Partner Jessica Lee and Associate Menelaos Karampetsos Unpack UK Crypto Regulations in Law360

Partner Jessica Lee and associate Menelaos Karampetsos co-authored an article published by Law360 on Dec. 15 examining the U.K.’s proposals to regulate crypto assets.

The article builds on an originally published client advisory, noting that the U.K. government unveiled its proposals to regulate crytpo-assets on Oct. 30 when it published three different reports detailing its plans.

Those plans included regulation of fiat-backed stablecoins, a financial regulatory regime for crytpo-assets and the management of the failure of systemic digital settlement assets. Those reports were followed by similar documents published by the Financial Conduct Authority and the Bank of England.

“The new regulations will require a more detailed assessment by the FCA of firms' regulatory compliance areas not previously assessed under former money laundering regulations registrations, nor will holding a money laundering regulations registration entitle a firm to automatic authorization,” they wrote. “This raises the question as to how effectively the FCA will be able to process an influx of authorization applications that will no doubt follow the incoming regulatory regime.”

The government's regulatory plans are split into two phases. In Phase 1, the issuance and custody of fiat-backed stablecoins will be brought within the scope of the Financial Services and Markets Act 2000, they explained. Phase 2 will see the wider regulation of crypto-assets capturing issuance, exchange activities, investment and risk management; lending, borrowing and leverage; and safeguarding, administration and custody activities, they wrote.

“There is already some concern around the authorization process for firms undertaking regulated crypto-asset activities under Phase 1 and Phase 2,” they wrote. “Historically, the FCA has not had a track record for the fastest or smoothest processing of registrations for crypto-asset firms under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.”

The U.K. has indicated it intends to legislate in 2024 with Phase 1 of the regulations, they wrote, however, there has been no indication as to when the regulations would go into effect. Though, the regulators' joint road map expects them to be implemented by 2025, they wrote.

“The bulk of supervision of regulated firms will be conducted by the FCA, which will have to commit significant resources in order to determine how its rules will apply to crypto firms,” they wrote. “There are notable areas absent from the framework, such as staking, which should be developed as a matter of priority to provide further regulatory certainty for the industry. Firms should, however, be encouraged by the underlying message in the proposals, which is that the U.K. government intends to engage with the industry and is supportive of the potential of crypto in the U.K.”

Read the full article here.