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UK Treasury publishes response to feedback on proposal to regulate digital assets

The United Kingdom Treasury has published a response to its consultation and call for evidence on the future financial services regulatory regime for digital assets, emphasizing that the U.K. should be considered ‘open for business’ as a digital asset destination.

“With the future regulatory framework now taking clear shape and the Financial Services and Markets Act now passed, the UK is the obvious choice for starting and scaling a cryptoasset business,” wrote Andrew Griffith MP, the Economic Secretary to the Treasury.

“The UK is the largest financial centre globally outside the United States, and our tech industry is worth over $1tn; we are only the 3rd country to hit this valuation after China and the US. This combined with world-leading systems of law and financial regulation makes for a potent combination. Unsurprisingly the UK consistently ranks at or near the top of research reports on ‘crypto-readiness’ and ‘crypto-friendliness’.”

The consultation and call for evidence was issued in April of this year, following an announcement by the Treasury that it intends to regulate several digital asset-related activities under the pre-existing U.K. financial services regulatory regime alongside specific regulatory proposals. Under the U.K.’s Financial Services and Markets Act, the Treasury is empowered to order the creation of new rules in relation to specific activities.

In particular, the Treasury proposed a ‘same risk, same regulatory outcome’ approach, focusing on the risk posed by digital assets rather than the specific technology underpinning them. The Treasury proposals envision that almost any digital asset used for financial activities would fall under the financial services regime. Specific regulatory proposals included more stringent rules around digital asset token issuances, including setting the minimum standards of information that must be made available to investors and regulators before issuances, and establishing liability and compensation in cases of untrue or misleading statements.

Exchanges are also proposed to be subject to the same requirements as any other financial trading venue, which would mean the imposition of liquidity, licensing, and resiliency thresholds for exchanges.

In the report published Tuesday, the Treasury outlined the results of its consultation period. In addition to hosting a series of roundtables and workshops with over 80 organizations, the Treasury received 131 responses, 50% of which came from firms, 25% from trade associations, and 12% from members of the public or Universities.

79% of respondents were ‘mostly supportive’ of the proposals. 12% were ‘neutral or mixed,’ and just 9% were ‘mostly critical.’ Those in the ‘mostly critical’ category also include those respondents who would want digital assets to be banned or brought in line with the umbrella of gambling laws rather than that of financial services.

Specifically, 94% of respondents agreed with the Treasury’s overarching proposal to expand the list of ‘specified investments’ to which the Financial Services and Markets Act will apply to include digital assets. This is central to the Treasury’s desired effect of bringing digital assets within the existing financial services regime. Those who disagreed with the proposal were “mostly of the view that cryptoassets (or at least certain types of cryptoassets – such as unbacked cryptoassets) should not be given legitimacy by being brought within the financial services regulatory perimeter.”

There was also broad agreement on the proposal to treat the admission (or application for admission) of a digital asset to a U.K. trading venue as the ‘regulatory trigger point,’ with 94% responding positively.

One of the more controversial consultation questions was on the Treasury’s proposal to regulate firms based on whether they are in the U.K. or, most importantly, provide services in the U.K. This proposal gives extraterritorial scope to the regime in a manner consistent with the recently adopted financial promotion rules. 67% of respondents agreed with this approach, highlighting a common observation that many recent market failures involved overseas firms. Some respondents, however, questioned whether it’s reasonable to expect U.K. regulators to be able to enforce the rules on overseas firms.

Despite the dissenting responses, the Treasury report clarifies that the government intends to proceed with the originally planned territorial scope.

There was a similarly divided response on the question of liability for submitting false or misleading disclosure documents. The original proposal was that liability for such documents would be applied to the ‘preparer’ of the document, which could be the issuer or the trading venue. 64% of respondents at least ‘generally’ agreed with the proposal. Even among those in this camp, the report notes that many had expressed concern over legal costs that could be transferred to investors. Others advocated for early-stage exemptions or minimum thresholds to help foster innovation in new products.

In response, the report emphasized that the intention is still to proceed with the proposals, saying that the government believes that “all cryptoassets which are made available for trading on a UK cryptoasset trading venue” should be subject to disclosure requirements. However, it did say that the government agrees with the comments that digital asset exchanges which have taken reasonable care to identify and describe the necessary risks to investors should not be liable for the accuracy of disclosures.

Common feedback also addressed areas where respondents felt that more clarity was needed: for example, respondents wanted clarity on the Treasury’s proposals on stablecoins, which would extend existing regulatory powers to manage the insolvency of certain financial infrastructure forms to ‘systemic’ digital settlement asset firms, including stablecoin issuers. For example, the proposals most commonly referenced in the feedback were those around non-fungible tokens (NFTs), with respondents asking for more guidance on what constitutes a financial services use in order for an NFT to be captured by the regime. The Treasury noted that more clarity would be provided in further regulations.

The Treasury also notes that there have been a number of key developments in the digital asset industry since the original call for feedback. For one, another amendment was made to the Financial Services and Markets Act 2000, which introduces strict requirements for advertising digital asset products in the country. The U.K. Law Commission also published its long-awaited report on digital asset law, which contained recommendations for a reform of the legal regimes governing digital assets.

Regardless, the government’s approach remains mostly unchanged in response to the feedback. This makes sense, considering how many consultation questions received broad support from respondents. However, the fact that the government is staying the course on some of the more controversial questions is likely to rankle some feathers.

You can read the full Treasury report here.

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