Government consultation on regulation of cryptoassets deals with issuance and disclosures of cryptoassets within the UK

13/03/2023

On 1st February 2023, His Majesty’s Treasury (“HMT”) published a comprehensive consultation paper (“Consultation Paper”) that sets out the UK Government’s (“Government”) intention to bring cryptoassets and cryptoasset related activities within the scope of the UK financial services regulatory regime, marking the next phase of the Government’s approach to regulating cryptoassets. We have published a summary of the Consultation Paper here, with the proposals including a new regulatory regime for the creation, issuance and distribution of cryptoassets.  This article outlines these particular proposals in detail.

Applicable legislation and the regulatory trigger points

The issuance and disclosures of crypotassets mirrors a lot of aspects of the securities markets and the Government is proposing to utilise existing legislation to regulate the space. The Government is seeking to regulate specifically two instances when a cryptoasset is:

1) admitted (or seeking the admission of) to trading on a regulated venue and therefore becomes exchangeable for fiat currency; or

2) subject to a public offer (this shall include initial coin offerings).

However, the Consultation Paper confirm that there is no desire to attempt to regulate the creation of unbacked cryptoassets under financial services regulation. 

What the legislation aims to achieve:

The Consultation Paper sets out a number of high-level principles which the legislation seeks to achieve. With the goal of instilling market confidence and stability to the cryptoassets space, without hampering innovation. In summary the principles are: 

  • Standardisation of information available on a cryptoasset. similarly, to securities law whereby companies wishing to make an offer to public or be admitted to a regulated trading venue need to provide a minimum set of information on the company such as trading history, directors etc. Cryptoassets will be required to provide a minimum set of information (including the underlying technology supporting the cryptoasset and information such as protocol and consensus mechanism) in order to allow investors to make informed investment decisions. Further relevant disclosures may include information on the features, prospects and risks of the cryptoasset and any rights or obligations attached to it. Where applicable the person seeking admission to trading should also be disclosed. There will need to be a balancing act between ensuring the investor is sufficiently informed and not placing a disproportionate burden on the issuer or the trading venue.
  • Liability and compensation: there will be consequences for untrue and misleading statements made in disclosure/ admission documents that will sufficiently protect investors and encourage issuers and venues to vet statements made in respect of a particular cryptoasset. The reforms conclude that a clear liability should be attached the disclosure/ admission document. It is worth noting that where marketing materials and advertisements are available to retail investors they will need to comply the financial promotions regime.
  • Due diligence: issuers and trading venues will be responsible for ensuring that a certain level of due diligence has been conducted in respect of the contents of the disclosure/ admission document. Similarly, to the securities market there is likely to be a process of issuers and venues being required to have evidence in support of statements that may encourage investors to participate in the fundraising.
  • Investor protection: marketing materials should be reviewed from a protectionist lens and should clearly show the associated risks with the potential investment, avoiding sweeping statements which may gloss over dangers and include any necessary disclaimers. Trading venues will be required to implement rules that govern marketing materials and products appropriately.

Whilst the Government intends to establish an issuance and disclosures regime for cryptoassets grounded in the intended reform of the UK prospectus regime the regulation will be adapted in order to deal with the specific attributes of cryptoassets. This includes the type and design of the cryptoasset and the underlying technologies involved such as the relevant blockchain and how this impacts the creation, issuance and distribution of the cryptoassets. There is also the decentralised nature of cryptoassets which results in actors being located globally as opposed to at a company’s registered office. Furthermore, the actors involved in the issuance of cryptoassets varies immensely in comparison with cryptoassets for example Bitcoin does not have a “traditional” issuer i.e the company who’s shares will be listed on the trading venue but instead coins can be minted (created) according to protocol which has been coded by computer developers.

Proposals

As is required by securities legislation, all admission and disclosure documents for cryptoassets would be stored on the National Storage Mechanism (NSM), maintained by the FCA. Venues shall be required to search the NSM before new admissions and ensure that the information in their possession is consistent with other documents logged.

