UK Government Publishes Draft Rules on Cryptoasset Regulation

Key takeaways include:

➡️ The draft text enables the FCA and PRA to provide (and hopefully finalise) rules and guidance in anticipation of when firms are expected to comply.

➡️ Amendment of the RAO to introduce the definition of "qualifying cryptoassets", which includes "qualifying stablecoins" but excludes "specified investment cryptoassets" (e.g. tokenised equities or bonds).

➡️ Definition of new specified activities that will require FCA authorisation:

1. Stablecoin issuance,
2. Custody of qualified cryptoassets and specified investment cryptoassets,
3. Operation of a qualified cryptoasset trading platform,
4. Dealing in cryptoassets as principal (including crypto lending and borrowing),
5. Dealing in cryptoassets as an agent,
6. Arranging deals in qualifying cryptoassets (including operating a cryptoasset lending platform), and
7. Qualifying cryptoassets staking (including liquid staking, with the issuance of liquid staking tokens counting as dealing and thus requiring an additional license).

➡️ No provisions for decentralised finance, with requirements not applying if the activities are "undertaken on a truly decentralised basis". What this means in practice is still to be confirmed.

➡️ The geographic scope means that firms (UK-based or overseas) serving UK retail customers need authorisation. However, for some activities (operating a platform, dealing as agent/principal or arranging deals), overseas firms serving only institutions would not require authorisation.

➡️ Stablecoin issuers would only require authorisation if issuing from a UK establishment.

➡️ The Financial Promotion order (FPO) is amended to reflect the new activities and the temporary provision for MLR-registered firms to approve their own FP is removed.

➡️ The Money Laundering Regulations (MLRs) are amended to reflect the new activities. Firms authorised under those won't need to register separately under the MLRs, just to notify the FCA. However, the MLR requirements apply in full.

➡️ Firms should be able to submit advance applications for authorisation prior to the commencement of the regime, and there are provisions for the wind-down of activities of entities providing crypto services that fail to secure authorisation.

Comments can be submitted until May 23rd, and more information will follow on the admissions and disclosures and market abuse provisions.