Treasury proposals would be a huge change for crypto assets

From the perspective of existing regulated firms and their advisers, this is very familiar territory. For unregulated crypto firms it is going to be a substantial change; in many cases it will require them to obtain authorisation and to comply with detailed rules in relation to how they run their businesses and communicate with their customers. 

The Treasury’s proposals would be a huge change to the existing crypto asset ecosystem.

Following the introduction in 2020 of the requirement for certain categories of UK based crypto firms to register with the Financial Conduct Authority for anti-money laundering purposes, a number of firms in the crypto ecosystem relocated to more crypto-friendly jurisdictions, such as those in the Baltic states.

These firms continued to target UK based investors on a cross-border basis. It is therefore very interesting to see the proposed geographical scope of the UK’s regulations. 

The Treasury indicates in the paper that it intends the UK regulations to cover overseas firms that are providing services to UK-based customers. 

This could of course mean that some international firms may simply chose not to provide services to UK customers (thereby limiting the range of crypto products and services available to UK customers) and some smaller operators may simply choose to ignore the UK regulations entirely on the assumption that they are unlikely to be pursued by the regulators. 

However, a number of non-UK firms are likely to wish to seek authorisation to provide services to UK customers given the current appetite of UK customers for crypto assets. 

No boots on the ground

It is interesting that the Treasury is anticipating that there may be no need for a physical presence in order for a crypto firm to be authorised by the UK regulators. 

At the moment there is a requirement for a financial services firm to have 'boots on the ground' in the UK before it can be authorised to do business here.

This may be a sign that the UK government would permit firms in other sectors the ability to have a regulatory authorisation without a physical place of business in the UK. 

This potential new approach may be of interest for EU financial services firms that, pre-Brexit, used the EU passport to provide cross border services without a place of business in the UK.

The Treasury paper focuses on the whole crypto ecosystem, from the issuers to the platforms, exchanges and custodians. 

From a consumer’s perspective, the regulation of custodians and exchanges should provide some welcome protection against the high-profile collapses we have seen in this area. 

The imposition of conflicts of interest obligations may also provide some additional consumer protection in relation to those platforms with multiple business lines that act as issuers, exchanges, custodians and lenders in the crypto area.  

The requirement to have detailed prospectuses for offers to the public would also be a marked change and would hopefully ensure customers have a better understanding about what they are purchasing, as currently many purchasers of crypto assets have very little understanding about what they are actually buying. 

However, as with the existing UK prospectus rules which relate to public offers of securities, it is likely that many firms would attempt to structure their offerings to fall within exemptions to the regime to avoid the onerous disclosure rules.    

Limitations

There is a distinct need for anti-market abuse regulation for crypto assets as currently there is nothing to stop manipulative behaviour in the crypto space – such as high-profile social media personalities 'pumping and dumping' or 'trashing and cashing'. 

However, as the Treasury mentions in the paper, this is something that really needs to be dealt with at a more international level, and it is likely that UK specific rules may only have limited effect in curbing bad behaviour in this area. 

If adopted, the Treasury’s proposals would be a huge change to the existing crypto asset ecosystem. 

It would impose serious regulatory obligations on the crypto firms, which is likely to be unwelcome to them; however, for consumers, their advisers and others in the more traditional financial services industry, the changes are likely to be very welcome. 

Kate Troup is a Partner at Fladgate LLP