The US government has proposed a new regulatory regime for cryptocurrencies to encourage “growth and innovation” in the sector while maintaining financial stability and clear regulatory standards.
The consultation paper published follows proposals made in the Financial Services and Markets Bill (FSMB). Several crypto asset activities will be regulated based on existing regulated activities in the traditional financial markets. This means crypto service providers must be fully authorized and supervised by the Financial Conduct Authority (FCA).
General Requirements For Crypto Firms
The proposal has frameworks for several activities by crypto companies that His Majesty’s Treasury (HMT) considers to be of the highest risk and require a special regulatory regime. They are:
- All applications by the companies to the FCA should include details of operations, services, and business plans, a description of organizational and governance arrangements, a description of controls and risk management process, cybersecurity, outsourcing arrangements, and their financial resources.
- The firms should provide details about their location which the FCA determines
- They must declare that they have sufficient financial resources to conduct business prudently. Capital and liquidity requirements are set by the FCA addressing both the potential for harm from ongoing operations and the ability to wind up business in an orderly manner.
- There must be robust governance arrangements
- Firms must be resilient, perform due diligence, and have oversight over outsourcing arrangements
Specific Activity Requirements For Crypto Firms
- Crypto token issuers or trading platforms that deal with assets without an issuer (eg. Bitcoin) will need to prepare an admission document. The FCA will consider whether there should be disclosure requirements once the crypto asset has been proposed.
- Liability for any losses suffered by the investor as a result of an inaccurate disclosure or admission documents would be borne by the service provider.
- Crypto trading platforms will need to provide customers with fair, open, and transparent access rules and fee schedules, conflicts of interest management, and procedures for handling customer complaints.
- The platforms will be required to make accurate and complete information readily accessible for both on and off-chain transactions. Market abuse monitoring will be done with the help of blockchain surveillance providers.
Custody Requirements for Crypto Firms Safeguarding Investors’ Assets
- Companies will need to make adequate arrangements to safeguard investors’ rights to their crypto assets
- They will be required to make adequate organizational arrangements to minimize the risk of loss or diminution of investors’ custody assets
- They will be required to keep records of investors’ crypto asset custody holdings
Requirements for Crypto Asset Lending Platforms
- Crypto firms will need to provide client disclosures, risk warnings, and clear contractual terms including ownership of legal and beneficial title.
- Crypto lending and borrowing firms will be required to monitor and manage liquidity and funding risks across different time horizons and stress scenarios. This is on top of the general sufficient financial resource requirements that all crypto firms must comply with.
The HMT says that the same regulatory outcomes should apply to all crypto asset activities regardless of the underlying technology, infrastructure, or governance mechanisms. This is also applicable to decentralized finance (DeFi) service providers.
The consultation for the proposed crypto regulatory bill closes on April 30, 2024.