (“FMI”), whilst at the same time noting that there are numerous risks to be managed. As such, HMT, the FCA and the BOE will work together to develop a FMI sandbox. The FMI sandbox will support firms wanting to test new technologies or structures, in particular (but not necessarily limited to) DLT, to provide the infrastructure services that underpin markets (such as trading and settlement).The FMI sandbox will be up and running in 2023 and the government notes that it could support certain types of trading venues, such as multilateral trading facilities who want to provide CSD-type functions (such as issuance, settlement, and securities maintenance) in addition to trading.
3. Unregulated tokens, DeFi and new market developments
HMT states that it is continuing to assess the appropriate regulatory response to broader cryptoassets and DeFi, and will work collaboratively with international partners to ensure common standards that enable innovation and harmonise guidance and concepts. HMT will consult later in 2022 on its proposed approach.
4. Centre for Finance, Innovation and Technology
The CFIT terms of reference have been established, which state that the CFIT model will be comprised of a ‘coalitions’ approach and will aim to have maximum impact in supporting the growth of the sector. The CFIT will be a virtual body that will enable enhanced connectivity across the regions and provide research and data capabilities in financial technology and innovation. A steering committee, chaired by Kalifa, will be working to continue to develop an effective proposition for the CFIT that will enhance and support the growth of innovation in financial services.
The steering committee will make proposals that shall constitute recommendations for the CFIT based on the following:
CFIT’s short-term and long-term objectives.
A business plan that will support CFIT in meeting those objectives.
Long-term funding options for CFIT.
An initial coalition for CFIT to focus on.
Any digital or other infrastructure which CFIT might require to operate effectively.
The work of the steering committee is expected to be conducted through monthly meetings taking place across spring and summer of 2022.
5. Issuance of NFT
The Chancellor of the Exchequer has requested that Royal Mint work on a non-fungible token (“NFT”) in summer 2022 as an emblem of the approach that the UK plans to take moving forward.
6. Tax friendly crypto environments
The government will explore ways of enhancing the competitiveness of the UK tax system to encourage further development of the cryptoasset market in the UK, including reviewing how decentralised finance loans are treated for tax purposes. The UK is also playing a leading role in negotiations on the new “OECD Cryptoassets Tax Reporting Framework”, ensuring enhanced tax transparency and consumer confidence in the sector, and enabling a level playing field in tax reporting globally.
7. Cryptoasset engagement groups and sprints
Various engagement groups will be set up in the coming months, including:
A two day ‘CryptoSprint’ in May, hosted by the FCA with industry participants, seeking views directly from the industry on key issues relating to the development of a future cryptoasset regime.
The Economic Secretary establishing and chairing a Cryptoasset Engagement Group, convening key figures from the regulatory authorities and the industry to advise the government on issues facing the cryptoasset sector.
The changes are exciting and show the UK’s approach to becoming a leader in the cryptoasset sector. Firms operating in the UK market should follow these changes closely to see how the landscape further develops.
CMS has leading specialists working within the cryptoasset sector on all aspects of law and regulation. Please get in touch if you have any questions or require further guidance on any of these developments.
Co-authored by Anna Charles