Brexit may not be aging well in the UK, but there are a few things that the British are doing right, and that’s in the name of crypto regulation. The United Kingdom and His Majesty’s Treasury released their official guidelines for the registration and ultimate function of the crypto economy in the British Isles.
The new UK rules will impact UK-based businesses as well as crypto businesses located outside the UK. Businesses in the UK will need to obtain authorization from the Financial Conduct Authority (“FCA”) when the new rules come into force. They must enhance their systems, controls, and governance arrangements to meet the new increased regulatory standards.
US and other non-UK businesses will need to comply with the new requirements in order to access the UK market. The UK presently takes a benign approach to cross-border business in the UK. This will start to change in 2023 with the introduction of the new UK marketing rules (for financial promotions) and, subsequently, with the new authorization requirements.
How Will Regulation Affect Crypto Marketing?
The UK Government has stated that it will bring crypto marketing activities within the regulatory net under the existing financial promotions framework. This framework is set out under section 21 of the Financial Services and Markets Act 2000 (“FSMA”), which imposes restrictions on the issue of an invitation or an inducement to engage in investment activity.
This regime will be applied to promotions relating to a “qualifying crypto asset.” This means that only an FCA-authorized firm would be able to issue or approve crypto advertisements or other marketing.
These proposals have caused considerable disquiet in the crypto sector (as you can imagine). Cryptoasset businesses registered with the FCA under the UK Money Laundering Regulations are not authorized persons under FSMA and, therefore, under the original Government proposals, would not have been able to issue their own marketing communications.
A registered UK crypto business would therefore have needed to involve an FCA-authorised firm in approving its marketing materials. This could include its website, all communications with customers, and advertising. Given that only a few authorized firms would have the expertise or risk appetite to perform this role, there were industry-wide concerns that crypto businesses would effectively be precluded from engaging in any promotional activities.
Guess who listened and decided to implement changes to these original proposals (hint: the government).
3 Phases of Crypto Regulation in the UK
The UK Government will introduce crypto regulations in distinct phases. These are:
- Phase 1 to cover fiat-backed stablecoins;
- Phase 2 to cover activities relating to other categories of crypto assets; and
- Phase 3 covers certain residual activities.
The new regime will apply to crypto asset activities provided in or to the UK. This means that offshore exchanges and other businesses targeting UK clients could become subject to a UK authorization requirement. They will also need to comply with the new financial promotion rules mentioned above.
For crypto-asset issuance and disclosures, the Government proposes to follow a similar approach. A crypto-asset is admitted to trading on a regulated crypto-asset trading venue or is subject to a public offer.
The UK Treasury states that it does not intend to directly regulate the “creation” of unbacked crypto assets under financial services regulation.
Will the US and Other Countries Follow Suit?
What do you guys think? Are these guidelines something we could recreate in the United States? Is there hope for the SEC to gain inspiration from our cousins across the Atlantic?
If we have learned anything from history, we might be a few steps behind the UK.
