A. Overview of Digital Pound Foundation
The Digital Pound Foundation (DPF) is a not-for-profit membership organisation launched in 2021 to work with a variety of stakeholders and participants towards the implementation of a well-designed digital Pound, in both public and privately-issued forms, and an effective and diverse ecosystem for new forms of digital money.
The DPF’s goal is to act as a catalyst among stakeholders across the public and private sectors, including academia to explore and articulate the case for a well-conceived digital Pound, in both publicly and privately issued forms. Beginning with a programme of research, advocacy and multi-stakeholder engagement, our work will progress through to regulatory engagement and industry testing, via support for practical sandbox experiments, proofs-of-concept, and pilot work, as needed. The DPF supports and complements other projects and associations having similar objectives, including the Bank of England’s consultation framework and Engagement and Technology Forums, existing industry associations, and private sector initiatives.
Our intention is to create an inclusive, well-functioning forum for collaboration that looks at the implementation of a digital Pound from a holistic perspective, addressing narrow questions, such as the design, implementation and successful adoption of CBDC, and the wider impact of a digital Pound, in both publicly and privately issued forms and on the UK’s economy and society. We advocate and provide constructive input on vital considerations such as privacy, financial inclusion and technology inclusion, and consider the digital Pound’s role in enabling the UK’s transition to a digital economy and underpinning a more efficient, sustainable payments and financial markets infrastructure.
The DPF’s Originating Team members include Jeremy Wilson, Jannah Patchay, Lee Schneider, Victoria Thompson, Phil Kenworthy and Melanie Budden. Foundation and Associate members include Accenture, Avalanche, Clifford Chance, CGI, Electroneum, Modulr, OneStep Financial, Quant and Ripple. Partners include Herbert Smith Freehills, The Realization Group, CryptoUK and the Digital Euro Association.
The Digital Pound Foundation is also proud to be a member of the UK Forum for Digital Currencies (UK FDC), an alliance of trade associations intended to be a forum for discussion and collaboration around the industry’s response to digital currency developments in the UK. This includes the potential for a Central Bank Digital Currency (CBDC), as well as the regulatory approach to stablecoins and other variable value cryptoassets. Other members of the UK FDC alliance are City of London Corporation, Innovate Finance, TheCityUK, The Payments Association, and UK Finance.
B. General Comments
The Digital Pound Foundation (DPF) takes pleasure in responding to this HMT Consultation and call for evidence on the Future financial services regulatory regime for cryptoassets.
The DPF is supportive of the UK government’s commitment to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation, and to take a staged and proportionate approach to cryptoasset regulation, and one which is sensitive to risks posed and responsive to new developments in the market. We echo HMT’s comments in the Consultation that “crypto technologies can have a profound impact across financial services. By capitalising on the potential benefits offered by crypto we can strengthen our position as a world-leader in fintech, unlock growth and boost innovation.”
Given our focus as an organisation on new forms of digital money, we have deliberately chosen to concentrate our attention on responding to those questions having relevance to the development of rules and regulations that will impact privately-issued new forms of digital money, including stablecoins, noting that the consultation process for the regime to regulate stablecoins is progressing in parallel to this Consultation. This scope includes both those questions having a direct relevance to stablecoin regulation, as well as those more broadly impacting stablecoins within the context of the wider cryptoasset taxonomy and ecosystem.
Our view at the DPF is that new forms of digital money, in particular, can enable the UK to successfully transition to a digital economy, and, by providing the market infrastructure that will enable financial innovation and growth, to maintain and further grow its position on the world stage as a leader in financial services and FinTech.
The DPF is also mindful that these privately-issued new forms of digital money remain a nascent sector at present, and that many discussions – including those between the Digital Pound Foundation, its Members and Partners, and the wider financial and FinTech communities – are taking place about the form of digital money in the future, the use cases and applications to which it might be applied, and the market structures and ecosystems that may evolve and rise.
