UK passes bill recognizing digital assets as regulated financial activity

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The United Kingdom has passed the Financial Services and Markets Bill (FSMB) after it received approval from King Charles on June 29. The bill aims to regain control over financial services rules post-Brexit and includes provisions that bring digital assets and stablecoins within the scope of financial services regulations.

The passing of the FSMB bill extends the banking rules of the Financial Services and Markets Act 2000 (FSMA)—the core legislative framework for financial services oversight in the U.K.—to stablecoins and digital assets. This means that for the first time in the U.K., digital assets will be officially recognized as a regulated financial activity.

The government announcement said the bill “enables the regulation of cryptoassets to support their safe adoption in the UK” and “establishes ‘sandboxes’ that can facilitate the use of new technologies such as blockchain in financial markets.”

Crucially, the FSMB gives U.K. regulators, namely the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), the powers that they need to be able to set the digital asset rules on which the Treasury began consulting in February, making it the first step towards comprehensive digital asset regulation in the country.

The Treasury’s February consultation, which closed in April, laid out plans to wrap digital asset activity into existing financial regulation—namely the FSMA.

The Treasury’s proposals, as outlined in the consultation paper, were “informed by recent market events – including the failure of FTX.” As such, the driving force was to mitigate the most significant risks associated with digital asset businesses operating within financial services without negatively impacting the U.K.’s goal of becoming a digital currency hub.

Key proposals included establishing an issuance and disclosure regime tailored to digital assets; strengthening the rules that apply to financial intermediaries and custodians of digital assets; and adopting a bespoke, digital asset-specific market abuse regime.

The adoption of the FSMB on Thursday is an important first step, should the outcome of the consultation be a more complete integration of digital assets into the FSMA.

Passage of the Bill

The 340-page FSMB bill was introduced in July 2022 to take advantage of Brexit freedoms and give domestic regulators more power over the U.K. financial system. The original version included a proposal to regulate stablecoins under the U.K.’s payments rules, and in October, an amendment was added to recognize digital assets under regulated financial activities.

The bill passed its third reading in the House of Lords (the upper house) on June 19 and was sent back to the lower house for any amendment to be considered. As the upper house tabled no major amendments, the bill was sent on for Royal Assent, which was given by King Charles on June 29.

“This landmark piece of legislation gives us control of our financial services rulebook, so it supports UK businesses and consumers and drives growth,” said Economic Secretary to the Treasury, Andrew Griffith, on Thursday after the Royal Assent was announced.

Griffith also stated that “By repealing old EU laws set in Brussels it will unlock billions in investment – cash that can unlock innovation and grow the economy.”

UK v EU

Ironically, considering it was hailed by the Government as proof of Britain taking back control post-Brexit, the FSMB actually brings the U.K. more in line with the EU regarding digital assets.

The EU’s landmark Markets in Crypto Assets (MiCA) legislation passed its final vote in April. When it eventually comes into force, likely in early 2024, MiCA will bring digital assets, issuers, and service providers under a broad regulatory framework. MiCA will also provide new classifications for different digital assets and proof-of-funds requirements for stablecoin issuers.

The U.K.’s FSMB is not as sweeping as MiCA and is also not a digital assets-focused bill, being designed as a more general update of the U.K.’s financial sector rules. However, it does bring the U.K. closer to the EU’s approach than the U.S., where regulators and industry advocates continue to argue over regulatory approaches to the industry.

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