HM Treasury has set out its final proposals for the UK’s future financial services regulatory regime for cryptoassets, confirming its intention to bring a number of crypto activities into the regulatory perimeter for the first time. The proposals, published on 30 October 2023, are outlined in HM Treasury’s response to its February 2023 consultation and call for evidence on the topic, its response to the May 2022 consultation on managing the failure of systemic digital settlement asset (including stablecoin) firms, and a policy paper which provides an update on plans for the regulation of fiat-backed stablecoins (together the HMT Final Proposals). The legislation to facilitate the bringing of stablecoins and cryptoassets into financial services regulation, the Financial Services and Markets Act 2023 (FSMA 2023), received Royal Assent on 29 June 2023. 

A week after HM Treasury’s final proposals were published, on 6 November 2023 the Financial Conduct Authority (FCA) published its discussion paper DP23/4 on ‘Regulating cryptoassets Phase 1: Stablecoins’ and the Bank of England (BoE) also issued a discussion paper on its proposed ‘Regulatory regime for operators of systemic payment systems using stablecoins and related service providers’. Both papers are open for feedback until 6 February 2024.

This briefing gives a high-level comparison of some of the key areas of HM Treasury’s original proposals (the HMT Original Proposals) and the HMT Final Proposals, as well as incorporating some of the detail from the regulators’ discussion papers on the stablecoin regime. Readers should note that, although HM Treasury has now confirmed that cryptoassets are to become regulated in an expansive way, the draft secondary legislation is yet to be published and much of the detail will be set out in the regulators’ rules, which will need to be consulted on in due course. In the case of the stablecoin regime, the FCA and BoE will need to consider feedback from their discussion papers before they can consult on detailed rules. There remains a lot of work still to be done before the industry can plan for and adapt to its new regulatory reality.

Comparative overview of selected areas:
  HMT Original Proposals  HMT Final Proposals 
Regulatory approach
HM Treasury proposed to regulate cryptoasset-related activities within the existing UK regulatory framework, rather than creating an entirely standalone regime. This would be done via amendments to the Financial Services and Markets Act 2000 (FSMA), the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO), the Financial Services and Markets Act 2000 (Financial Promotions) Order 2005, and the FCA Handbook. Some provisions may also be introduced through the new Designated Activities Regime (DAR).

In general, HM Treasury plans to proceed as proposed. This will include expanding the list of “specified investments” in the RAO to require firms that undertake relevant activities involving cryptoassets by way of business to be FCA authorised. The RAO definition of “financial instruments” will not be expanded to include currently unregulated cryptoassets.

HM Treasury has also confirmed that it considers the DAR a ‘strong, flexible tool’ that is likely to form part of the future financial services regulatory regime for cryptoassets. It has firmly rebutted the suggestion of banning cryptoassets or regulating them as a form of gambling.

HM Treasury said it would focus on the regulation of certain activities performed in relation to a broad array of cryptoassets. It proposed a broad definition of “cryptoasset” to capture all current types of cryptoasset and ensure the Government also has the power to regulate other types of cryptoasset that may exist in the future.
While confirming the adoption of a broad definition of cryptoassets, following feedback the HMT Final Proposals seek to reassure industry on some specific examples (although HM Treasury notes that the precise legal mechanism for distinguishing between in- and out-of-scope tokens will be set out in relevant secondary legislation and FCA rules).

Cryptoassets that are not used for one of the listed regulated activities (set out in Table 4A of the HMT Original Proposals) within financial services markets or used as a financial services instrument, product or investment are not intended to be in scope of the proposed regime (although they may be subject to other regulatory regimes). Cryptoassets which are specified investments that are already regulated are also not intended to be captured.
The HMT Original Proposals suggested that certain activities performed in relation to non-fungible tokens (NFTs) may be in scope and therefore require authorisation, so there would be no blanket exemption for NFTs.
Following feedback that the proposed treatment of NFTs and utility tokens should be clarified, and subject to the previous row, the HMT Final Proposals explain that activities relating to “truly unique or non-fungible” NFTs that are more akin to digital collectibles or artwork than financial services (in the general sense) or products should not be subject to financial services regulation. The focus in deciding whether an NFT falls in scope of the regime will be on what the token is used for rather than how it describes itself.
Issuance of cryptoassets

Under the HMT Original Proposals, the mere issuance of a cryptoasset would not in itself be a regulated activity, save where that cryptoasset is a fiat-backed stablecoin. However, the admittance of a cryptoasset to trading on a cryptoasset trading venue would be regulated and public offers of cryptoassets that are not security tokens would also be a designated activity.

The HMT Original Proposals set out proposed requirements in relation to preparation of disclosure / admission documentation, liability requirements, and general marketing requirements. These proposals seek to align with the UK’s proposed Public Offers and Admissions to Trading Regime.