C. Key Observations
In the course of drafting this response, we identified three key areas for consideration by HMT and the UK’s regulatory bodies when developing the regulatory framework for cryptoassets:
- Scope of applicability – The treatment of cryptoassets that at present already qualify as specified investments, including but not necessarily limited to tokenised deposits, tokenised e-money and security tokens, is unclear and creates a risk of potentially bifurcating the regulatory framework for these types of investments . It appears that HM Treasury is proposing to treat tokenised deposits, tokenised e-money and tokenised securities differently to traditional e-money, deposits and securities i.e. the proposal seems to propose different regulatory outcomes purely as a result of the use of cryptographic technology when creating these assets. This potentially deviates from the “same risk, same regulatory outcome” principle espoused by the Consultation. In our view, a specified investment should always be treated consistently regardless of the underlying technology; for example, a deposit and a tokenised deposit should not be treated differently under the rules. To the extent that the use of technology creates different operational risks, this is a matter for the firm to address as part of applicable systems and controls and risk management procedures.
A number of our members have considerable concerns around the extent to which future business models could be placed on a less competitive footing – when considered against firms providing services in “non-tokenised” specified investments – and the potential creation of a two-tiered regulatory framework that differentiates risk and regulatory outcomes purely based on the underlying technology choices.
- Terminology – It is our view that the term “stablecoin” is increasingly a redundant one, potentially covering as it does so many variants on structures, risk profiles and issuers, and that it would be more appropriate and useful to develop a more granular terminology associated with the many variant new forms of digital money that may come into existence. Each of these can have a very different risk profile and therefore regulatory treatment. We are also very conscious that wholesale categorisation of such instruments as “stablecoins” may lead to a tendency to treat them differently, from a regulatory perspective, from how they would be treated if they were not reliant on cryptographic technology or DLT.
The Digital Pound Foundation, together with our fellow trade associations under the UK Forum for Digital Currencies umbrella, and participants across the wider ecosystem, is working to produce a glossary of terms related to new forms of digital money, which we hope will provide a firm foundation for a more nuanced understanding and discussion of the many variants of new forms of digital money and their associated risk profiles and regulatory considerations.
- Phasing – We can understand HMT’s adoption of a phased approach that focuses initially on regulating stablecoins, given the considerable interest in such new forms of digital money at present, and the potential, as identified by HMT in its previous Consultation on cryptoassets and stablecoins, for these to become systemically important in their usage very quickly. However, we also have some concerns around the decision to adopt a sequential, phased approach due to the potentially lengthy timescales of the legislative / rulemaking processes involved.
There is potential that such an approach may risk undermining the UK as a financial centre and FinTech hub (let alone becoming the crypto hub envisaged by policymakers and Government). Firms require clarity to be able to plan, and a phased approach in piecemeal format seems less than ideal.
A phased approach can also lead to confusion and clarity around the treatment of stablecoins, which Phase 1 considers as an instrument of payment, whilst Phase 2 considers them as an instrument of investment. The DPF notes that HMT stated as part of the Consultation response to the regulation of stablecoins that the stablecoin framework (Phase I) would be created through amendments to, among others, the Electronic Money Regulations 2011 and the Payment Services Regulations 2017.
From this, it would seem that Phase 1 will create a regime for the issuance, payment, and custody of certain fiat backed stablecoins and their use for payments, while the trading and exchange of such stablecoins would be subject to the regime being created under Phase 2.
As neither the Payment Services framework nor the Electronic Money framework requires FSMA authorisation, but trigger separate authorisation requirements, it is currently unclear how HM Treasury sees both regimes interacting . In particular we are concerned that once Phase 2 comes into effect, rules applicable to cryptoassets that are stablecoins and subject to Phase 1 may contradict E-Money and Payments legislation.
