UNITED KINGDOM Law and Practice Contributed by: James Burnie, Kathryn Dodds, Olga Antonova and Nicky Androsov, gunnercooke llp
10.11 Virtual Currencies There is no specific regulation of virtual currencies other than that as set out above in 10.3 Classifica - tion of Blockchain Assets . In the future, however, there is likely to be a move to regulate stablecoins used for payment services. A core focus here is where such stablecoins may be used for payments analogous to traditional payment services. The proposed new regime will be influenced both by the existing approach to regulating payment services as well as the approach used in traditional investment management in terms of protecting back - ing assets. There will also be requirements in terms of the composition and location of backing assets. 10.12 NFTs Please see 10.3 Classification of Blockchain Assets regarding the regulation of crypto-assets generally. It should be noted that NFT projects are generally struc - tured so as not to involve the selling of an unregulated token. As a result, if they are sold into the UK from a jurisdiction outside of the UK, they are generally out - side of the financial promotion restriction as well as the other parts of the UK regulatory framework. It is therefore relatively uncommon for such platforms to be set up in the UK, as it is generally cheaper to sell into the UK on a cross-border basis. 10.13 Stablecoins Stablecoins are in the process of becoming regulated in the UK, with the regime being brought into being in various phases. The current focus is on stablecoins that reference a fiat currency, and seek or purport to maintain a stable value in relation to that referenced fiat currency by the issuer holding, or arranging for the holding of, either fiat currency or fiat currency and other assets. The FCA has set out a proposed approach to such stable - coins in its Consultation Paper CP25/14: Stablecoin Issuance and Cryptoasset Custody. Under the proposals, issuers of in-scope stablecoins would need FCA authorisation, and the framework is designed to ensure that stablecoins maintain their val - ue, are backed by high‑quality liquid assets, and are redeemable at par. This marks a significant milestone
a view to” the exchange of one crypto-asset for anoth - er (or for fiat) is a regulated activity under the MLRs that is given a wide interpretation, and, as a result, it is likely that operating a DeFi protocol would trigger a requirement to become FCA registered under the MLRs. This is, however, tricky conceptually given that the core of DeFi is that there is no centralised entity, and therefore no entity to register with the FCA. As a result, there is generally no substantive DeFi offering provided from a UK-based company (however, there are many UK companies that provide the intellectual property to offshore DeFi protocols). A further point to consider is the restrictions on finan - cial promotion of investment activity in certain crypto- assets into the UK. These apply to whoever is making the promotion into the United Kingdom to either limit communications to those that fall within an exemption to the restriction, or require the financial promotion to be signed off by an FCA-authorised firm. Getting signed off is a relatively high bar to selling into the UK, because the FCA-authorised firm takes some degree of responsibility in relation to the offering as a whole, and this option can be expensive. As a result, it is more common to rely on exemptions; however, this does significantly limit the persons who can be com - municated to. In particular, the most commonly used exemptions are those that enable fund managers and corporates with assets over GBP5 million to receive communications. 10.10 Regulation of Funds Funds that invest in blockchain assets are regulated the same way as funds generally. However, it should be noted that currently crypto-assets are not an eligi - ble investment for retail funds, and, as a result, crypto funds are generally restricted to professional inves - tors. It should also be noted that, whilst the regulation of crypto funds is not distinct from funds generally, existing service providers may not feel competent to operate with crypto funds. Consequently, there has been a notable increase in new service providers spe - cifically targeting the crypto funds sector to address this gap in the market.
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