Where there is no issuer of a particular cryptoasset – such as Bitcoin – it will be the responsibility of a cryptoasset trading venue to take on the responsibilities of an issuer if it wishes to admit that asset to trading on its venue.

HM Treasury plans to proceed with its position as consulted on. The Government’s view is there should be disclosure documents in place for all cryptoassets (including those with no issuer) which are made available for trading on a UK cryptoasset trading venue.

Trading venues will still be required to define detailed content requirements for admission disclosure documents, but the Government acknowledges industry’s appetite for prescriptive content requirements and supports the idea of a central coordinating body.

In terms of liability, it will use the necessary information test and notes that the proposed recklessness liability standard for certain forward-looking statements, and negligence liability standard for historical, factual statements, will enable market participants to manage their liability provided they make reasonable enquiries.
HM Treasury also confirms its support for the use of publicly available information to compile appropriate parts of the disclosure and admission documents, as long as those preparing the documents are clear on where the information originated from and the level of due diligence they have done on it.
Issuance of stablecoins
The HMT Original Proposals did not specifically address the issuance of stablecoins, as measures to address those asset classes had already been consulted on by HM Treasury and changes were being made via FSMA 2023 (which at the time had not yet been passed) to reflect the intended regulatory outcomes for persons issuing and providing various activities in relation to fiat-backed stablecoins.
HM Treasury has confirmed it plans to create a regulated activity under the RAO for the issuance of fiat-backed stablecoins in or from the UK, which will apply to all issuers of fiat-backed stablecoins located within the UK.

FCA rules will specify the requirements for backing assets for fiat-backed stablecoins issued under this activity, as well as holding them under a statutory trust and the requirements for redemption rights and capital requirements (amongst other things). If the stablecoins were to be recognised by HM Treasury, BoE’s proposed rules (which have some important differences) would apply.

HM Treasury noted that the regulators would consult on these rules before they come into force, and they began this process on 6 November 2023 with the publication of their discussion papers. In DP23/4, the FCA sets out its proposed approach to regulation around issuing and holding stablecoins, which (under the HMT Final Proposals) will include authorisation requirements for firms wishing to issue fiat-backed stablecoins in or from the UK, or to carry out custody activities in relation to stablecoins from the UK or to UK based consumers.
Monitoring and restrictions on the use of stablecoins
As for issuance, monitoring and restrictions on the use of stablecoins were not specifically addressed in the HMT Original Proposals.
HM Treasury intends to regulate the use of fiat-backed stablecoins in payment chains for both mixed stablecoin payments (where there is a conversion from stablecoin to fiat, or vice versa, within the payment chain) and for pure stablecoin payments. This will be done through amendments to the Payment Services Regulations 2017 (PSRs). More detail on HM Treasury’s suggested approach to regulation in this area is set out in the stablecoin policy paper.

The FCA’s and BoE’s November discussion papers cover their proposals to implement the regulation of stablecoins for use in payments in the UK. Under the HMT Final Proposals, the FCA will regulate the use of stablecoins as a means of payment under the PSRs using two possible models (the ‘hybrid model’ and the ‘pure stablecoin model’), while the BoE will regulate operators of systemic payment systems using stablecoins, service providers that provide essential services to those systems and service providers that are systemic in their own right.
Territorial scope
The regime to be established under the HMT Original Proposals would capture cryptoasset-regulated activities that are provided in or to the UK. This would, therefore, capture overseas firms servicing UK-based customers, unless such firms are able to benefit from a relevant exemption.
The territorial nature of the regime remains as consulted on, but there is confirmation that the Overseas Persons Exclusion will not apply to cryptoassets business, which is a marked departure from traditional financial services regulation.
Location requirement for cryptoasset service providers
In the HMT Original Proposals, whether or not providers are required to have a physical presence in the UK in order to become authorised to carry out cryptoasset services remained under consideration. It was expected that the FCA would apply its existing approach to international firms when determining whether a firm is mandated to be located in the UK as part of any authorisation.

The HMT Original Proposals clearly anticipated that operators of cryptoasset trading venues would need to establish a UK-based entity if they wished to be authorised under the regime.
The HMT Final Proposals confirm that firms dealing directly with UK retail consumers should be required to be authorised irrespective of where they are located.

HM Treasury suggests that UK firms that operate a regulated crypto trading venue in an overseas jurisdiction could be permitted to apply for authorisation for a UK branch extension of their overseas entity. However, the FCA would determine the specifics of requirements on location in line with existing practice in the UK.
Provision of intermediary services in cryptoassets
The HMT Original Proposals envisaged that persons performing a range of intermediary activities in relation to cryptoassets could be required to seek authorisation with the FCA. This would capture firms engaged in dealing as principal, dealing as agent, arranging (bringing about) deals in investments or making arrangements with a view to transactions in cryptoassets.