- Proportionality – We note the need for proportionality to be considered when deriving rules from MiFID as they apply to existing regulated activities, and applying them as the basis for cryptoasset intermediation activities. MiFID is a regime whose rules and requirements are designed to apply to activities undertaken in financial instruments by credit institutions and investment firms. The nature of cryptoassets in scope for these regulatory requirements is different to that of financial instruments, as such the firms undertaking regulated activities in cryptoassets are not, in the main, credit institutions or investment firms. From what we can see in these proposals, and from our discussions alongside trade associations with the Financial Conduct Authority, we can see that HMT’s intent is clearly to apply a degree of proportionality to the treatment of cryptoasset activities. We are particularly heartened by the consideration given to the use of Regtech as well as the potential leverage of the innate characteristics of cryptographic technology and DLT to develop more appropriate solutions for market surveillance, prevention and detection of market abuse, and other areas.
Notwithstanding the above, we remain very mindful of the risk that these proposals may introduce another unwanted impact in terms of disproportionate treatment of specified investments on the basis that they also meet the (extremely broad) definition of cryptoassets on which the Consultation relies.
D. Consultation Response
Do you agree with HM Treasury’s proposal to expand the list of “specified investments” to include cryptoassets? If not, then please specify why.
We are broadly supportive of this approach. We note HMT’s declaration that “This consultation focuses specifically on the future UK regulatory framework for cryptoassets used within financial services, rather than the wider application of distributed ledger technology (DLT) in financial services or the use of cryptoassets outside financial services”. As such, it makes sense to align treatment of in-scope cryptoassets with existing financial services regulatory concepts and frameworks. We also note that the government’s intention is to regulate the activities associated with a cryptoasset, as opposed to the cryptoasset itself, also in line with existing financial markets regulatory principles.
Nevertheless we are mindful that the proposed cryptoasset definition referred to in the Consultation is potentially an extremely broad one, and this raises a number of additional questions for us.
Most significantly for us, however, the treatment of cryptoassets that at present qualify as specified investments, including but not necessarily limited to deposits, e-money and securities is unclear. It appears that HMT’s intention is that existing specified investments that would fall within the cryptoassets definition should be subject to the cryptoassets regime on the basis that they rely on cryptography to be issued. This deviates from the “same risk, same regulatory outcome” principle espoused by the Consultation. In our view, a specified investment should always be treated consistently regardless of the underlying technology; for example, a deposit and a tokenised deposit should be treated in the same way. To the extent that there are operational and other risks that arise as a result of the technology being used, this should be addressed through the systems and controls requirements that accompany all regulatory authorisations.
We see two potential options in practice: one is to create a new category of “financial cryptoassets” which is defined to have a reasonably wide capture, along with a set of specific exclusions to ensure that existing specified investments remain out of scope of the cryptoassets framework. Separately, we note that there may be many instances where non-financial tokens could qualify as cryptoassets because they rely on cryptography and have some form of value, these may include in game money or uses of DLT as a register. In our view it is therefore also necessary to create an exclusion that de-scopes such non-financial tokens. The second option is to create two or more new categories which refer more specifically to some of the subcategories of cryptoassets outlined in Box 2.A. This would also allow for a more nuanced and granular application of the scope of regulated activities to sub-categories of cryptoassets.
In any case, we envisage a clear need to create a formal categorisation of cryptoassets. As per our analysis through the UK FDC’s collective analysis on MiCA challenges, strengths and opportunities in the UK regulatory context, one of MiCA’s main drawbacks is its lack of clear distinction between different types of cryptoassets and according corresponding lack of application of a risk-based approach to different types of cryptoassets depending on their different characteristics. The UK has a clear opportunity to remedy this in our own regulatory framework, in line with HMT’s overarching policy objectives and principles: “same risk, same regulatory outcome” “proportionate and focused”, and “agile and flexible.
Do you agree with HM Treasury’s proposal to leave cryptoassets outside of the definition of a “financial instrument”? If not, then please specify why.
We agree, noting that much of the legislation pertaining to financial instruments is currently frozen as a result of the EU Withdrawal Act and so could not be amended. Additionally, the broad definition of cryptoassets used in this Consultation means that it includes digital assets which already qualify as specified investments (and which in turn are considered to be MiFID financial instruments). Others may currently fall within the definition of e-money and therefore the scope of the Electronic Money Regulations. Referring back to our response to Q1 above, it is therefore imperative that the expansion of the list of specified investments to include cryptoassets is well-defined and consistent with the current regulatory treatment of those instruments that fall within the definition of a specified investment at present and hence the regulatory perimeter (including e-money tokens).
