Fintech, digital assets, payments and consumer credit | UK Regulatory Outlook May 2023

FCA speech on regulation of digital assets in UK

On 25 April 2023, the Financial Conduct Authority (FCA) published a speech by Sarah Pritchard, FCA executive director of markets and of international, on the regulation of digital assets in the UK.

Ms Pritchard stressed that, while regulation may be able to mitigate some of the harm associated with cryptoassets, it will not be able to remove all risk, in particular the risk of financial loss, and consumers who buy crypto must be prepared to lose all their money. The FCA expects crypto promotions to be treated on a par with promotions of other high-risk investments, with failure to comply due to become a criminal offence. The regulator is open to input from industry to make sure it gets the future regulatory regime for cryptoassets right.

Key points covered in the speech include the following:

• Cryptocurrency-based crime hit a worldwide high in 2022 – cryptoassets are at high risk of exploitation by organised criminals and are used in ransomware attacks. It is important that this level of risk is understood and future regulatory regimes strike an appropriate balance.
• The FCA is working closely with the government on its proposals to regulate stablecoins used for payments and its consultation on regulation of the wider cryptoassets regime. However, even with safeguards in place, cryptoassets will not offer the same level of market integrity and protection for consumers as traditional markets. It is therefore important to be clear that consumers are highly unlikely to be covered by the Financial Services Compensation Scheme and the Financial Ombudsman Service if things go wrong after they have purchased cryptoassets.
• Since cryptoassets transcend national borders, the FCA is working with its international counterparts to identify ways to boost market integrity. The government proposes to give the FCA powers over firms conducting activities related to crypto that do not have origins or a base in the UK but do provide services to UK consumers (a new approach).
• The FCA has established workstreams to understand what future crypto standards and requirements may mean when viewed through an environmental, social, and governance (ESG) lens. It will reflect on how best to factor ESG considerations into the design of the future UK cryptoasset regulatory regime.

Recommendations for next phase of open banking in the UK

On 17 April 2023, the Joint Regulatory Oversight Committee (comprising the FCA, the Payment Systems Regulator, the Competition and Markets Authority, and HM Treasury) published a report setting out its recommendations for the next phase of open banking in the UK. The committee's priorities are to allow open banking to develop further and to establish the future open banking entity (future entity) that will replace the current Open Banking Implementation Entity.

To deliver its vision for open banking, the committee sets out a roadmap of 29 actions that fit into the following themes, which it will progress in stages over the next two years:

1. Levelling up open-banking API (application programming interface) availability and performance.
2. Mitigating the risks of financial crime in open banking.
3. Ensuring effective consumer protection if something goes wrong.
4. Improving information flows to third-party providers and end users.
5. Promoting additional services, using non-sweeping variable recurring payments as a pilot.

The committee will publish terms of reference for the actions for which it is asking the sector to develop proposals.

To establish the future entity, the committee will work with open banking participants over the next few months to analyse the options for the entity's structure, governance and funding. The report contains an overview of the options and the work needed to finalise detailed proposals. The committee expects this analysis to be completed by Q3 2023 and will communicate its refined views in Q4 2023.

The committee also refers to the government's plans to use powers contained in part 3 of the Data Protection and Digital Information Bill to create a long-term regulatory framework for data sharing in open banking.

Update on the EU's MiCA Regulation and Wire Transfer Regulation

On 20 April 2023, the European Parliament published a press release announcing that it has adopted the Markets in Cryptoassets (MiCA) Regulation and the recast and revised regulation on information accompanying transfers of funds and certain cryptoassets (the Wired Transfer Regulation (WTR)).

On 3 May 2023, the Council of the EU published a press release announcing that it has adopted MiCA together with a similar press release on the recast and revised WTR – this represents the final step in the legislative process.

MiCA applies to cryptoassets that do not already qualify as financial instruments, deposits or structured deposits under EU financial services legislation. The regulation introduces new rules for cryptoasset service providers and issuers on supervision, consumer protection, and environmental safeguards relating to cryptoassets. (Please see our recent Insight on the scope of MiCA to find out more.)

The recast and revised WTR addresses the need to ensure traceability of cryptoassets transfers, and will allow suspicious transactions to be blocked. Applying the "travel rule" to crypto transfers means that information on the source of the asset and its beneficiary will have to travel with the transaction and be stored on both sides of the transfer – the rule already applies to traditional finance.

The two regulations will enter into force 20 days after their publication in the Official Journal of the European Union. MiCA will apply 18 months after it enters into force (except for requirements relating to asset-referenced tokens and e-money tokens, which will apply 12 months after the entry into force date). The recast revised WTR will apply from the same date as MiCA.