HM Treasury consults on UK regulatory approach to cryptoassets and stablecoins

On 7 January 2021, HM Treasury (“HMT”) published a consultation and call for evidence on the UK’s regulatory approach to cryptoassets and stablecoins, which sets out HMT’s proposals for a new regulatory regime covering stablecoins and its approach to regulating cryptoassets more generally. The proposals follow HMT’s July 2020 consultation on bringing certain cryptoassets within the scope of the financial promotions regime (see our blog post here).

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EU digital finance and retail payments strategies: understanding the big picture

Last month, the European Commission (“EC”) adopted a new Digital Finance Package, which it published together with a communication entitled “A Retail Payments Strategy for the EU” containing specific policy measures needed in relation to payment services given their key role among digital financial services. The European Parliament (“EP”) subsequently adopted a nonbinding resolution on the EC’s Digital Finance Package on 8 October 2020. Continue reading

HMT consultations on financial promotions: approving promotions and promoting cryptoassets

HM Treasury has announced two consultations on possible changes to the UK financial promotions regime:

  • a consultation on limiting the scope of firms that can approve financial promotions of unauthorised persons; and
  • a consultation on extending the financial promotions regime to include unregulated cryptoassets.

The deadline for responses to both consultations is 25 October 2020.

These consultations reflect the continued focus by the Financial Conduct Authority (FCA) on marketing and the related risks to consumers, particularly following the mini-bond scandal, as well as the continued focus on the regulation of fintechs and cryptoasset technologies. Continue reading

Bank of England speech on payments trends and cryptoassets following Covid-19

Following Covid-19, the message from the UK financial regulators regarding payments firms and payments innovation has stepped up. Recently, the Bank of England published a speech given by Christina Segal-Knowles (Executive Director, Financial Market Infrastructure Directorate) on 11 June in which she discussed the emerging themes and challenges for payments firms and payments innovation. Continue reading

The FCA publishes proposals to ban sale of crypto-derivatives to retail consumers

The Financial Conduct Authority (“FCA“) has published proposals to ban the sale of derivatives or exchange traded notes (“ETNs“) which reference certain types of cryptoassets (“crypto-derivatives“), to address harm posed to retail consumers. The scope of the ban would extend to the sale, marketing and distribution of all derivatives (ie. options, futures and contracts for difference (“CFDs“)) and ETNs which reference ‘unregulated transferable cryptoassets’ by FCA-regulated firms acting in, or from the, UK to retail consumers (ie. ‘retail clients’ as defined in COBS 3.4). The ban would be implemented through proposed changes to the conduct of business (“COBS“) sourcebook.

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FCA calls for input on proposed Cross-sector Sandbox by 30 August 2019

New technologies, such as artificial intelligence (“AI“) and distributed ledger technology (“DLT“), continue to have a significant impact on the way in which firms, customers and regulators interact.  Firms introducing innovative business models whose products or services fall under the jurisdiction of different sectoral regulators can find themselves having to address competing regulatory expectations.

As these new innovative technologies and cross-sector business models begin to emerge, regulators have recognised a need to:

  • create a safe and encouraging environment for firms to develop positive innovations. At the same time, providing regulatory certainty;
  • ensure consumers are protected from new technologies still under development; and
  • ensure efficient and cost saving new technologies are made available to the public in a timely manner.

On 29 May 2019, the FCA issued a Call for Input seeking views on whether a single point of entry cross-sectoral sandbox would be useful in achieving these goals.  This is the first cross-sector sandbox proposed by a [global] regulator and reflects the UK’s desire to be perceived as a key centre for innovation and a thought leader on technology.

In a nutshell, the proposed cross-sector sandbox will allow firms to test innovative products, services and business models in a live market environment. Firms whose business span across different sectors (e.g. telecommunications, public utilities and banking) will be able to use this opportunity to obtain informal regulator input and guidance.  Products will be tested on a small scale and appropriate safeguards would be put in place to protect test participants.  The deadline for submissions to the FCA is 30 August 2019.

It appears that technology companies, telecommunication companies, public utility providers and financial institutions will be the most likely users of the cross-sector sandbox. Possible use cases include the launch of Orange Bank by the French telecommunications company, the launch of Ant Financial by the Alibaba Group, and the introduction of other “hyper platform” models by technology companies such as Tencent and Baidu (Open Edge).

We consider the FCA’s proposed cross-sector sandbox in more detail below.


Traditional business models have largely been considered by regulators on an individual basis.  Where there have been areas of overlap, the FCA have relied on bilateral memorandums of understanding (“MoUs“) and existing fora to discuss cross-cutting issues.  However, there is currently no practical mechanism for multiple regulators to collaborate. With the development of more innovative and cross sectoral business models, regulators have recognised the need for a more focused and streamlined approach.  This is where the proposed cross-sector sandbox comes in.