Separately the DPF notes that HMT stated as part of the consultation response to the regulation of stablecoins that the stablecoin framework (Phase I) would be created through amendments to, among others, the Electronic Money Regulations 2011 and the Payment Services Regulations 2017.
From this, it would seem that Phase 1 will create a regime for the issuance, payment, and custody of certain fiat backed stablecoins and their use for payments while the trading and exchange of such stablecoins would be subject to the regime being created under Phase 2. We would encourage HMT to consider the extent to which exclusions from the Phase 2 regime may be appropriate for exchanges between two stablecoins treated as e-money or other “funds” under the payment services framework, in keeping with spot foreign exchange transactions being outside the FSMA perimeter.
As neither the payment services framework nor the electronic money framework requires FSMA authorisation, but trigger separate authorisation requirements, it is currently unclear how HM Treasury sees both regimes interacting . In particular we are concerned that once Phase 2 comes into effect, rules applicable to cryptoassets that are stablecoins and subject to Phase 1 may contradict E-Money and Payments legislation.
Phase 1 and Phase 2 seem incongruent, because fundamentally the proposal for Phase 1 is to treat stablecoins as an instrument of payment, whereas Phase 2 treats them as an investment. This is contradictory and must be avoided.
We note however that Box 2.A also includes security tokens, NFTs, fan tokens and others that arguably should be out of scope. In our view, not all of the assets set out in Box 2.A should be included as specified investments.
Do you see any potential challenges or issues with HM Treasury’s intention to use the DAR to legislate for certain cryptoasset activities?
We welcome HMT’s clarification that the regulation of cryptoassets will be dependent on the activity undertaken. We are also very much supportive of the expansion of the RAO to include cryptoassets among “specified investments” and to require firms undertaking specified activities with respect to cryptoassets to obtain regulatory authorisation under Part 4A of FSMA.
Given the extent to which cryptoasset-related innovation may give rise to new market entrants and activities, the introduction of powers that would enable HMT to regulate activities falling outside the scope of the RAO could be a useful mechanism for responding with greater agility and flexibility to market developments. This will allow dynamic calibration of rules within a stable framework.
It is imperative that the FCA as the competent authority for supervising and enforcing the DAR regime, does so on a proportionate basis, enabling issuances of all types of cryptoassets. In this context, it is unclear which stablecoins (if any) would be subject to the DAR framework as opposed to the regime under the amended electronic money regulations. In the DPF’s view it would be undesirable to have a fragmented approach to asset backed stablecoins vs fiat backed stablecoins and deposits.
How can the administrative burdens of FSMA authorisation be mitigated for firms which are already MLR-registered and seeking to undertake regulated activities? Where is further clarity required, and what support should be available from UK authorities?
We note that the list of proposed cryptoasset activities in Chapter 4 of the Consultation seeks to incorporate the full scope of activities currently requiring registration under the MLR into the regulatory perimeter of FSMA. As such, there will be some firms that are currently MLR-registered and which in future will also require FSMA authorisation. There will undoubtedly be some uplifts to the regime for these firms, given that a full FSMA authorisation gives rise to additional requirements not currently associated with the MLR registration.
Nevertheless, the current MLR registration application captures a significant portion of the information required for a full FSMA authorisation, and this should be taken into account both with respect to the additional information required to support a FSMA application as well as the ability of MLR-registered firms to continue their operations under their existing registration until their applications for FSMA authorisation can be duly processed. In these cases, we would strongly advocate that HMT and the FCA consider the introduction of:
- A Temporary Permissions Regime (TPR) under which such firms may continue to operate pending a decision on their FSMA application; and
- A streamlined application process that takes into account information already provided in the course of the MLR registration process, and provides the ability for firms to update their existing documentation or requests only the uplifts required for a full FSMA application.
In either case, the priority for firms will be clarity around their ability to continue as is with their businesses under their existing registration, while they are awaiting a decision on their application.
