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UK confirms Crypto needs RegTech

The UK Treasury’s fired a warning shot across the bow of digital assets businesses yesterday.

The proposed regime will be a significant challenge for the current exchanges and digital asset firms who do not have access to institutional-grade RegTech solutions.

With so much at stake, it is essential that those affected understand what impact these TradFi rules will have on their business and make their voices heard before the window of opportunity closes.

Join JWG’s 22 March virtual seminar to learn more.

Register here for complementary delegate pass for firms & regulators 

The global impact of HMT’s consultation

The UK’s HM Treasury published a consultation on the regulation of crypto-assets yesterday.

The Future financial services regulatory regime for cryptoassets: Consultation and call for evidence contains detailed proposals that will reshape how digital assets are traded across the world.

Feedback on this consultation will result in millions of paragraphs that tweak existing rules, such as MiFID II, PRIIPS, MAR to fit the characteristics of these assets.

For those involved in this dynamic space, it’s important to understand how these proposed regulations could affect their business – both now and in the future.

The 82-page consultation closes on April 30, but the Financial Services and Markets Bill needs to obtain royal assent before any rule making begins.

Once the bill becomes law UK regulators will need to consult on rules before publishing policy statements and guidance. This process will stretch into next year and possibly beyond.

The goal is to bring all cryptoasset activities under the regulatory perimeter of FSMA, creating a single authorization process for firms.

Highlights of HMT’s proposed regulatory approach.

JWG has analysed the proposals and picked out some of the key points which are likely to have the largest impact on RegTech solutions below.

Issuance and disclosures

• Trading venues are to be responsible for defining the detailed content requirements for admission and disclosure documents, as well as performing due diligence on the entity admitting the cryptoasset
• A necessary information test for cryptoasset disclosure/admission documents is proposed, which includes information about the features, prospects, and risks of the cryptoasset, rights and obligations attached to it, the underlying technology, and person seeking admission to trading
• All admission and disclosure documents must be stored on the National Storage Mechanism (NSM) maintained by the FCA.

Trading venues

• Physical location requirements and prudential standards (e.g. financial resources, minimum capital, liquidity) will be set by the FCA
• Consumer protection, governance, conflicts of interest, operational resilience, and data reporting standards must be met
• Trading venues must have the capability to make information accessible for on- and off-chain transactions and should have systems for sharing information for market abuse monitoring. Specific requirements to be set by the FCA, which are likely to require order book data and transaction information (e.g. type of cryptoasset, price, time stamp, wallet information) and information concerning management of large positions (e.g. size of holdings and holder information for large positions) – as well as market abuse reporting.

Intermediation activities

• MiFID-derived authorisation is required for regulated activities and applications must include details of operations, services, and business plans, among other things including prudential requirements and risk management controls
• Consumer protection and governance requirements include acting honestly and fairly, managing conflicts of interest, and assessing cryptoassets as appropriate for the consumer
• Data reporting includes detecting market abuse and submitting STORs, with the possibility of further reporting requirements in the future, including regular and wider reporting over time.

Custody

• This regulated activity will require details of operations, services, business plan, description of governance arrangements, controls and risk management processes, cybersecurity, outsourcing arrangements, and financial resources with thresholds set by the FCA
• Existing custody provisions in the Client Assets Sourcebook (CASS) will be used as a basis to design bespoke custody requirements for cryptoassets
• Availability of FSCS protection for claims against failed authorized cryptoasset custodians is under consideration, and persons offering cryptoasset custody should have robust governance arrangements.

Market abuse

• Trading venues are required to establish systems, controls, and methods of disruption, which could include KYC, public blacklists, order book surveillance, information sharing, and ongoing disclosures of information.
• Persons arranging or executing transactions are also required to establish systems and controls to prevent and detect market abuse
• Regulated firms are proposed to be required to disclose inside information and maintain insider lists (subject to views) which may be difficult to apply in cryptoasset markets.

It can be difficult to keep up with all the changes – but that’s where we come in. JWG has collaborated with hundreds of SMEs to help guide MiFID compliance since 2006. Our analysts monitor all regulatory websites and use our RegDelta platform to spot the key issues for the business and identify the impact on the middle and back office

What happens next

The secondary legislation for cryptoassets is expected to be proposed in 2023.

As part of this consultation, the government will also undertake a programme of stakeholder engagement.

A Crypto Engagement Group will continue to run on a regular basis over the course of 2023. This group will ensure that key industry participants can offer insights and support the government in establishing a clear regulatory framework that supports innovation and protects consumers.

Ultimately, this consultation provides a platform for stakeholders to offer their views on how best to ensure clearer standards for digital assets across Europe – and beyond.

We will have a panel dedicated to digital assets at NextGen Trading Compliance RegTech seminar on 22 March. These events are ‘must go’ for many senior decision makers which help shape the future of the of RegTech and are at the forefront of this rapidly growing industry.

We look forward to having you on board!

Register here for complementary delegate pass for firms & regulators