Detailed explanation of the final proposal for the regulation of crypto assets in the UK: DeFi regulation will not be attempted at this stage

Original source: DLNEWS

Original text compiled by: BitpushNews Mary Liu

On Monday morning, the UK Treasury released its much-anticipated report on the crypto-asset regulatory regime, aiming to achieve the ambition of positioning the UK as a financial services industry at the forefront of crypto-asset technology and innovation.

The UK Treasury said in the report that by 2024 it hopes to regulate crypto assets like traditional financial instruments and services. With a clear regulatory path taking shape, Finance Minister Andrew Griffith believes the UK is a “clear choice to start and expand crypto-asset businesses.”

The industry has been eager for clarity since the countrys finance ministry released proposals for expert comment in February in order to prepare for the new framework.

The proposed framework will complement the Financial Services and Markets Act (FSMA), which was implemented earlier this year. FSMA brings cryptocurrencies within the scope of financial regulation. The Treasury Department’s proposed new rules would include activities such as issuance, exchange, investment, custody and lending.

The government also published its final views on stablecoin rules, placing them under the auspices of the Financial Conduct Authority.

The UK’s regime will compete with the EU’s crypto regulations (Markets in Crypto-Assets (MiCA)), and although European member states are gearing up to prepare for the new law, the UK hopes to implement it earlier than the EU by the end of 2024.

So, what are the highlights of the UK Treasury’s crypto asset regulatory proposals?

DEFi≠Gambling, DEFI supervision will not be attempted at this stage

The report shows that the UK Treasury is abandoning any previous hostility towards cryptocurrency regulation. For example, the government emphasized that it will not ban decentralized finance (DEFI) because this may hinder innovation and fail to protect consumers.

The final proposal does not involve the regulation of DeFi, and the report states that DeFi regulation will not be attempted at this stage.

A proposal put forward by the Treasury Board in May to regulate unsecured crypto assets in the same way as gambling was also ruled out because it would depart from the framework of bills such as MiCA and the recommendations of standard-setting bodies.

Trading association CryptoUK said it was pleased to see the Treasury develop a coherent framework and acknowledged that it is premature and will not have a substantial effect to overly intervene in DeFi activities.

But the proposal still has a long way to go, with parliament needing to complete the legislative process of turning the proposal into a bill and debate it before it can become law.

“There are still many unknowns,” Albert Weatherill, financial services regulatory partner at law firm Norton Rose Fulbright, said in a statement. Those unknowns include when the new rules will take effect, how crypto entities will be approved and many of the specific details of the terms.

Albert Weatherill said: “The main challenge for regulators is to provide this certainty as quickly as possible so that the industry can start to adapt to the new regulatory reality”.

NFTs and staking

NFTs were the main point of interest for 131 government consultation respondents.

Just as the sale of art is not regulated in the same way as financial services, officials concluded that “generally speaking, NFT-related activities are not suitable for regulation as financial services.”

The proposed regime is not intended to cover activities related to crypto-assets, which are specific investments that are already subject to regulation, such as security tokens, the report said.

But if the NFT is used in one of the activities proposed to be regulated, such as trading, it may still fall within the scope of future regulation.

Similarly, respondents said they were eager for the government to address staking issues and for the Treasury to step up its work to understand this area.

Among other things, the Treasury Department wants to develop a clear definition of staking on proof-of-stake blockchains, identify the types of staking models that exist and determine how to mitigate associated risks, the report said. The government currently views operating validator nodes using on-chain staking crypto assets as a technical, operational function rather than a financial services activity.

However, while the proposal does not intend to ban staking, it does argue that certain staking activities, such as the issuance of liquid tokens, pose risks to consumers.

These activities have the potential to be covered by other institutional frameworks - including financial promotions, custody, lending and intermediation - without the need for separate further regulation, the report said.

registration process

Currently, companies providing crypto services to the UK’s 68 million people need to comply with anti-money laundering and terrorism financing rules to obtain FCA approval.

The Crypto Innovation Council’s Navaratnam said this registration process “is a meaningful regulatory hurdle. This should be explicitly considered during the authorization process to reduce unnecessary process time and cost.”

New reports suggest that already registered firms will not be automatically approved once the new regime is in place, with the FCA subsequently conducting consultations to fill the gaps.

The UK also plans to enable regulated foreign companies to apply for UK authorization of UK branches.

Stablecoin

Parallel to the consultations, the government also released a policy update setting out how it plans to bring fiat-backed stablecoins within the scope of existing regulations.

Andrew Whitworth, policy director for Europe, the Middle East and Africa at Ripple, said: “Focusing on stablecoins is a wise step as they are often seen as a cornerstone of broader cryptocurrency participation, providing a means to bridge traditional finance with digital assets.

Under the latest FSMA regulations, the Bank of England and the payments regulator already have powers over stablecoins. According to the policy update, the Treasury plans to develop secondary legislation, which will also introduce the FCA to allow regulators to oversee stablecoin issuers and custody providers.

With all three regulators taking action, risks to consumers and the wider financial system will be contained, the report said.

The UK government also hopes to attract international stablecoin issuers. However, this all depends on secondary regulations that have yet to be enacted. The Treasury said it aimed to complete the work by early 2024, but this would depend on parliaments agenda.

Some people see hope, but some in the stablecoin industry say the threshold for these rules is too high.

Sean Kiernan, CEO of digital asset merchant bank Greengage, said: “The support provisions surrounding fiat-backed stablecoins are helpful as we see more and more customers using USD-backed stablecoins to make cross-border payments more efficient.

Akash Mahendra, director of Haven 1 Foundation and portfolio manager of Yield App, said the decision to give the FCA the power to issue and custody stablecoins under the FSMA makes sense as it would treat these assets on an equal footing with traditional financial instruments in the UK.

“This is significant because it ensures that the entire financial system will remain robust amid potential future fluctuations in the cryptocurrency space,” he said.

But John Egilsson, chairman and co-founder of electronic currency provider Monerium and former chairman of the supervisory board of the Central Bank of Iceland, said the update was a good faith effort to pave the way for future rules and supervision, but lacked specific regulatory recommendations.

“The lack of clear regulatory advice is confusing, especially given the Bank of England’s initial lead in this area,” he said, citing the example of former finance minister Mark Carney, who said in 2021 that he believed stablecoins should Enter the central bank’s balance sheet.

John Egilsson said: While the Treasurys desire to drive finance into the future is laudable, they appear to have lost their way by expressing a will without clear action and regulation.

Andrew Whitworth, Policy Director for Europe, the Middle East and Africa at Ripple, also expressed a similar attitude. The UK is moving in the right direction, but still needs further clarity on a feasible transitional authorization system. He added: The UK now needs to develop secondary legislation to Allow regulators to develop final rules