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Commercial Question

Regulation of cryptoassets

updated on 07 May 2024


Cryptoassets: how are they being regulated?


What are cryptoassets?

The term ‘cryptoassets’ comprises a broad range of digital assets based on blockchain technology, such as cryptocurrencies and non-fungible tokens (NFTs). The UK government defines ‘cryptoassets’ as: "A cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored, or traded electronically." The Bank of England describes cryptoassets as broadly comprising a digital-only asset, which are retained as investments by individuals or companies that anticipate the asset's value to increase over time.

As with any form of investment, the likelihood of a return on investment and the magnitude of any return is speculative in nature. Due to crypto assets being a novel form of investment and a relatively new entrant within the financial sphere, their value has at times been particularly volatile, as shown by the variance in Bitcoin's value since its launch in January 2009. At its peak in March earlier this year, Bitcoin had reached almost $73,000, only two years following its crash in November 2022 which saw prices fall to as little as $16,000. Cryptoassets have hugely increased in popularity due to the potential for their rapid growth over short periods of time. The surge in interest has attracted a range of investors, such as those with a genuine use for the cryptoasset, as well as others whose investment is simply speculative trading (ie, investing in cryptoassets after hearing their value may rise, as opposed to having reviewed evidence that supports this prediction). Research conducted by the Financial Conduct Authority (FCA) has evidenced this popularity, with 10% of 2,000 survey participants confirming that they owned cryptoassets and that ownership more than doubled from 2021 to 2022.

Regulatory developments: HM Treasury

UK regulation has had to quickly adapt to respond to the growth of cryptoassets. On 30 October 2023, HM Treasury published its final proposals for the UK's future financial services regulatory regime, specifically for cryptoassets. HM Treasury's proposals largely look to integrate cryptoassets and related activities within the UK's existing regulatory regime, such as through expanding the definition of ‘specified investments’ under the Financial Services and Markets Act 200 (Regulated Activities) Order 2001, to include relevant cryptoassets activities. Interestingly, HM Treasury proposed that deciding whether NFTs should fall within the new regime wouldn’t be determined by what exactly the NFT is, but how the NFT is used. Expanding on its reasoning behind the proposal, HM Treasury likened NFTs as comparable to artwork or collectible items, rather than a financial product suitable for regulation.

Regulatory developments: the FCA

The FCA has worked closely with the UK government in developing cryptoasset regulations and continues to do so. Some of the FCA's powers arise from the fact that the Financial Services and Markets Act 2023 brings cryptoassets within the scope of the existing regulatory regime under the Financial Services and Markets Act 2003, in respect of ‘regulated activities’ and restrictions on financial promotions. To date, the FCA has focused on ensuring consumer protection via regulating the marketing of cryptoassets. A package of new FCA rules that came into force on 8 October 2023 requires those promoting cryptoassets to ensure any adverts not only provide clear risk warnings, but are also clear and not misleading. The new rules also prohibit ‘refer a friend’ bonuses, and introduced a mandatory cooling-off period for first-time investors, collectively, these rules ensure cryptoassets are subject to the same marketing regulations that the FCA applies to other high-risk investments.

Sheldon Mills, executive director of consumers and competition, commented at the time of the October 2023 rules: "It is up to people to decide whether they buy crypto. But research shows many regret making a hasty decision. Our rules give people the time and the right risk warnings to make an informed choice. Consumers should still be aware that crypto remains largely unregulated and high risk. Those who invest should be prepared to lose all their money."

While regulations continue to adapt, cryptoassets remain largely unregulated in the UK, with consumers unable to access certain protections, such as the Financial Services Compensation Scheme in the event that they suffer losses as a result of investing in cryptoassets.

Looking ahead

For firms involved in the marketing of cryptoassets or undertaking related activities, it’s vital to stay abreast of the ever-changing regulatory changes. The FCA's research demonstrating the continued growth of consumer interest and investment in cryptoassets highlights the market for financial services firms to provide solutions and guidance to both individual and corporate investors. This is borne out by all of the Big Four offering cryptoassets services, such as valuations, investment advice, regulatory guidance and risk assessments. In conjunction with the clear market growth of cryptoassets and associated services within the financial services sector, the UK government has explicitly embraced cryptoassets as part of its plans announced in April 2022 to make the UK a global hub for cryptoassets technology and investment." Looking ahead, it seems inevitable that cryptoassets will continue as a growth area within the UK financial sector but, in such a fast-paced regulatory environment, it’ll be crucial for financial services firms to adapt to ensure they remain on top of evolving regulation landscape.

Hannah Kendall is a trainee in RPC’s Bristol office.