HM Treasury's crypto consultation to inform 2023 regulatory reform in the UK

Yesterday, 1 February 2023, HM Treasury launched its consultation on the "Future financial services regulatory regime for cryptoassets." 

The consultation paper sets out proposals for the future regime and marks the next phase of the government’s approach to regulating cryptoassets. It builds on previous HM Treasury proposals, which focussed on stablecoins and the financial promotion of cryptoassets.

What does the consultation cover?

The consultation covers (in addition to general market abuse requirements):

• Regulatory outcomes for:
  • Issuing cryptoassets and disclosures
  • Operating a cryptoasset trading venue
  • Operating as a cryptoasset intermediary
  • Providing cryptoasset custody
    
    
• Calls for evidence in relation to:
  • Decentralised Finance
  • Investment and portfolio management, post trade activities and mining/validation 
  • Sustainability

When is the deadline for responses, and who can contribute?

The consultation closes on 30 April 2023. Responses are welcome from everyone, including cryptoasset firms, technology firms, financial institutions, other businesses impacted by cryptoasset regulation, trade associations, representative bodies, academics, legal firms, and consumer groups. 

What other important developments are happening in 2023?

This is not the only important development in the legal and regulatory landscape for digital assets that is scheduled for 2023. 

In 2022, the UK Government asked the Law Commission to make recommendations for reform to ensure that the law is capable of accommodating both crypto-tokens and other digital assets in a way which allows the possibilities of this type of technology to flourish. That consultation closed on 4 November 2022 and the report setting out the law reform recommendations is expected later this year. 

What will the Law Commission's report cover?

The Law Commission published a summary of the consultation prior to publication of the final report. In that summary, the Law Commission agreed with the view of Sir Geoffrey Vos (speaking extra-judicially) that: “We should try to avoid the creation of a new legal and regulatory regime that will discourage the use of new technologies rather than provide the foundation for them to flourish.” 

The Law Commission's provisional proposals from the summary are: 

1. The explicit recognition and definition of a “third” category of personal property distinct from things in possession and things in action, which would allow for a more nuanced consideration of new, emergent, and idiosyncratic objects of property rights. This category is called “data objects”.  
2. "Control" (as opposed to "possession") best describes the relationship between data objects and persons.
    
3.  A set of rules that govern the derivative transfer of title in data objects (including cryptoassets), including in the context of the unauthorised disposition of a cryptotoken.
   
   
4. The special defence of good faith purchaser for value without notice should apply to crypto-token transactions.
    
5. Statutory law reform clarifying the scope and application of section 53(1)(c) of the Law of Property Act 1925 in connection with certain dealings in specified forms of equitable crypto-token entitlements.
   
   
6. Law reform clarifying and simplifying the apportionment of shortfall losses arising out of commingled crypto-token holdings (held on trust by an insolvent custodian) would be beneficial.
    
7. There are arguments in favour of extending the tort of conversion (or a conversion-type cause of action) to data objects.
   
   
8. There is an arguable case for law reform to provide courts with the discretion to award a remedy denominated in certain crypto-tokens in appropriate cases. 

What impact will regulation have on the digital assets market in 2023?

2022 has been widely referred to as being the "crypto winter". Many, both from within and without the sector, have been heralding improved regulation as being fundamental to any recovery. To continue the seasonal reference, whether or not these reforms will precipitate a thaw and stimulate the green shoots of the second wave of growth in the sector will depend on the clarity and efficacy of the reforms, and how swiftly they are implemented. 

Other jurisdictions may be further along in terms of the development and implementation of the digital assets regulatory and legal regimes but English law is still highly respected in the international marketplace. As a result, the eyes of the world will be watching the outcome of these consultations and the resulting proposals with interest. Just like the transmission of digital assets themselves, the impact of these consultations could be swift and wide-ranging.