Is the delineation and interaction between the regime for fiat- backed stablecoins (phase 1) and the broader cryptoassets regime (phase 2) clear? If not, then please explain why.
We think that the delineation between the regime for fiat-backed stablecoins (phase 1) and the broader cryptoassets regime (phase 2) merits further clarification. We are particularly interested in the relationship between proposed regimes for fiat-backed stablecoins, cryptoassets more broadly, and digital settlement assets (DSAs) more specifically, and the potential for these to interact and overlap.
Our understanding is that DSAs – which include fiat-backed stablecoins, but are not limited to cryptoassets and may also include instruments that are not cryptoassets, as well as other types of cryptoassets that are not fiat-backed stablecoins (for example should an unbacked cryptoasset be used routinely for payments and so become systemic in nature) – will be recognised as instruments for payment and settlement purposes within the context of a DSA payments or settlement system.
Separately, other activities in such fiat-backed stablecoins could be captured by other regulatory requirements; for example, the exchange of a fiat-backed stablecoin for another cryptoasset on a cryptoasset exchange may be regarded as the buying or selling of that fiat-backed stablecoin and fall within the scope of the rules associated with trading of cryptoassets on a cryptoasset exchange.
The issuance and distribution of the fiat-backed stablecoin could fall under both the (potentially amended) Electronic Money Regulations as well as those proposed for the issuance of cryptoassets and their offering via a cryptoasset exchange.
We observe that the regulatory treatment of such fiat-backed stablecoins may vary depending on the activity in which they are being used – which is a fundamental and accepted consequence of the principle of regulating the activity as opposed to the asset. In this instance it is analogous to the treatment of cash / FX – which may be either a settlement asset or the tradable instrument itself, depending on the context of the activity.
There are however other areas of potential uncertainty and lack of clarity that may arise where, for example, a cryptoasset that is not a fiat-backed stablecoin is used as a payment instrument, and where, depending on the structure of that cryptoasset, different rules could apply. In particular, the distinction between a cryptoasset being used as means of payment / settlement on exchange, as opposed to being traded as an asset on the exchange, requires some thought and consideration in our view.
More generally, it is our view that the term “stablecoin” is increasingly a redundant one, potentially covering as it does so many variants on structures, risk profiles and issuers, and that it would be more appropriate and useful to develop a more granular terminology associated with the many variant new forms of digital money that may come into existence. Each of these can have a very different risk profile and therefore regulatory treatment. We are also very conscious that wholesale categorisation of such instruments as “stablecoins” may lead to a tendency to treat them differently, from a regulatory perspective, from how they would be treated if they were not reliant on cryptographic technology or DLT.
Does the phased approach that the UK is proposing create any potential challenges for market participants? If so, then please explain why.
We can understand HMT’s adoption of a phased approach that focuses initially on regulating stablecoins, given the considerable interest in such new forms of digital money at present, and the potential, as identified by HMT in its previous Consultation on cryptoassets and stablecoins, for these to become systemically important in their usage very quickly. However, we also have some concerns around the decision to adopt a sequential, phased approach due to the potentially lengthy timescales of the legislative / rulemaking processes involved.
There is potential that such an approach may risk undermining the UK as a financial centre and FinTech hub (let alone becoming the crypto hub envisaged by policymakers and Government). Firms require clarity to be able to plan, and a phased approach in piecemeal format seems less than ideal. A phased approach can also lead to confusion and clarity around the treatment of stablecoins, which Phase 1 considers as an instrument of payment, whilst Phase considers them as an instrument of investment (refer to our response to Question 2 above).
The road, from proposal to Consultation through to having an effective regulatory regime in place and having taken force, is a potentially long one, especially considered across the broader scope of cryptoassets. Depending on the intermediate treatment of proposed regulated activities in cryptoassets, the length and lack of clarity around these timelines could lead to further attrition of cryptoasset businesses to other jurisdictions having greater regulatory certainty and more advanced regimes in place, undermining the UK government’s goals with respect to cryptoasset leadership.
