What do the Treasury proposals mean for cryptoasset regulation?

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.

This was further split into the common parlance of the industry: exchange tokens (those cryptoassets whose fundamental purpose is to act as a means of exchange to facilitate transactions) and utility tokens (those cryptoassets that provide some form of inherent benefit or utility within a defined ecosystem or product set).

HM Treasury explicitly says that it is focused on the regulation of activities and not the assets themselves.

In addition to these requirements, the UK also implemented the new virtual asset service provider regime under the fifth money laundering directive, which requires cryptoasset exchange providers and custodian wallet providers to seek registration with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 as amended.

The process of becoming registered was extensive and many applicants did not make it through the process.

Where we are going with the reforms

Fast-forward then to February 2023 and the proposals announced by HM Treasury.

These proposals represent the roadmap for the second phase of UK regulation relating to cryptoassets – the first being in relation to fiat-backed stablecoins used as a means of payment – and the package of overall reforms is extensive.

At its core is a fairly all-encompassing definition of 'cryptoasset', which will be included as a form of specified investment under the RAO meaning that a range of activities performed in relation to cryptoassets will become regulated activities in the UK.

This includes general activities like dealing and execution of orders in cryptoassets, as well as the custody of cryptoassets, while there are also some crypto-specific activities, such as the operation of a centralised cryptoasset trading venue, admitting cryptoassets to trading on a cryptoasset trading venue and operating a cryptoasset lending platform. 

We can also expect to see a new market abuse regime for cryptoassets in an effort to stop manipulative and abusive practices like pump and dump schemes.

HM Treasury explicitly says that it is focused on the regulation of activities and not the assets themselves, and it calls out the fact that any person performing these types of activities in relation to any cryptoasset satisfying the definition may need to be regulated.

Whether this is how the regime is enforced in practice remains to be seen, but the proposal certainly builds in the flexibility for activities to be performed in relation to a wide array of cryptoassets.