On 6 January 2021, HM Treasury launched a consultation and call for evidence on the UK's regulatory approach to cryptoassets and stablecoins.
HM Treasury's proposed approach, on which it is seeking industry feedback, has been characterised in some quarters as a move to bring crypto-asset and stablecoin transactions within the regulatory perimeter, prior to beginning work on a licensing regime for issuers and involved firms.
However, this interpretation does not properly capture the government's intentions. Rather than looking to regulate transactions ahead of creating a licensing regime, the Treasury is more accurately seeking to define the type of activities that will require licensing.
Regulated vs unregulated activities
For any licensing regime to apply, regulators first need to define who and what needs to be licensed; this will need to be done by reference to the specific activities that are being undertaken.
In financial services, there are important distinctions between what is regulated and what is not, depending on how the financial service or product is marketed and applied.
For example, acting as a commercial lender (as opposed to a consumer credit lender or a regulated mortgage lender) is not a regulated activity. However, taking steps to recover amounts due under a credit agreement (including in relation to commercial lending) is a regulated activity requiring a licence under the Financial Services and Markets Act.
Issuing a book token (i.e., a token that can only be spent in a particular shop) is not regulated, but issuing e-money (i.e., an electronic token that can be spent more widely) is highly regulated.
Regulation always needs to start with consideration of what activities need to be covered, before laying down clearly where the regulatory perimeter lies.
HM Treasury's approach to crypto-assets and stablecoins
So far, HM Treasury's approach to digital assets is appropriate, albeit that it has taken some time to get to this point.
Before proceeding with any regulatory interventions, the Treasury must consider where activities around stablecoins may or may not already be regulated.
It then needs to assess, by reference to what it is seeking to achieve through regulation (which, in broad terms, is to protect the stability of markets and payment systems, and to protect consumers), whether any of these activities should be brought within the scope of existing regulation, or whether new regulation is needed to achieve these aims.
Keeping up with the EU
Some have questioned to what extent the UK government will feel under pressure to keep in step with the EU approach to regulating crypto-assets.
The European Commission's Regulation of Markets in Crypto-assets (MiCA) proposal is a regulatory framework developed in 2018 to regulate out-of-scope crypto-assets and their service providers in the EU, and provide a single licensing regime across all member states by 2024.
This is perhaps more a political question than a legal one, however the EU's approach seems unlikely to constrain the direction taken by the UK.
It is more likely that, post-Brexit, the UK will concentrate on developing a response to regulation that meets the aims set out in HM Treasury's January 2021 consultation, without feeling inhibited by the approaches of other regulators.
Politically and legally, crypto-asset and fintech regulation in general is an arena where the UK has the opportunity to demonstrate that it can be more nimble and more future-facing than it was able to be within the EU.
Given that crypto-assets and fintech were not a major sticking point in the UK-EU Brexit negotiations, and that there is not currently a common regulatory approach to diverge from, the UK is unlikely to have to pay a high price for striking out on its own regulatory path in this field.
Regulatory equivalence and cooperation
While there is a lot of discussion in the media around "equivalence", this concept does not apply as a legal concept across the board in relation to financial services regulation.
Under existing EU law, the concept is important only in a few very restricted areas and not at all in relation to payment services.
The regulation of digital assets is a new area of regulation where there is little harmonisation worldwide between regulators, and one where UK regulators are used to taking a leading approach. For example, there is a good argument that much of the new regulation in MiFID II represented Europe catching up with regulatory innovations that the UK had first introduced.
That said, regulators do like to cooperate and this is especially important in relation to digital assets, as it may be difficult to say with certainty where (in jurisdictional terms) activities taking place.
However, in general, it seems probable that the UK will be looking globally in relation to cooperation, rather than focusing solely on the EU.
This article was authored by Nicholas Thompsell, a partner in Fieldfisher's financial regulation group with particular expertise in payment services and in regulatory perimeter issues.
Sign up to our email digest
Click to subscribe or manage your email preferences.