We also note that the introduction of a FSMA authorisation regime for activities in cryptoassets will lead to significant additional calls on FCA resources, during both the initial authorisation process and on an ongoing basis in terms of supervision and enforcement. Once the new regime has taken effect, we note that the Consultation envisions that (subject to any equivalence regime introduced) firms will no longer be able to provide cryptoasset services into the UK from another jurisdiction; they will require local authorisation in the UK in order to undertake any regulated crypto services / activities in the UK or with UK customers. In order to maintain a competitive environment in the UK, we foresee that careful planning and consideration will be required around process and resource allocation, when implementing the authorisation regime (so that the FCA is not overwhelmed by applications), accompanied by clear guidance on how and when firms should be expected to implement final requirements, in tandem with the other suggestions and TPR proposed in our response to Question 3 above.
Do you agree with the proposed territorial scope of the regime? If not, then please explain why and what alternative you would suggest.
We read HMT’s proposals as a fundamental change to the way the existing territorial scope of the UK perimeter is determined. Currently, the UK perimeter is assessed on an activity-by activity basis taking into account the characteristic performance of each activity as well as any available exclusions. Broadly, the outcome is that an overseas firm will be caught by the territorial scope when they are carrying on a regulated activity from the UK or when the characteristic performance of the activity is “in the UK”.
HMT’s proposal seems to want to change this test so that in respect of cryptoassets the territorial scope of the perimeter is based on whether or not the service is provided “to the UK”. In our view this creates undesirable fragmentation and is inconsistent with the current framework. In our view, UK authorised firms strongly benefit from the position under the current regime whereby they can benefit from exclusions (including the overseas persons exclusion in Article 72 RAO) to have legal certainty that when they interact with an overseas firm the territorial scope of the perimeter is not engaged. This fosters the financial sector’s activity in the UK and enables it to export its financial services. It would be hugely disadvantageous if UK firms had to worry that their dealings with overseas firms may involve the overseas firm breaching the UK perimeter and carrying on a criminal offence. As this would mean that any proceeds of such transactions are subject to Proceeds of Crime legislation.
One approach HMT may wish to consider for reconciling these positions is to provide (perhaps by way of amendment to section 418 of FSMA) that cryptoasset-related activities are carried on in the UK if carried on with a person situated in the UK, while providing a corresponding exclusion similar to Article 72(4) RAO for activities undertaken by overseas persons with or through an authorised person or an exempt person.
More broadly, we also have questions as to the extent to which and process by which equivalence and mutual recognition frameworks will be developed, and what the process will be for recognising overseas firms under such frameworks or for authorising them if they are required to become authorised in the absence of such frameworks, and what requirements for local establishment (if any) will be. We strongly welcome the proposal to rely on third country authorities where appropriate, and would welcome further clarity on the criteria for jurisdictions with which such arrangements can be put in place (recognising that typically this only works for those jurisdictions for which there are reciprocal enforcement arrangements in place between regulators).
Do you agree with the list of economic activities the government is proposing to bring within the regulatory perimeter?
We are generally supportive of this list, and welcome its focus on proportionality and the risk-profile of the activity undertaken. The list is also aligned with the regulated activities defined for the traditional financial markets regulatory regime, which bases its regulatory requirements on the potential risk of a given activity.
With respect to the treatment of fiat-backed stablecoins in particular, we note once again the potential for uncertainty to arise around the treatment of activities such as issuance and admission to trading, payment activities and exchange activities, and await greater clarity on these in due course (particularly with respect to the payment activities which are yet to be further defined). We note as well that a stablecoin (whether backed by fiat or one or more other assets) may be capable of being both admitted to trading on a trading venue as well as being used as a means of payment / settlement on that venue or off-venue, and would appreciate further clarity around the boundaries of such activities.
Do you agree with the prioritisation of cryptoasset activities for regulation in phase 2 and future phases?
Please refer to our response to Question 6 above.
We would also like to better understand how HMT and the relevant regulatory authorities would propose, or be required, to treat emergent new activities and innovations that may not be foreseen in the planning and execution of this phased approach.
