Does The Financial Services and Markets Bill have the Crypto Factor?
Regulation or innovation? One question on everyone’s lips is whether these terms are mutually exclusive in the world of cryptocurrency. At present, there is a backdrop of considerable uncertainty: war impacting the distribution of key commodities such as grain; UK recession; UK currency falling in value against the dollar; and a deteriorating standard of living. This pattern is reflected globally, with 45 countries facing inflation rates of over 15%.
The crypto horizon looks particularly gloomy when one also considers the sudden and catastrophic crash of FTX last November. With an estimated $8 billion in losses, this episode undoubtedly gives crypto skeptics renewed ammunition for criticism.
Yet, the UK government is set on transforming Britain into ‘a global hub’ for crypto. Indeed, last July the Financial Services and Markets Act (FSMA) was introduced to Parliament.
The original Bill and its subsequent amendments are indicative of government attempts to chase the tails of this rapidly changing technology. It also largely mirrors progress taken on the continent, demonstrated by the EU’s Markets in Crypto Asset regulation.
Financial Services and Markets Act: The Initial Changes
The original version of the FSMA set out plans to recognise stablecoins as a valid form of payment, giving the Financial Conduct Authority (FCA) the power to regulate them. Those stablecoins capable of effecting payments, namely ‘digital settlement assets’, are to be brought within the Bank of England’s regularity perimeter.
The FSMA also clearly defines ‘digital settlement assets’ and gives HMT the power to amend this definition. This is of particular importance, as it ensures the legislation will keep pace with rapidly developing technology.
Further Developments
Further amendments to the FSMA, made in November, will broaden the remit of the FCA’s powers if passed into law. Andrew Griffith explained that the changes ‘amends the Financial Services and Markets Act 2000 to clarify that the powers relating to financial promotion and regulated activities can be relied on to regulate crypto assets and activities relating to crypto assets.’
At present, the FCA’s power extends to ensuring that cryptoasset firms are employing effective anti-money laundering (AML) and financial crime procedures. However, these changes mean that cryptoassets will be treated, and thus regulated, in a similar way to shares and other more traditional securities.
What does this mean for cryptoasset firms?
This regulation would essentially lead to a ‘levelling-up’ for cryptoasset firms when it comes to their compliance obligations.
As a result, firms that are offering services relating to cryptoassets will likely require FCA authorisation. This means that any firm operating crypto exchanges, supplying investment advice or custody services in relation to cryptoassets will need to be fully registered with the financial services regulator in order to operate legally in the UK.
Those firms who are already registered and subject to the FCA’s AML regime must go through a separate registration process. This is because full authorisation under the FSMA will potentially mean that firms will be subject to all rules laid out within the FCA Handbook, not just those under the AML regime. Notably, this could include the Financial Ombudsman Service rules on complaints.
The FCA’s new powers will enable a much broader regulation of cryptoasset firms, including restrictions on advertising and selling in the UK market. This is due to a move to append ‘including where an asset, right or interest is, or comprises or represents, a crypto asset’ to Section 21 of the Act. This represents an extension to the financial promotions regime, as Section 21 prevents the advertisement and promotion of investment activities by unregulated firms.
Any firms violating these rules and engaging in fraudulent activities involving cryptoassets will be at risk of fines and/or other penalties at the behest of the FCA.
What does this mean for consumers?
One of the FSMA’s overall objectives is to ensure greater protection for those engaging in crypto-related services and investments. Indeed, it will undoubtedly consign more power into the hands of the consumer.
In order for crypto to flourish meaningfully, this legislative certainty is indisputably necessary. In 2022, the Financial Lives Survey indicated that around 3 million UK consumers have already invested in cryptoassets. The FSMA will ensure greater business certainty, attracting even more investment and creating more jobs in the sector. The Act has had its second reading in the House of Lords on 10th January, and is currently going through the Upper House’s committee stage, after which there will be the report stage and third reading before the Bill reverts to the Commons for further debate. Royal Assent is expected in spring/summer this year.
https://bills.parliament.uk/publications/49063/documents/2625 p. 79.
https://publications.parliament.uk/pa/bills/cbill/58-03/0146/amend/finserv_rm_pbc_1021.pdf p. 14.