The FCA shall also consider whether cryptoassets shall be required to provide ongoing disclosures following admittance to a trading venue in order to ensure that an ongoing and up to date minimum set of information is provided to investors. The ongoing information may include items such as code audits or changes to how the cryptoasset functions.  

Prospectus reform: traditional securities

The intended prospectus reforms aim to capture (i) instances where securities are admitted to trading on a UK Regulated Market (ii) where securities are admitted to trading on Multilateral Trading Facility (“MTFs”) operating primary markets and (iii) securities offered via a “public offer platform” (a new bespoke permission for platforms facilitating public offers of unlisted securities, such as crowdfunding platforms).

The regulations will also continue to incorporate a certain set of exemptions according to the type or scope of public offer, these will include offers below a de minimis monetary threshold, offers made only to “qualified investors” and offers made to fewer than 150 persons.

In order for securities to be admitted to trading on a Regulated Market, the FCA will continue to set detailed rules, including on whether a prospectus is required and what information it should contain and will still require approval by the FCA ahead of publication. For those securities admitted to trading on an MTF, the FCA would be given rulemaking powers to require MTFs operating as primary markets to stipulate that an admission document in particular scenarios will need to be published and treated as a prospectus. The Government shall continue to allow companies to offer securities to the public where certain conditions apply regarding the size of the offer.

The reforms also propose for offers of securities to be made to the public via a new regulated activity covering the operation of an electronic platform for the public offering of securities (this shall cover crowdfunding platforms). Although these issuances shall not require a prospectus, the FCA will have the powers to determine the detailed requirements for such platforms including the levels of due diligence and disclosure required on offers made through them.

Prospectus reform: cryptoassets

In relation to the admission of cryptoassets to a UK cryptoasset trading venue, the Government is proposing to adapt the MTF model from the intended reform of the UK prospectus regime. This would result in trading venues being responsible for writing and administering admission and disclosure requirements, laid out by the FCA in its handbook. The onus would be placed on the cryptoasset trading venue to ensure a minimum level of information on each cryptoasset available to investors via its platform. The FCA understands that the disclosure requirements will differ from traditional admission documents and shall focus on the specific aspects of the cryptoasset and the typical investor profile. A due diligence process on the cryptoasset ahead of admission on to the trading venue would be required to be undertaken by the trading venue and the trading venue would be responsible for rejecting the application for admission of the cryptoasset if it may result in investor detriment. In instances where there was no per se issuer of the cryptoasset the venue would under law take on the responsibilities of the issuer should they wish to admit the cryptoasset to trading. Issuers and venues will need to consider prudential requirements to ensure that they have the capabilities to absorb any financial losses such as reserves or professional indemnity insurance.

The Consultation Paper states that public offers of cryptoassets, where a fund raiser creates new tokens and sells them to investors may meet the definition of a security offering. The replacement of a share or bond with a take does not fundamentally change the nature of a capital raising event from a regulatory perspective. The Government discusses that offers of cryptoassets to the public which meet the definition of a security offering and are considered an STO, may be appropriately regulated by the intended Public Offers and Admissions to Trading Regime. Similar exemptions which apply to the public offers of cryptoassets such as an offer under the de minimis monetary threshold in the reformed regime. Those that were larger, would need to go through a public offer platform (or a Regulated Market or a primary MTF) and would not require a prospectus; instead, due diligence would be done via the platform according to the platform’s rules.

Those public offers of cryptoassets which do not meet the definition of a security token offering, are likely to be regulated via an alternative route.

HMT has asked for respondents to submit their responses to the Consultation Paper by 30th April 2023. 

Comment

The proposed regime seeks to provide a level of investor protection that has previously been lacking within the cryptoasset space. Whilst acknowledging the underlying differences of cryptoassets the Government plans to utilise the existing regulatory framework for issuance of securities.  Issuers and MTFs will need to consider the consequences of admissions and public offers and should seek legal advice in anticipation of either of the two trigger points. MTFs have a lot of work in order to be ready and compliant with the new legislation and should consider what internal controls and governance changes will need to be implemented. 

For any queries, please speak to one of our experts.