As per our response to Question 3, we have questions around the powers bestowed on HMT by the DAR to bring certain cryptoasset activities into the regulatory framework, or to exclude them entirely, and the process by which this will be applied in practice. We would also like to better understand how the introduction of new regulatory requirements via the DAR may then be embedded across other regulatory bodies, and how risks that this may result in a fragmented and inconsistent process might be addressed.
It would be useful, in our view to, to have a set of regulatory objectives and principles defined and enforced, around how the above might work in practice, with the aim of providing both regulatory confidence as well as giving the cryptoasset industry greater comfort that they may grow and innovate in the UK without undue concern that their innovations may be rejected by a regulatory framework that is lacking in the agility, flexibility and consistency of application to support such innovation.
Do you agree with the assessment of the challenges and risks associated with vertically integrated business models? Should any additional challenges be considered?
We agree that each individual cryptoasset business activity and associated risk(s) should be considered on its own merits and potentially be subject to its own rules. Given the current size and scale of the cryptoasset industry, which remains far smaller and – for now at least – less systemic in nature than the traditional financial services industry, the “conglomeration”, concentration and competition risks that may arise from such vertically integrated business models may be addressed, in the short to medium term, through appropriate governance and organisational requirements via the FCA authorisation process and ongoing supervision.
In the longer term, one might anticipate at some point in the future when the market is more developed and mature for more stringent rules to be introduced around appropriate segregation of such activities (e.g. separating out custody and trading within the same Group) and some requirement for interoperability with third parties as well, so that customers are not locked in to a single tightly integrated operator, and with the aims of reducing concentration risk in the market as well as opening up greater competition. This would be aligned with what has happened in traditional financial instruments markets (most notably equities markets).
Do you agree that so-called algorithmic stablecoins and crypto- backed tokens should be regulated in the same way as unbacked cryptoassets?
We would reiterate that the principle of “same risk, same regulatory outcome” should apply in this scenario as it does elsewhere: regulation should be based on the risk profile of the activity and the asset in which it is undertaken, as well as the sophistication and risk profile of the target market segment (e.g. retail vs professional investors). There is clearly a difference between an algorithmic stablecoin which is unbacked by any asset, and backed stablecoins, with a corresponding difference in risk profiles.
In this case, the risks associated with so-called algorithmic stablecoins and crypto-backed tokens should be considered on their own merits, and accorded the appropriate – and consistent – regulatory treatment. It is not immediately apparently that these would necessarily be the same as those appropriate for unbacked cryptoassets, as a more detailed analysis of the respective risk profiles would be required.
Do you agree with the proposal for trading venues 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? If not, then what alternative would you suggest?
Whilst we broadly agree with this proposal, we also strongly recommend that detailed guidance is provided to trading venues around their admissions processes and criteria, and the due diligence required to be evidenced in their decision-making.
Given the DPF’s focus as an organisation, our particular interest lies in the treatment of fiat-backed stablecoins that are admitted to trading on a trading venue. Such stablecoins, as outlined in HMT’s phasing proposals, would potentially be subject to the e-money regime, whilst also still potentially under current proposals falling within the scope of “cryptoassets”. It is unclear at present how this will work for fiat-backed stablecoins, and in particular those fiat-backed stablecoins that are issued outside of the UK.
In this case, it is worth bearing in mind that trading venues may be asked to consider admissions from both regulated cryptoasset firms as well as unregulated firms issuing cryptoassets, and will need to carefully consider the admission criteria, requirements and processes that they introduce in the context of the issuer’s regulatory status and general risk profile.
Do you agree with the proposal to use existing RAO activities covering the operation of trading venues (including the operation of an MTF) as a basis for the cryptoasset trading venue regime?
Yes, we broadly agree with this proposal, as it will ensure consistency and familiarity as well as following the principle of same risk, same regulatory outcome, thus avoiding unnecessary distinction between cryptoasset trading venues and their counterparts in traditional financial markets. This is of particular relevance given that in the future we may expect to see trading venue operators providing both cryptoasset and traditional segments in a single marketplace.
