With the recent amendments to the Financial Services and Markets Act 2023, the UK government is taking some initial formal steps to regulate the crypto sector.
The amendments, some of which will come in to force in October this year, are widely considered as an entry in the statute book that starts to give some clarity about the regulatory framework for digital assets and crypto companies, in respect of registration requirements and financial promotions.
Globally, market participation in crypto has continued to grow at both retail and investor level. However, regulators worldwide have been slow to introduce comprehensive – and coordinated – measures to protect investors.
Similarly, crypto companies have had to navigate uncertainty surrounding the regulations that do, or do not, apply to their business and services, and the challenges that come with operating a business across multiple jurisdictions with inconsistent, or non-existent, regulations.
In the aftermath of the high-profile collapse of FTX, and noting the Securities and Exchange Commission complaints recently filed against Binance and Coinbase in the US, it is a timely and welcome step towards managing the risks and providing some clarity to companies operating in this rapidly developing sector.
Commentators have voiced concern about whether the FSMA amendments go far enough.
Last year, Rishi Sunak set out plans to make the UK a global hub for crypto technology and investment.
The consultation in February 2023 stated that the government’s“firm ambition is for the UK to be home to the most open, well-regulated, and technologically advanced capital markets in the world. Delivering on this ambition means taking proactive steps to harness the opportunities of new financial technologies.”
Against this background, ministers may have had to tread a fine line between safeguarding investments while simultaneously retaining sufficient market confidence and international competitiveness to be in a position to fulfil this ambition.
The amendments to FSMA aim to provide clarity, certainty and protection for consumers, businesses and investors in the rapidly growing and evolving digital asset sector.
The Financial Conduct Authority hopes that the developments will help to strengthen protection, and enable customers to be better informed about risks associated with their investments.
So, which digital assets are within scope?
Section 69(4) of the act defines a crypto asset as "any cryptographically secured digital representation of value or contractual rights that (a) can be transferred, stored, or traded electronically, and (b) uses technology supporting the recording or storage of data (which may include distributed ledger technology)".
This definition is broad and covers both regulated crypto assets, such as security tokens and e-money tokens, and unregulated crypto assets, such as utility tokens and exchange tokens, which were previously outside the regulatory perimeter.
However, questions have been raised about whether or not this definition is sufficiently future-proof to capture technological advancements and new types of digital assets that emerge in the coming months and years.
