Cryptocurrency or cryptoassets, also known as ‘crypto’, is a store of value which can be transferred or exchanged digitally. Once regarded as a niche asset, interest in cryptocurrency has gained widespread interest in the last few years as a form of investment. Last year, the UK Prime Minister, Rishi Sunak, who was at the time the UK finance minister, spoke of making Britain a “global hub for cryptoasset technology” which highlights the potential of cryptocurrency.
However, with opportunities there are always threats. There is a grey cloud over the regulatory framework governing digital assets in the UK but the UK have recently amended the Financial Services and Markets Act 2023 (FSMA) to shape the regulatory framework for cryptocurrencies.
Regulation of cryptocurrency before the Financial Services and Markets Act reform
Before the reform of the Financial Services Markets Act 2023, the Financial Conduct Authority (FCA) only had a limited role in registering and regulating UK-based cryptoasset exchanges for anti-money laundering purposes. The FCA ensures that cryptoasset firms have robust anti-money laundering (AML) and counter terrorist financing procedures in place.
The Financial Conduct Authority (FCA) is the main financial regulatory body in the UK. The purpose of the FCA is to regulate firms providing financial services to consumers and to ensure maintenance of the integrity of the financial market in the UK.
Cryptocurrencies themselves are not regulated by the FCA and are not covered by the Financial Services Compensation Scheme. This represents a risk of holding cryptocurrencies as you could lose all your money. The only cryptoasset that is FCA regulated is security tokens, tokens with specific characteristics that provide rights and obligations to a specific investment such as a share or debt instrument.
The Financial Services and Markets Bill reform
The UK government has recognised the need for a comprehensive regulatory framework to address the unique challenges posed by cryptocurrencies and digital assets.
The government has taken the first steps to regulate the crypto market by reforming The Financial Services and Markets Act 2023, to include cryptocurrency as a regulated financial activity. Essentially, this means that cryptocurrencies will be regulated by the FCA in the same sense that it oversees the trading of stock and bonds. The amendments are due to come into force in October and provides initial clarity on the regulatory framework of cryptocurrency in the UK.
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)’.
With this Act, it lays down the foundation for the advancement of blockchain technology within financial markets as it provides clarity, certainty and protection to businesses and investors.
Another significant development under the reform is that cryptocurrency firms now need to have an establishment and be authorised in the UK in order to market regulated activities to UK consumers. If a cryptocurrency firm does not meet these criteria, then they must apply to the FCA for authorisation. This allows the FCA to have extensive oversight of the operations of cryptocurrency firms and the promotion of their services to consumers.
With this Act, it lays down the foundation for the advancement of blockchain technology within financial markets as it provides clarity, certainty and protection to businesses and investors of the significant risks posed by digital assets whilst harnessing the benefits crypto technology can bring to the economy.
The Financial Services and Markets Act 2023 marks a significant turning point in the regulation of cryptocurrency in the UK. By introducing a comprehensive framework that addresses licensing, consumer protection, security standards, it aims to foster a secure and transparent environment for cryptocurrency businesses and investors.
As the cryptocurrency landscape continues to evolve, reforms of existing Acts and the establishment of new Acts will be necessary in order to provide a regulatory framework to mitigate the risks posed by cryptocurrency and safeguard the financial stability of consumers.
Monarch Solicitors specialist Cryptocurrency Solicitors provide a tailor-made approach to your needs and can assist with cryptocurrency related issues. Please get in touch with us by either calling 0330 127 8888 or emailing [email protected] for an initial consultation.
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