UK Treasury Announces Plan to Regulate Crypto Assets Within FSMA Framework

Yesterday, February 2nd, 2023, the HM Treasury published its much-anticipated consultation paper. The paper outlines the Treasury’s plans to effectively regulate the sector while promoting innovation and competition.

Under the proposed regulatory regime, the UK Treasury has opted to regulate crypto within the existing framework of the Financial Services and Markets Act (FSMA) 2000. The decision to use the well-established FSMA was made to ensure a level playing field between traditional financial services firms and those in the crypto sector conducting the same activities.

According to the consultation paper, the Treasury considered using a bespoke regime outside of the FSMA framework. This proposal was discarded due to concerns that it would not provide a fair regulatory outcome and could lead to overlapping regimes and confusion for market participants.

Crypto Firm Authorisation and FCA Oversight

Responsibility for oversight of crypto firms will be given to the Financial Conduct Authority (FCA). The proposed framework requires that regulated firms apply to the FCA for authorization. This means that firms would have to have adequate controls and procedures in place, including:

• Keeping adequate records;
• Applying appropriate anti-money laundering/counter-terrorist financing (AML/CTF) procedures;
• Protecting client assets;
• Demonstrating that they have sufficient capital;
• Ensuring that they are using suitable procedures to identify, assess, manage, and monitor risks
• Demonstrating that they have appropriate systems and controls in place to ensure effective and equitable customer treatment.

The paper also highlights the need for consumer protection in the crypto market. It proposes measures to address potential risks, such as the need for clear disclosure of risks and the availability of compensation schemes.

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The proposed regulatory regime for crypto assets is part of the UK government’s broader efforts to position the country as a leader in fintech and innovation. The responses received through this consultation will help the Treasury to create an effective and appropriate regulatory regime for the sector. The Treasury invites the public to respond by April 30th.