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(Kitco news) – The United Kingdom on Wednesday released its long-awaited regulatory framework for crypto regulation, outlining the government’s choice of regulators to oversee the sector, as well as detailed guidance on stablecoin classification, rules for ICOs, exchanges, custody and other key regulations for digital assets.
“Our aim is to establish a proportionate, clear regulatory framework that enables companies to innovate quickly, while maintaining financial stability and clear regulatory standards,” wrote Andrew Griffith, Economic Secretary to the Treasury. “This includes a proposal to bring centralized crypto-asset exchanges under financial services regulation for the first time, as well as other core activities such as custody and lending.“
The regulatory framework outlined in the report aims to achieve four overarching policy objectives: fostering growth, innovation and competition in the UK; enable consumers to make well-informed decisions, with a clear understanding of the risks involved; protect the financial stability of the UK; protect the integrity of the UK market.
The Treasury Department said the framework also adheres to a number of core design principles:
“Same risk, same regulatory outcome,” meaning the government will remain “technology agnostic” when deciding whether digital assets increase or mitigate risks, “but the goal is to achieve the same or very similar regulatory outcome” whenever possible.
“Proportionate and focused,” meaning they will focus attention on “where the risks and opportunities are most pressing or acute” and will do their best to avoid “disproportionate or overly burdensome regulation” for crypto entities.
“Agile and flexible,” meaning that any regulation should “accommodate evolving markets and products” and should “allow regulators to adapt to market changes and the development of international standards.” The regulatory framework should also be “consistent” with the Future Regulatory Framework (FRF) to be established by the Financial Services and Markets Act 2022 (FS&M Proposal), and should also be aligned with regulations in other jurisdictions.
The underlying legislative approach will be to place the regulation of cryptoasset financial services “within the regulatory framework established by the UK Financial Services and Markets Act 2000 (FSMA), taking advantage of the trust, credibility and regulatory clarity that this existing system provides, and as it intends to update By the proposal of the law on FS&M.”
The report says it also considered “developing a fully tailored regime outside of FSMA” but decided against it because it would create a “level playing field” between crypto and traditional financial services firms, violate “same risk, same regulatory outcome ” and would likely create “overlapping regulatory regimes and confusion for market participants”.
This means that when the new crypto regime under FSMA (as amended by the FS&M Bill) becomes law, crypto companies will move from the interim Financial Conduct Authority (FCA) rules they have been operating under since January 2020 to rules that more closely resemble those governing traditional finance. including those related to anti-money laundering/countering the financing of terrorism (AML/CFT).
“HM Treasury expects companies undertaking regulated cryptoasset activities to adhere to the same financial crime standards and rules under FSMA as apply to equivalent or similar traditional financial services activities,” the report said.
A key provision in the report is a new distinction between “stable coins”, which under the new regime would include only those tokens fully backed by their underlying fiat currency, and so-called “algorithmic stable coins” which, while not illegal as in many other jurisdictions, they would not be classified as a stablecoin and would be prohibited from using “stable” in their marketing or documentation.
The new regulatory regime for cryptoassets divides various crypto products and activities into two expected phases of implementation. The first phase will include rules for issuance, payment and custody activities only for fiat-backed stablecoins, while the second phase will include rules for all activities related to issuance (ICOs, listings), exchanges (CEX and other crypto exchanges) , investing and risk management (principals and agents, arranging deals), lending, borrowing and leveraging (crypto asset lending platforms) and custody (apart from fiat-backed stablecoins).
Rules governing activities related to validation and governance (mining or validating transactions, managing a node on the blockchain) will not be part of the first two phases and will be left to future phases of implementation. Some investment and risk management activities, such as crypto asset management and advisory, could be excluded from the regulatory regime entirely.
The report also includes “Calls for Evidence” for decentralized finance (DeFi), sustainability and other cryptoasset activities, as well as a broader call for consultation on the new regulatory framework: “Responses from all stakeholders are welcome, including cryptoasset companies, technology companies, financial institutions, other businesses affected by the regulation of crypto assets, trade associations, representative bodies, academics, legal firms and consumer groups.”
The report states that interested parties have until April 30, 2023 to submit their evidence, recommendations and feedback for consideration.
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