UK Crypto-Assets Task Force Outlines the Path to Crypto-Asset Regulation

The U.K. Crypto-Assets Task Force has published its Final Report. Established in March 2018 by the U.K. Chancellor of the Exchequer as part of the U.K. government's FinTech Sector Strategy, the Task Force comprises representatives from HM Treasury, the U.K. Financial Conduct Authority (FCA) and the Bank of England.

The Task Force engaged with over 60 firms and other stakeholders to seek their views on topics including: the trajectory of the industry, the risks, benefits and underlying economic value of crypto-assets and the U.K.’s future regulatory approach. Stakeholders were of the view that there is a lack of regulatory clarity in the U.K. and that regulation should be introduced to support the legitimate players in the crypto-assets market. It is also crucial in mitigating risks. There were also calls for regulatory and tax frameworks to be aligned.

The Final Report sets out an overview of crypto-assets and their underlying distributed ledger technology (DLT) and assesses the associated risks and potential benefits. The Task Force considers that DLT has the potential to deliver significant benefits in both financial services and other sectors and all three authorities will continue to support its development. As a priority, the Task Force calls for strong action to be taken to address the risks associated with crypto-assets that fall within existing regulatory frameworks. It then sets out an approach to future crypto-assets regulation in the U.K., consistent with the need for the U.K. to maintain its international reputation for transparency and high regulatory and consumer protection standards for financial markets, while fostering innovation in the financial sector.

The Task Force considers how the current regulatory perimeter applies to different crypto-asset-related activities, using a high-level framework the Task Force has developed from its analysis of the types of crypto-assets and their common uses. As an important caveat, the Task Force stresses that whether and what regulation applies to a particular crypto-asset instrument or activity can only be decided on a case-by-case basis. This means that firms and persons involved in crypto-asset-related services or investments must consider carefully the extent to which their activities could involve regulated activities or the issuing of financial promotions. They should also bear in mind that some regulatory provisions in the FCA's Handbook can apply to unregulated activities.

The Final Report highlights key actions that the three authorities propose to take to develop and implement the U.K.'s policy and regulatory approach:
 

• by the end of 2018: the FCA will consult on (i) guidance for crypto-asset activities currently within the regulatory perimeter; and (ii) a potential ban on the sale to retail consumers of derivatives referencing certain types of crypto-assets (for example, exchange tokens), including CFDs, options, futures and transferable securities;
• by early 2019: HM Revenue and Customs will issue revised guidance on the tax treatment of crypto-assets;
• in early 2019: HM Treasury will: (i) consult on transposing the Fifth Money Laundering Directive in the U.K. and further broadening anti-money laundering and counter-terrorist financing regulation; (ii) consult on potential changes to the regulatory perimeter to bring in crypto-assets that have comparable features to specified investments; and (iii) explore how exchange tokens might be regulated if necessary;
• on an ongoing basis: the Prudential Regulation Authority will assess the adequacy of the prudential regulatory framework, in conjunction with its international counterparts.

Additionally, all of the authorities will remain engaged on an ongoing basis in monitoring market developments, working towards a coordinated international response and supporting innovation with DLT.