Do you have views on the key elements of the proposed cryptoassets trading regime including prudential, conduct, operational resilience and reporting requirements?
These rules should be broadly aligned with existing requirements for trading venues, and with the international standards, recommendations and best practices that are being and have been defined by international bodies such as IOSCO. From a UK perspective, we would advocate that rules should not be line-by-line proscriptive, but should instead make the most of the agile regime proposed in this Consultation, with a focus on effective outcomes. Finally, as also proposed elsewhere in this Consultation, wherever possible, the opportunities for more efficient, robust and resilient mechanisms to meet regulatory requirements, afforded by the innovative technology underpinning cryptoassets and activities in cryptoassets, should be recognised and leveraged at the point of implementation.
Do you agree with HM Treasury’s proposed approach to use the MiFID derived rules applying to existing regulated activities as the basis of a regime for cryptoasset intermediation activities?
In line with our response to Question 19, we broadly agree with this proposal, as it will ensure consistency and familiarity as well as following the principle of same risk, same regulatory outcome, thus avoiding unnecessary distinction between cryptoasset trading venues and their counterparts in traditional financial markets. This is of particular relevance given that in the future we may expect to see trading venue operators providing both cryptoasset and traditional segments in a single marketplace.
We note however the need for proportionality to be considered when deriving rules from MiFID as they apply to existing regulated activities, and applying them as the basis for cryptoasset intermediation activities. MiFID is a regime whose rules and requirements are designed to apply to activities undertaken in financial instruments by credit institutions and investment firms. By definition, the cryptoassets in scope for these regulatory requirements are not financial instruments, and the firms undertaking regulated activities in cryptoassets are not, in the main, credit institutions or investment firms. It would be disproportionate to apply parts of MiFID verbatim to cryptoasset intermediation activities, and whilst we do not think this is HMT’s intention, we are mindful that this should continue to be borne in mind on the path to implementation of these rules.
Do you have views on the key elements of the proposed cryptoassets market intermediation regime, including prudential, conduct, operational resilience and reporting requirements?
We refer to our response to Question 20 above. Whilst the proposed key elements appear reasonable at this high level, we note that careful calibration of, for example, prudential requirements will be necessary in order to maintain the proportionality of application articulated in our response to Question 21 above.
Do you agree with the assessment of the challenges of applying a market abuse regime to cryptoassets? Should any additional challenges be considered?
Yes, we agree with the assessment of the challenges of applying a market abuse regime to cryptoassets. We appreciate HMT’s recognition of the essential differences and challenges that can arise in extending MAR-like rules to cryptoasset markets, in terms of the nature of cryptoasset market participants and the ways in which they interact, amongst others. We also appreciate HMT’s recognition of the potential arising from new technology to support achievement of the desired outcomes, in terms of prevention and detection of market abuse, through exploration of the novel features offered by this technology.
We are in agreement with HMT’s recognition that the Consultation is very much focused on centralised financial market structures (CeFi) in cryptoasset markets, and that the question of achieving these same objectives in DeFi market structures remains open. Given the potential for a single cryptoasset to be traded across both CeFi and DeFi market structures, this leaves a significant gap in the coverage of cryptoasset market abuse regulation.
Do you agree that the scope of the market abuse regime should be cryptoassets that are requested to be admitted to trading on a cryptoasset trading venue (regardless of where the trading activity takes place)?
Yes, we agree with this definition of scope. It is aligned with the scope and applicability of MAR to include those instruments that are admitted to trading on a trading venue, regardless of where such activity takes place. The key risk here is that off-venue trading, if not subject to market abuse rules, may then create opportunities for market manipulation and abuse that are executed and manifested on trading venues.
Do you agree that the prohibitions against market abuse should be broadly similar to those in MAR? Are there any abusive practices unique to cryptoassets that would not be captured by the offences in MAR?
Yes, we broadly agree. Please refer to our response to Question 25 with respect to the potential coverage gap between CeFi and DeFi market structures.
Do you agree with the proposal to require all regulated firms undertaking cryptoasset activities to have obligations to manage inside information?
Yes, we agree with this proposal.