UK Unveils Digital Asset Legislation, Poised to Become Crypto Hub

The UK government is set to introduce new legislation for digital assets and stablecoins by June 2024, building upon the Financial Services and Markets Act (FSMA) 2023. The legislation aims to establish a regulatory framework for digital asset activities, including exchanges and custody services, bringing them within the regulatory perimeter for the first time. This move aligns with Prime Minister Rishi Sunak's goal of making the UK a digital asset hub and aligns with the EU's Markets in Crypto Assets (MiCA) regulation.

United Kingdom Prepares New Digital Asset Legislation

London, March 20, 2024 - The United Kingdom is poised to introduce comprehensive legislation governing digital assets and stablecoins, according to Economic Secretary Bim Afolami. Speaking at the Innovate Finance Global Summit in London on Monday, Afolami announced that the government is finalizing legislation encompassing digital asset activities and stablecoins.

"We are working diligently to enact legislation that will establish our final proposals for a comprehensive regulatory framework," Afolami stated. "Upon its implementation, a wide range of crypto-asset activities, including operating an exchange, safeguarding customer assets, and others, will be brought within the regulatory purview for the first time."

While Afolami did not disclose specific details about the upcoming legislation or its enforcement mechanisms, it is expected to build upon the foundation established by the Financial Services and Markets Act (FSMA) 2023, which was enacted last June and recognized stablecoins and digital assets as regulated activities in the United Kingdom.

These upcoming changes align with Prime Minister Rishi Sunak's vision to transform the United Kingdom into a digital asset hub while ensuring the country remains competitive with its European counterparts and their Markets in Crypto Assets (MiCA) regulation.

Regulatory Evolution in the United Kingdom

The FSMA 2023, passed by the U.K. parliament in June 2023, extended existing banking regulations to encompass stablecoins and digital assets. These regulations require entities involved in digital asset activities to maintain adequate capital, provide transparent information to customers, and adhere to other financial industry standards.

The FSMA 2023 also empowered the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) to implement HM Treasury's goals outlined in a February 2023 consultation on the Future Regulatory Regime for Cryptoassets.

This includes establishing an issuance and disclosure regime tailored to digital assets, strengthening regulations for financial intermediaries and custodians, and implementing a specialized market abuse regime.

The implementation of FSMA 2023 has been gradual, with the introduction of the Financial Promotions Regime for digital assets taking effect on October 8, 2023. This regime governs the advertising and marketing of digital asset products and services in the U.K.

Under the new regime, promotions of digital asset products or services must include a "clear warning," and firms marketing these assets to U.K. consumers must provide a 24-hour cooling-off period for first-time investors.

Firms now have four approved methods for communicating digital asset promotions in the U.K.:

• Through an "authorized person" as defined by the FCA, which includes ICVC, the Society of Lloyd's, and persons with Part 4A permission.
• Through an unauthorized person whose promotion has been approved by an authorized person.
• Through a digital asset business registered with the FCA under the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations 2017 (MLRs).
• If the promotion meets the conditions of an exemption in the Financial Promotion Order.

Promotions that do not adhere to these routes are considered non-compliant with the new rules, a development that has caused some concern within the market.

Afolami's speech on Monday underscores the government's dedication to integrating digital assets into the country's financial framework through legislation and regulation.