Crypto Currency: Will 2023 Be The Year Regulation Catches Up With Digital Assets?

• Published date: 31 August 2023
• Subject Matter: Finance and Banking, Wealth Management, Technology, Financial Services, Wealth & Asset Management, Fin Tech
• Law Firm: King & Wood Mallesons
• Author: Mr James McKenzie and Romy Descours-Karmitz

THE UK CONTINUES TO PLAY A LEADING ROLE IN THE REGULATION OF CRYPTOCURRENCY AND DIGITAL ASSETS

The UK Government's consultation on what it calls a "world first" new regime of cryptocurrency regulations promises to bring the regulation of digital assets closer in line with traditional financial instruments.

Similar developments in English law jurisprudence, most recently in the Tulip Trading Ltd case, portend greater regulation, scrutiny of and potential responsibility for actors in the blockchain. The case, and others we have previously reported on, show that, independent of current pending legislation, the common law will step in where the facts require. They also indicate a potential, incremental development of legal concepts (such as fiduciary duties) to deal with this novel asset class.

Given recent market turbulence, there will be strong views about these developments, and they are set to make 2023 another interesting and fast-moving year for digital assets.

UK MOVES TOWARDS CRYPTO REGULATION

In the short time since our recent articles¹ We recently wrote on the following subjects: How to get your money back in a cryptocurrency demise or cryptocurrency fraud?; and Locating stolen cryptocurrency: how disclosure orders can help. about digital assets, a number of noteworthy developments have emerged in the UK.

In February, the UK Government launched a 3-month consultation on its proposals for a new regulatory regime for crypto assets in order to bring the sector in line with its approach to traditional banking and finance instruments (the Consultation). Some of the key proposals in the Consultation include:

• Expanding the scope of Financial Services and Markets Act 2000 to add "crypto assets" as a new type of "specified investments" as defined in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.
• Implementing a definition of crypto asset which defines crypto assets as "any cryptographically secured digital representation of value or contractual rights that: (a) can be transferred, stored or traded electronically, and (b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology)."
• Listing the tokens covered by the definition of crypto assets exchange; utility; security; non-fungible; (fiat-backed) stable coins; asset-referenced tokens; commodity-linked; crypto-backed algorithmic; governance; and fan tokens.
• Applying future financial services regulation of crypto assets to a particular subset of crypto assets depending on the matter being regulated, and accordingly use narrower definitions for each.
• Strengthening the rules for crypto trading platforms, financial intermediaries and custodians, responsible for facilitating transactions and storing customers' assets.
• Creating a robust top-world regime for crypto lending and delivering a financial services roadmap by embracing technological change and innovation to grow the economy.
• Implementing more transparency and protections for consumers and businesses and improving market integrity to limit market and price volatility.
• Placing responsibility on crypto trading platforms for defining the detailed content requirements for admission and disclosure documents to ensure fair standards.

The UK Treasury's messaging on the proposals is that it intends to lay down sensible, transparent rules on crypto assets, enhance reporting and prevent market abuse such as...