HM Treasury consults on future financial services regulatory regime for cryptoassets

HM Treasury published a consultation and call for evidence on a future financial services regulatory regime for cryptoassets, the Treasury Committee said. The committee's report, published on 17 May 2023, states that the Government published the consultation paper in February 2023 setting out its overarching plan for the regulatory framework to be applied to cryptoassets used within financial services¹.

The Government's stated objectives for the framework are to encourage growth, innovation and competition in the UK; enable consumers to make well-informed decisions with a clear understanding of the risks; protect UK financial stability; and protect UK market integrity¹. It said it would be guided by core design principles of "same risk, same regulatory outcome", proportionate and focussed, and agile and flexible¹. The proposed legislative approach is to bring cryptoassets within the framework established by the Financial Services and Markets Act 2000 by expanding the list of specified investments in Part III of the Regulated Activities Order to include cryptoassets. Once the relevant legislation is made, the Financial Conduct Authority would need to consult on the detailed rules it will apply¹.

The committee set out the scale and risks of the market. It said there are currently more than 23,000 cryptoassets in existence, with Bitcoin and Ether alone accounting for around two-thirds of total market capitalisation¹. Total market capitalisation stood at $1.2 trillion, or 0.2 per cent of the $487 trillion of total global financial assets, down from a peak of $2.9 trillion in November 2021¹. Research by the Bank for International Settlements estimated that 73 to 81 per cent of users who entered the Bitcoin market over 2015 to 2022 were likely to have lost money¹. Estimates of the proportion of global cryptoasset trades related to crime range from 0.15 per cent to 46 per cent, and the National Crime Agency estimated that illicit cryptoasset transactions linked to the UK in 2021 likely equated to at least £1.24 billion, around 1 per cent of total transaction value, with a realistic possibility they were significantly higher¹. The Financial Ombudsman Service said just over half of the investment scams it had seen involved cryptocurrencies¹.

The committee also noted the failure of the Bahamas-based exchange FTX, which it said resulted in consumers losing significant amounts of money¹. It recorded that the Bitcoin network's annualised energy consumption is estimated at 131 terrawatt-hours, more than that of Norway or Sweden¹.

Why it matters for households

The proposals concern how cryptoasset activities provided in or to the UK would be regulated, and the committee's report sets out the consumer risks that regulation is intended to address. The report cites price volatility in unbacked cryptoassets, the share of investment scams involving cryptocurrencies, and losses following the failure of FTX¹. It also notes that the Government's consultation covers areas it associates with a higher degree of risk from a consumer and overall market perspective¹. The framework is at consultation stage: the committee states that the Government's proposed approach is to bring cryptoassets within the Financial Services and Markets Act 2000 framework, and that the Financial Conduct Authority would then need to consult on detailed rules¹. No date for those rules has been reported.

What happens next

The Treasury Committee report is a House of Commons Committee report with recommendations to government, and states that the Government has two months to respond¹. The committee also notes that other jurisdictions are developing frameworks, including the European Union through its Markets in Crypto-Assets regulation¹. The report says it does not cover central bank digital currencies, which the committee is considering separately, consistent with the separate consultation paper published by the Government and the Bank of England¹.