The state of crypto regulation in the UK and US

summary

Emerging crypto regulation in the United Kingdom (“UK”)

On 25 October 2022, the House of Commons voted in favour of adding crypto to the scope of activities to be regulated via the proposed Financial Services and Markets Bill 2022-23 (the “Bill”). The Bill has the aim to treat crypto like other forms of financial assets. The draft Bill already included measures to extend existing regulations to payments-focused stablecoins and outlines why it is important to regulate them.

Contrary to the existing Financial Services and Markets Act 2000 (“FSMA”), clause 14 states that “crypto-assets could be brought within the scope of the existing provisions” relating to regulated financial activities. Such measures could enable the regulation of crypto promotions and therefore, outlaw companies that are not authorised to operate in the country. The inclusion of crypto in the scope of the Bill will ensure the country’s Treasury can respond to developments in the crypto sector quickly and deliver regulation more efficiently and consistently.

Expanding crypto regulation in the United States (“US”)

On 3 October 2022, the Financial Stability Oversight Council (“FSOC”) released its report on Digital Asset Financial Stability and Regulation. The report identifies the following key gaps in the regulation of crypto-asset activities in the US:

  • First: those spot markets for crypto assets that are not securities are subject to limited direct federal regulation.
  • these markets do not have sufficient rules and regulations to ensure trading that is transparent, and as a result fail to prevent conflicts of interest and market manipulation.
  • Second: crypto-asset companies lack a framework that is consistent and comprehensive.
  • such crypto firms have affiliates and/or subsidiaries that operate under different regulatory frameworks, and there is no one single regulator that has oversight.
  • Third: Some crypto-asset trading platforms propose to their customers, direct access to markets by implementing services provided by intermediaries (broker-dealers or futures commission merchants).
  • Issues such as financial stability and investor protection may give rise in the future as there is a likely high risk of exposure to practices proposed by vertically integrated trading platforms.

In order to address the gaps, the report recommends:

  1. the legislation provides a rulemaking authority for federal financial regulators over the spot market for crypto assets that are not securities;
  2. the steps needed to address the regulatory arbitrage such as, coordination and legislation relating to the risks posed by stablecoins and legislation, which relate to regulators’ authorities to have more supervision of the activities of all the affiliates and/or subsidiaries of crypto asset entities;
  3. a study of potential vertical integration of crypto-asset firms.

next steps for firms

As the UK and US continue to deepen ties on crypto regulation and market developments, by identifying the risks and gaps in crypto opportunities and identifying how these can be regulated for the future, the benefits will be: improvement to consumer protection, financial system integrity and financial stability.

In the US, crypto platforms will continue to be an area of increased regulatory scrutiny. We can assist firms with examining the governance, controls, trading, and custody arrangements in this ecosystem.

For more information, and any guidance or advice on the future of crypto regulation in the UK and US, Cleveland & Co External in-house counsel™, your specialist outsourced legal team, are here to help.

To read the full FSMA Bill 2022-23 click here.

To read the full FSOC report click here.

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