HM Treasury proposed segmented requirements for firms performing cryptoasset-related regulated activities, so rather than one chapter of provisions relating to cryptoasset service providers in general, separate provisions would apply to trading venues, intermediaries, lending platforms and custodians.

Cryptoasset intermediaries would need to comply with a range of ongoing requirements once authorised, including best execution, conflicts, appropriateness, data reporting, capital requirements, outsourcing and operational resilience standards, and governance requirements.

HM Treasury has confirmed that it plans, in general, to take forward its proposed approach. It will define a set of new regulated activities relating to the intermediation of cryptoassets, drawing from analogous activities in the existing regulatory perimeter.

The legislative approach and subsequent rules set by the FCA will be designed with careful consideration of specific aspects of crypto markets and implications for concepts which may not map across well from the traditional financial services sector.

Trading venues for cryptoassets
Under the HMT Original Proposals, in addition to compliance with general requirements applicable to providers of services in cryptoassets, operators of trading platforms in cryptoassets would have to maintain clear and transparent operating rules for the trading platform. They would also have to have in place appropriate systems, procedures and arrangements to ensure their platform’s resiliency, orderly functioning and protection against market abuse and money laundering / terrorist financing. Before admitting a cryptoasset to trading, they would have to ensure that it complies with the trading platform’s operating rules and assess its suitability.

Operators of cryptoasset trading platforms would be prohibited from dealing on own account on their platform. They would, however, be able to engage in matched principal trading, subject to client consent. Transparency requirements, akin to those applicable to securities trading venues would also be applicable.
The HMT Final Proposals confirm HM Treasury’s intention to proceed with the proposed approach but reiterate that specific characteristics and risks of crypto trading activities must be taken into consideration.

Having understood that there are numerous business models and execution protocols, HM Treasury reports that the Government does not intend to explicitly endorse or prohibit specific ones.

Firms intending to operate a cryptoasset trading venue will be required to obtain FCA authorisation for that activity, and will provide a crucial function in terms of admitting cryptoassets to their venue and conducting due diligence over them.
Crypto-lending platforms
The HMT Original Proposals set out a new regulated activity of operating a cryptoasset lending platform. Operators of such platforms would need to be authorised and to comply with a range of ongoing obligations, including disclosure requirements, capital and prudential standards and clear legal terms describing ownership of lent and borrowed assets.
The HMT Final Proposals confirm HM Treasury’s intention to take forward the approach outlined in the consultation, in line with broad support from industry and consumer groups.

As there are various types of cryptoasset borrowing and lending arrangements, involving different business models, market participants and risks, HM Treasury notes that it would not make sense to regulate all borrowing and lending activities in the same way or adopt a single model of traditional lending regulation for all crypto lending arrangements. There will therefore, for example, be a clear differentiation between lending to retail consumers and lending between wholesale counterparties, with centralised lending platforms to retail consumers being prioritised for regulation and likely to be subject to additional requirements.
Custody of cryptoassets
The HMT Original Proposals stated that persons safeguarding and administering cryptoassets and / or means of access to a cryptoasset (i.e. private keys) would need to seek authorisation under the regime. The FCA would also be tasked with using the existing bones of its Client Assets Sourcebook to create a bespoke regime for cryptoassets, which would cover books and records requirements, safeguarding arrangements, controls and governance requirements and organisational requirements.
HM Treasury plans to take forward the proposed approach and will pass legislation defining a new regulated activity for custody covering (i) safeguarding, (ii) safeguarding and administration, or (iii) the arranging of safeguarding or safeguarding and administration, of a cryptoasset. The regime will be based on existing frameworks for traditional finance custodians but with suitable modifications to accommodate unique cryptoasset features and putting in place new provisions where appropriate.

In DP23/4, the FCA sets out its proposed approach to setting the standards that should apply to custody of regulated cryptoassets (or the means of accessing them, such as private keys). While this covers custody of regulated stablecoins and security tokens, the FCA notes that, subject to feedback, it is likely to apply a similar approach to custody of other cryptoassets that come into regulation in the future.
Passporting rights / equivalence
As a domestic regime, the HMT Original Proposals did not include any passporting rights for persons authorised to provide cryptoasset-related regulated activities.

However, HMT stated its intention to seek to establish equivalence arrangements for overseas firms subject to comparable obligations.
In the HMT Final Proposals, HM Treasury acknowledges the benefit of working towards deference or equivalence type arrangements and notes that it is committed to cooperating with international partners to deliver a framework that can accommodate this. In the meantime, it is recognised that an approach to facilitate access to global liquidity pools will be needed, even if this is time limited, until such arrangements are in place.

