Clifford Chance

In January 2022, the Law Society and Tech London Advocates (TLA) Blockchain Legal and Regulatory Group published a second edition of its report on Blockchain: legal and regulatory guidance.

The report provides in-depth guidance a range of key UK legal and regulatory issues for lawyers to be aware of when advising on DLT-related matters, and includes a foreword from Rt Hon Sir Geoffrey Vos, Master of the Rolls.

Senior Associate Laura Douglas co-authored the section of the report relating to regulation of cryptoassets.  Key recommendations from this section of the report include:

• The UK has an opportunity to develop an effective and proportionate regulatory regime for cryptoassets. However, the UK must act quickly to clarify its policy approach and introduce new rules where relevant in order to give the market certainty and facilitate the development of efficient and orderly markets in cryptoassets in the UK.
• The UK should confirm how it intends to expand the current UK regulatory perimeter following recent HM Treasury consultations on the UK regulatory approach to cryptoassets and stablecoins and on cryptoasset promotions.
• Any new rules expanding the regulatory perimeter for cryptoassets should adopt the principle of “same activity, same risk, same regulation”. Care should be taken with cryptoasset definitions and taxonomies in particular to ensure any extension to the regulatory perimeter is based on granular characteristics of cryptoassets and other uses of DLT (e.g. as a pure record-keeping tool) are not inadvertently captured. The territorial scope of the regime and potential interaction and overlap with other jurisdictions’ rules must also be carefully considered given the cross-border nature of the cryptoasset market. The overseas persons exclusion (OPE) should be extended to relevant cryptoasset-related activities.
• The UK should also confirm whether it intends to extend other aspects of the UK regulatory regime such as market abuse requirements to cryptoassets and how it intends to adjust other aspects of the existing regulatory framework applicable to regulated cryptoassets such as security tokens to facilitate the development of efficient and orderly markets in cryptoassets.
• To aid certainty, legislation and/or regulatory guidance should also be provided clarifying which regulatory requirements apply to "hybrid" cryptoassets and cryptoassets that move between categories throughout their lifetime, particularly with respect to authorisation requirements under the Electronic Money Regulations 2011 and Financial Services and Markets Act 2000, and the registration requirements under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
• Perimeter guidance should be provided in the context of the application of the UK financial promotion regime, outsourcing and conduct rules in respect of crypto-related services and business models.
• Perimeter guidance should also be provided with respect to the activities of acting as a "cryptoasset exchange provider" and "custodian wallet provider".
• The PRA should set out a detailed prudential framework for cryptoassets, and as part of this, detail any additional guidance, including measures under Pillar II (i.e. discretionary supervisory measures and, potentially, additional capital charges). Moreover, it would be helpful for there to be clarification of the accounting treatment of cryptoassets to avoid queries about their prudential treatment under prudential laws and regulation.
• Given that the law and regulations governing the current post-trade market infrastructure in the UK were not designed with DLT in mind, an assessment should be undertaken of whether the UK legislative and regulatory framework for post-trade infrastructure needs to be adapted to facilitate market adoption of DLT technology (and if so, how), including, but not limited to the impact of the European Market Infrastructure Regulation, Securities Financing Transactions Regulation or the Central Securities Depositories Regulation (CSDR). As part of this assessment, it would be helpful to explore the implications of CSDR book entry form requirements for cryptoassets and provide guidance on how they are to operate in practice, and explore whether decentralised structures may act as financial market infrastructures.
• Legislation and/or regulatory guidance should be provided on whether the use of cryptoassets as collateral would be deemed to be enforceable security under the laws of England and Wales.
• Legislation and/or regulatory guidance should be provided clarifying that any cryptoassets will not be considered as a commodity or fiat currency under the laws of England and Wales. Clarity on this latter point is important particularly following El Salvador’s adoption of Bitcoin as legal tender in 2021.