February 1 2023 may go down in the history books as a momentous day in the nascent but rapid evolution of cryptoassets in the UK.
It was a day where HM Treasury proposed a totemic shift in the regulatory landscape for an asset class that continues to divide opinion.
For those eager watchers of the industry, the announcement of a series of wide-ranging reforms was not in itself a surprise – HM Treasury has been signalling for a number of years now that it intended to tighten the framework that applied to cryptoassets – but the extent of the reform proposals and their breadth will have almost certainly caught a number off guard.
This article examines the proposals in further detail and how they shift the current thinking, and considers what their impact may be for the industry at what is widely regarded as an inflection point in the future of cryptoassets in the UK.
A brief history of regulation
In order to get a proper sense of where we are headed, it is worth taking a moment to reflect on where we have been in terms of cryptoasset regulation in the UK.
To its credit, the Financial Conduct Authority moved fairly quickly compared to its international counterparts to establish where it felt the UK regulatory perimeter should be drawn in relation to cryptoassets, publishing in July 2019 its Policy Statement 19/22.
That statement sought to classify cryptoassets into different categories and then expressed a view as to whether or not those categories would fall within the regulatory perimeter, such that persons performing certain types of activities in relation to those categories of cryptoassets would need to seek authorisation with the FCA or rely on some form of relevant exclusion from authorisation.
These categories are as follows:
1. Security tokens
That is, those cryptoassets that provide rights or obligations that are akin to those specified investments, excluding electronic money, that are included in Part III of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 as amended (RAO).
In this sense, security tokens have characteristics of traditional securities, such that the rights and associated obligations for the holders of security tokens are largely, if not exactly, the same as those that would arise if they held traditional securities.
2. E-money tokens
That is, those tokens that satisfy the definition of electronic money under the Electronic Money Regulations 2017 as amended, meaning it is issued on receipt of funds by an issuer and is a form of stored value that can be used for the purpose of making payment transactions with persons other than the person who issued it.
The most common example is fiat currency-back stablecoins, where they meet the conditions of the definition.
3. Unregulated tokens
As the name suggests, those cryptoassets that the FCA considers as not falling within the UK’s regulatory perimeter, meaning market participants could perform a range of activities in relation to these types of cryptoassets without needing to be regulated.