What is the Financial Services and Markets Act 2023?
The Financial Services and Markets Act (FSMA) 2023 received Royal Assent to become law on 29 June 2023. According to the Government, the Act will support the vision to grow the economy and create an open, sustainable, and technologically advanced financial services sector. The major reforms brought about by the Act include the enhancing authority of the financial services regulators; the removal of unnecessary restrictions on wholesale markets; the introduction of protections for victims of Authorised Push Payment scams; the inclusion of cryptoassets in the regulations to support their safe adoption in the UK; and the establishment of 'sandboxes' to facilitate the use of new technologies such as blockchain in financial markets.1
The relevance to cryptocurrency
The FSMA is considered an important piece of legislation that aims to bolster the competitiveness of the UK's financial sector. The FSMA establishes the UK's post-Brexit regulatory framework on financial services, by enabling areas of financial services regulation currently in retained EU law to be moved into the UK's FSMA model. Among those which have attracted the attention of the crypto community are the inclusion of cryptoassets in several sections.
In the cryptoasset space, the Act introduces a new regulatory framework for "digital settlement assets" (i.e., stablecoins), as well as a Designated Activities Regime (DAR) to include cryptoassets and services relating to cryptoassets.
Section 70(3) FSMA 2023 expands the scope of regulated activities under the FSMA 2000 to also cover investment "where an asset, right or interest is, or comprises or represents, a cryptoassets." Section 70(4) FSMA 2023 defines cryptoassets as "any cryptographically secured digital representation of value or contractual rights that— (a) can be transferred, stored or traded electronically, and (b) that uses technology supporting the recording or storage of data (which may include distributed ledger technology)." These provisions have, in effect, covered investment in cryptoasset as a regulated activity under the FSMA.
The scope of cryptoasset being recognised under the FSMA is still subject to great scrutiny. As evidence, section 70(4) FSMA 2023 states that "The Treasury may by regulations amend the definition of "cryptoasset"." This provision may in part reflect the concerns among UK policymakers on a specific type of cryptoasset – i.e., the unbacked cryptoasset such as Bitcoin and Ether.2
The FSMA 2023 also introduces a new Part 5A on Designated Activities Regime (DAR). The new section 71K(3) specify designated activities as those are related or connected to either (a) the financial markets or exchanges of the United Kingdom, or (b) financial instruments, financial products or financial investments that are (or are proposed to be) issued or sold to, or by, persons in the United Kingdom. Section 71K(7) further clarifies that that "The financial instruments, financial products and financial investments mentioned [in subsection (3)(b) (designated activity)] may include cryptoassets". In essence, this provision allows the government to regulate cryptoassets.
Chapter 2 of the Act also empowered the HM Treasury to introduce Financial Markets Infrastructure (FMI) sandboxes to test the adoption of new technologies. The first FMI sandbox is expected to be up and running in 2023, which will explore the use of DLT securities settlement systems integrated with trading platforms.3
Implications for businesses
In accordance with the DAR, any firms falling within scope of the DAR will have a new set of rules to navigate. The new Part 5A of FSMA gives the Financial Conduct Authority (FCA) the powers to impose requirements on firms carrying out activities falling under notion of designated activities. This suggests there is the potential for a wider-ranging impact on firms' activities, including those related to cryptoassets. In light of the new FSMA, firms involved in cryptoasset-related activities (such as trading) will need to consider whether their activities will fall within scope of the DAR and prepare to comply with any new rules made in relation to relevant designated activities.
1. GOV.UK (2023-06-29). Rocket boost for UK economy as Financial Services and Markets Bill receives Royal Assent.
2. House of Commons Treasury Committee (2023-May-17). Regulating Crypto. Fifteenth Report of Session 2022–23 Report, together with formal minutes relating to the Report.
3. Sir Jon Cunliffe (2022-09-28). Innovation in post trade services - opportunities, risks and the role for the public sector − speech by Sir Jon Cunliffe given at AFME Conference, London.
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