Her Majesty’s Treasury published a consultation paper today covering the regulation of crypto assets. Andrew Griffith, the Treasury’s economic secretary, previously outlined the approach at a parliamentary hearing. Based on these statements, he does not expect the regulation of this consultation to be approved in 2023.

The UK considers that security tokens are already regulated, stablecoin legislation has been introduced as part of the Financial Services and Markets (FSM) Bill, and rules for crypto asset promotions are in the works. This query refers to other legislation on crypto assets, excluding non-financial assets such as collectibles (or NFTs).

The government is willing to further its support for innovation. “Risk-taking is a desirable part of the innovation cycle and we want to manage this, not stifle it,” Griffith said in the consultation foreword. At the same time, he is taking the “same risk, same rules” approach and wants to make sure any regulation is nimble enough given the nascent state of the cryptocurrency sector.

“The government’s view is that the technology underpinning this innovation could deliver a number of benefits and, with appropriate regulation and safeguards, certain crypto assets and associated activities can offer significant new financial service opportunities for users,” the report states. .

Specifically, the proposed crypto asset regulation aims to regulate crypto providers based in the UK or targeting UK customers. You can allow exceptions, such as if a UK resident voluntarily transacts with a foreign provider without receiving any UK promotions.

The first phase of regulation is the stablecoin legislation included in the Financial Services and Markets Bill. The second phase is the focus of this consultation which will cover the following:

• public crypto token offerings
• trading venues (but not post trade, yet)
• cryptocurrency trading and brokerage
• loan and borrowing
• custody.

Future regulatory phases may cover topics such as:

• crypto tip
• manage investments in crypto assets
• mining
• running validation and staking nodes.

One gray area is decentralized finance (DeFi). Addressing the issue of DeFi, the document states that its regulatory approach in the current phase “should apply to crypto-asset activities, regardless of the underlying technology, infrastructure or governance mechanisms. However, due to the challenges outlined above, including the rapidly evolving nature of the sector, how this is achieved may differ and take more time to clarify.”

The intent is to apply regulations to those who have significant control or influence over DeFi protocols.

“As the voice of the UK crypto sector, we welcome this positive step towards greater regulatory clarity,” said Ian Taylor, CryptoUK Board Advisor. “Given the provisions of the proposed legislation, consultation with industry could not be more critical.”