Blockchain, stablecoin, NFT, cryptocurrency, and DeFi. What are the regulatory consequences of this financial innovation tsunami?
As we have been able to verify in the last period, the growth in the use of cryptoassets has led, proportionally, to an increase in the regulatory interventions adopted on a global scale. The formidable and sudden escalation of the phenomenon and its continuous evolution makes it, however, difficult to keep up to date about the state of progress of the regulation elaborated by the different legislations, both at the European and international level.
The information in this post, then, while not exhaustive, will tend to clarify the blockchain, stablecoin and security token regulation adopted in the United Kingdom.
Recent events involving British domestic politics, following the resignation of Prime Minister Boris Johnson and the subsequent installation of Liz Truss in Downing Street, have been of particular concern to those in the financial sector, given the possible impacts they could bring about regarding the advancement and use of DLT cryptographic technologies in the financial sphere.
This is, admittedly, an issue that was central to the agenda of the previous Johnson government, which was intent on making the country a welcoming hub for cryptocurrencies.
In fact, as early as March 2018, a Taskforce composed of the UK Ministry of Finance, the Financial Conduct Authority (FCA), and the Bank of England had been established to monitor developments in the crypto asset sector. In the same year, the FCA also promoted, at the international level, the establishment of a Sandbox Global Financial Innovation Network, aimed at promoting, both the creation of a transnational co-working space for financial players interested in the new digital challenges and coordination and collaboration between national and supranational regulators regarding possible approaches to be taken in regulation and supervision.
Crypto activities, business opportunities, and stablecoin
The visible interest across the UK in the phenomenon of cryptocurrencies in its various financial applications culminated last April with the announcement by Chancellor Rishi Sunak and Treasury Secretary Jhon Glen that stablecoins will be accepted within the UK payments network, given that the Royal Mint will also issue its own NFTs.
This opening should ensure market conditions such that issuers and providers of stablecoin services will be able to operate and invest in the UK, expanding their offering with more efficient means of payment for consumers.
In this regard, a number of policy measures have been announced to ensure that the UK financial services industry remains at the forefront of technology. They include:
- the establishment of a ‘financial market infrastructure sandbox’ to promote innovation among financial players;
- the establishment of a crypto asset engagement group to ensure a more efficient dialogue with the financial system and its actors;
- improvements to the English tax system regarding the treatment of crypto assets, in order to make it more competitive and attractive on an international scale;
- the issuing of guidance on Defi transactions, in particular on lending and staking.
What about security tokens?
The FCA published its ‘Policy Statement on cryptoassets’ (PS19/22) in July 2019, identifying three subcategories of cryptoassets:
- Unregulated Token
- E-money Token
- Security Token
The FCA considers ‘Unregulated’ tokens whose purchase, sale and/or exchange occurs outside the regulatory perimeter represented by the Financial Services and Markets Act (Regulated Activities) 2001, MIFID II and the Electronic Money Regulations 2011 (EMR).
Similarly, the FCA identifies as “E-money”, tokens (i) having a monetary value attributed through DLT technology, (ii) issued upon receipt of funds from the issuer and (iii) that are intended for circulation. Such instruments therefore meet the requirements of ‘electronic money’ as regulated by the 2001 Regulated Activities Order, so much so that they have not been excluded from the application of the 2011 Electronic Money Regulation.
Finally, security tokens are identified as digital instruments that incorporate rights and obligations on a par with ‘specifed investments’ (as regulated in the 2001 Regulated Activities Order), i.e., true ‘financial instruments’ as defined in the context of MIFID II.
What will be the next steps on the regulatory front?
Due to the evident risk of volatility that has been affecting cryptoassets and, in particular, the world of cryptocurrencies in recent times, there have been direct actions on the banking supervision front, where the Bank of England has urged credit institutions operating in the UK to carefully assess the risks involved with monetary crypto assets, requesting a possible review of the strategies and systems adopted to manage the risk deriving from exposure to such instruments, as well as the amount of capital required to cover any losses.
Meanwhile, on the legislative and regulatory front, in March 2022, the Prospectus Regime Review Outcome was published, in which the UK government anticipated the main reforms that will affect the issuance and admission to trading of digital tokens will be.
A redefinition of the regulatory structure with regard to (digital) securities offerings in the UK has been envisaged, giving the FCA additional powers to ensure greater disclosure transparency to investors, particularly with regard to ‘forward-looking’ information about the performance of traded securities.
In addition, the Bank of England and the Financial Conduct Authority will carry out further work on rules for stablecoins and consult on a regulatory ‘template’ for so-called systemic stablecoins in 2023.
Differences in EU strategy
From an initial assessment, it would thus appear that the UK has intended to approach the crypto-asset phenomenon in a less comprehensive manner than is the case in the EU, where, as seen, a compromise on the regulation of crypto-asset markets (MICAR) was recently reached.
It is enough to consider how the definition of ‘digital asset’ elaborated by English law is not so clear and, in some respects, much more limited than that elaborated in the EU with MICAR.
This consequently leads to the assumption that, in all likelihood, the overseas regulator will be concerned with regulating a smaller number of services (i.e. exchange and custody of digital securities), contrary to what the EU did with the MICAR which, as is known, regulates a wide range of services, such as, among others, trading, advice, order transmission and others, not limiting itself to custody or exchange from and into cryptocurrencies.