The UK has a history of fostering a forward-looking digital economy within financial services and payments. An emerging area of technology transforming financial services involves cryptoassets and their underlying technology known as distributed ledger technology (DLT). This market is served by a wide range of participants of all sizes. As a result of the growing popularity of cryptoassets, jurisdictions across the world, including the UK, are considering how to regulate this new and exciting area of technology.
The challenge in devising a regulatory approach to new technologies is finding the appropriate balance between encouraging innovation, and providing regulatory clarity and ensuring that legislation mitigates possible risks raised by the relevant activities.
The UK has a valuable opportunity to shape its response to DLT and cryptoassets in a way that encourages competitiveness within the UK. Failure to address the subtleties in the way these systems can be deployed in any new regulation may create significant legal uncertainty and give rise to the potential for regulatory arbitrage. Cryptoassets, by their nature, require regulatory coherence with other leading jurisdictions to ensure cross-border interoperability, legal clarity, and certainty. Raising consumer awareness of the risks associated with cryptoassets will be important in ensuring consumer protection. Transparency on the part of issuers and other service providers is critical to protect consumers.
Therefore, our policy recommendations are:
In January 2021, HM Treasury published a consultation[1] on its proposed regulatory approach to cryptoassets and stablecoins. In TheCityUK’s response to this consultation, we encouraged the government to take into consideration the following principles when designing the future regulatory framework:
To understand how to regulate cryptoassets or ‘tokens’, consideration must be given to their characteristics and the general
principles that underpin them. Tokens are designed to do different things and work in different ways, including the rights they
provide holders and their economic uses and impacts. As a result, they do not always fit neatly within the parameters of the existing
regulatory regimes.
| Type cryptoasset / token | Description of cryptoasset / token | Regulatory status |
| Exchange tokens |
Often called ‘cryptocurrencies’ these are like traditional fiat currency in that they are intended to be used as a means of payment or exchange. However, they are not issued or backed by a central authority, and in more recent times have been a more speculative investment. | Unregulated in financial services regulation.[2] |
| Utility tokens |
Grant holders access to a service or product. The rights they confer are often like those held under pre-payment vouchers. | Unregulated in financial services regulation.[3] |
| Security tokens |
Have characteristics similar to traditional investments (e.g. shares or debt instruments) and bring with them similar rights and obligations. | Regulated. |
| E-money tokens |
Digital representations of a unit of fiat currency. | Regulated. |
| Stablecoins | Privately issued cryptocurrencies designed to have minimal price volatility. This is typically achieved by either linking their value to a stable underlying currency or asset (or basket thereof), or by using an algorithmic price stability mechanism. | Proposals to bring these within the scope of financial services regulation are currently under consultation. |
| CBDCs | Digital forms of money representing a direct claim on the central bank, denominated in a single fiat currency. Central banks globally, including the Bank of England, are studying CBDCs, either as a complement or substitute to existing forms of central bank money, e.g. physical cash or central bank reserve or settlement accounts held by large banks. In some markets (i.e. China, Sweden) pilots are underway. | Proposals to bring these within the scope of financial services regulation are currently under consultation. |
| Non- Fungible Tokens (NFT’s) |
Unique cryptoassets that represent rights to an underlying ‘tokenised’ typically digital asset, which is created and transferred using DLT giving security of ownership. This contrasts with many existing cryptocurrencies which are fungible or interchangeable in the same way as fiat currency. | NFTs are not specifically regulated in the UK but certain existing regulations may apply to a particular NFT depending on its structure, features and how it is marketed. |
Cryptoassets all have unique characteristics, features and use cases. The optimum regulatory framework should take this into account, being adaptable, flexible, tailored to specific emerging risks and clearly defined to serve both consumers and industry.
With thanks to Clifford Chance, Freshfields, Linklaters, Santander UK and Standard Chartered Bank for their support with this report.
[1] UK regulatory approach to cryptoassets and stablecoins: consultation and call for evidence – GOV.UK (www.gov.uk)
[2] While unregulated under financial services regulations, certain activities provided in respect of exchange and utilities tokens that qualify as cryptoassets under the antimoney laundering (AML) regulations may trigger registration requirements and ongoing anti-money laundering obligations for registered cryptoasset service providers. Under the UK AML Regs the FCA registers certain cryptoasset services providers which could include exchange tokens https://www.fca.org.uk/firms/financial-crime/cryptoassets-aml-ctf-regime. Also see proposal to expand UK financial promotions framework.
[3] See previous notes to footnote 2