FCA DP23/4 also discusses the potential for overseas stablecoins to be used for payment in the UK (as proposed by HM Treasury), provided they meet equivalent standards. HM Treasury is exploring the possibility of creating a new activity of acting as a ‘payment arranger’ to assess and approve overseas stablecoins for this purpose.
M&A rules for stablecoin issuers and cryptoasset service providers
Under the HMT Original Proposals, firms authorised to perform cryptoasset-related regulated activities would be authorised persons and so would fall within scope of the FCA’s change in control regime. This means persons acquiring control in such firms would need to seek prior approval from the FCA.
The position remains the same under the HMT Final Proposals and is confirmed by the FCA in DP23/4 in relation to stablecoins.
Market abuse
The intention under the HMT Original Proposals was to expand the existing scope of the UK’s market abuse regime to address cryptoassets that have been admitted or requested to be admitted to trading on a UK cryptoasset trading venue. The regime would apply to all persons, regardless of where they are based, and would create civil offences covering insider dealing, market manipulation and unlawful disclosure of inside information. A core feature of the regime would be the imposition of requirements on the operators of cryptoasset trading venues, with such operators required to develop systems and controls and procedures to identify and investigate suspected market abuse.
HM Treasury confirms its intention to proceed with most aspects of the approach consulted on, including regime scope, regulatory trigger points and use of the existing UK market abuse regime. It sets out a modified approach towards market abuse obligations on cryptoasset exchanges, acknowledging the potential need for a staggered implementation for cross-venue data sharing obligations, although this would be time-limited. HM Treasury also supports in principle the idea of having a centralised, industry-led body (with FCA oversight) to coordinate the information sharing effort.

The Government agrees that additional guidance should be made available by the regulator to provide clarity on what constitutes market abusive behaviour (including a non-exhaustive list of examples). The Government also agrees that key aspects of the regime will need to be periodically reviewed and assessed given the dynamic nature of the industry.
AML / CFT and existing cryptoasset service provider regimes
The HMT Original Proposals provided that, once the amended regime is in force and applicable, the UK’s existing cryptoasset service provider registration regime under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) would cease to apply. Instead, firms undertaking regulated cryptoasset activities would be expected to adhere to the same financial crime standards and rules that apply to similar traditional financial services activities. These are broader than those contained in the MLRs and cover anti-bribery and corruption, sanctions, fraud and other aspects of financial crime.
HM Treasury intends to proceed with the proposed approach. It reiterates that there will be no automatic authorisation under FSMA for cryptoasset service providers currently registered with the FCA under the MLRs. However, there is a lack of clarity as to whether there will be a transitional authorisation regime for existing providers – which was a key ask of the industry (see further below).

In DP23/4, the FCA notes that for the proposed regime for regulated stablecoins, it is exploring how the existing financial crime framework in FSMA and the MLRs can be applied, as well as any potential amendments to the Handbook that may be needed, in line with the approach of same risk, same regulatory outcome. The FCA says it considers it proportionate for regulated stablecoins issuers and custodians to be subject to the same financial crime rules and operate in the same way all FSMA authorised firms are expected to act.
The deadline for responses to the HMT Original Proposals was 30 April 2023.
Phase 1 (covering fiat-backed stablecoins) of HM Treasury’s approach to regulating cryptoassets has already begun to be implemented through the introduction of measures in FSMA 2023. HM Treasury plans to bring forward secondary legislation by early 2024 (subject to Parliamentary time) and, as discussed above, the regulators have started to seek feedback on their proposals for implementation.

There is a suggestion that secondary legislation to effect phase 2 (covering a wider range of cryptoassets and activities) of the regime will be laid in 2024, subject to Parliamentary time – a key caveat given the forthcoming General Election. The FCA will then need to design various aspects and consult on changes to its rules to operationalise the new regime.
Transitional arrangements
The HMT Original Proposals did not envisage any transitional arrangements, whereby firms registered as cryptoasset exchange providers and / or custodian wallet providers would be afforded more time or a different route to apply for full authorisation under FSMA.
As above, the HMT Final Proposals confirm that crypto firms already registered with the FCA under the MLRs will need to seek authorisation from the FCA under the new FSMA-based regime. However, the FCA will consider the regulatory histories of all applicant firms when assessing authorisation applications.

HM Treasury acknowledges the need for sufficient transitional disclosure arrangements for well-established tokens such as Bitcoin, in order to reduce the risks and impacts of “cliff edges” and avoidable removals from trading in relation to the back book of tokens already in circulation. However, no other transitional arrangements are being proposed at this stage.
Grandfathering arrangements
There were also no grandfathering arrangements established under the HMT Original Proposals. HMT stated clearly that firms already authorised under FSMA would need to apply to the FCA to vary their permissions to address the performance of any cryptoasset-related regulated activities. Firms registered as cryptoasset service providers under the MLRs would need to apply to the FCA afresh under the amended regime.
The position remains the same under the HMT Final Proposals.


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