The FCA’s suggestion of introducing a cross-sector regulatory sandbox is also consistent with the global trend of fostering innovation: at least 31 global financial services regulatory agencies now have a regulatory sandbox.  In addition, in January 2019, the FCA and 35 other financial organisations also launched the Global Financial Innovation Network (“GFIN”) to launch a cross-border testing pilot. The FCA’s current proposed cross-sector sandbox builds on the lessons learned from existing sandboxes and aims to leverage new opportunities brought by technological developments.

Key features of the FCA’s proposed cross-sector sandbox

The key features of the FCA’s proposed regulatory sandbox includes:

  • Restricted authorisation– the FCA will have a tailored authorisation process for firms accepted into the sandbox. Any authorisation or registration will be restricted to allow firms to only test ideas as agreed with the FCA;
  • Individual guidance– the FCA will explain how it will interpret the requirements in the context of a specific test;
  • Informal steers– the FCA can provide views on the potential regulatory implications of an innovative product or business model that is at an early stage of development;
  • Waivers– the FCA may be able to waive or modify an unduly burdensome rule, for a test. However, the FCA will not able to waive national or international law; and
  • No enforcement action letters–  if the firm deals with the FCA openly, keeps to the agreed testing parameters and treats customers fairly, the FCA accepts that unexpected issues may arise but it does not expect to take disciplinary action.

The FCA stated it will closely oversee tests and set specific safeguards for consumers. Sandbox tests are expected to have a clear objective (e.g. reducing costs to consumers) and be conducted on a small scale. Under the sandbox arrangement, firms will be able to test their innovations for a limited duration (up to 6 months) with a limited number of customers.

Perceived benefits

From a financial services perspective, the proposed cross-sector sandbox is expected to help:

  • Reduce time and cost of getting innovative ideas to the market (e.g. using DLT/ crypto assets as a payment mechanism for utility bills);
  • Facilitate access to finance and regulatory insight for innovators;
  • Enable products with potential or immediate cross-sector relevance to be tested and introduced to the market;
  • Ensure appropriate consumer protection safeguards are built into new products and services;
  • Allow regulators to share learnings from various tests and other sectors (e.g., on AI, DLT, Big Data and machine learning);
  • Allow regulators to create a common or harmonised regulatory and policy approach to the development and implementation of new technologies; and
  • Provide firms with complex new business models which span more than one regulator with a unique, coordinated single-point entry sandbox. Whilst the FCA has identified the possible use cases referred to above (Orange Bank, Ant Financial, Tencent and Open Edge), there will be greater use of more innovative business models as more and more technology and telecommunication firms diversify into traditional business areas, such as banking and public utilities, and vice versa.

Potential Challenges

The FCA has also identified some of the potential challenges a prospective cross-sector sandbox could face. They include:

  • Lack of demand– it is difficult to predict how many firms would submit an application that meets the eligibility criteria set by participating regulators.
  • Misunderstanding about the purpose of a sandbox– the FCA expects that participating regulators will set eligibility criteria and only accept applications from firms who have shown a “need for testing”. This, the FCA believes, will separate these genuine cases from those which simply wish to gain a regulatory seal of approval;
  • Firms do not improve own in-house knowledge – since regulatory feedback will be given, some firms (particularly smaller firms) may lose the incentive to develop in-house knowledge. As such, successful applicants to the cross-sector sandbox will need to show that they have an understanding of the regulatory framework in which they operate. Applicants will also need to provide reports of their findings and next steps.  Also, restrictions on firms will only be removed once the FCA is satisfied that a firm’s knowledge of the regulated market has sufficiently (i.e. when firms are able to operate without exposing markets and consumers to unacceptable harm);
  • Differing regulatory remits– given regulators have different mandates and objectives, they may arrive at different conclusions when looking at the same trial outcomes. Given different regulatory philosophies, there may also be situations where competing objectives conflict. For example, a new innovative business model that is prudentially sound may be approved by the PRA.  However, it may not receive the FCA’s blessing if it does not promote effective competition in the interests of consumers. However, the FCA is of the view that looking at tests concurrently with other regulators will help mitigate instances of uncertainty.  Although the sandbox should foster greater cooperation between regulatory bodies in the live testing environment, issues that are inherent in the various distinct regulatory frameworks may arise even after the product or offering has advanced into the formal marketplace. For example, a cross-sector product might fall within scope of several distinct dispute resolution mechanisms – different schemes, such as the Financial Ombudsman Service and the Energy Ombudsman, have different powers to, and parameters for, ordering redress and compensation.

HSF Comment

The proposed cross-sector sandbox is a further evolution of the FCA’s commitment to fostering innovation, and recognises that, even where sectors remain distinct, user behaviours and expectations are driving increased interaction between regulated sectors.  Innovators from sectors other than the purely financial should be encouraged to respond to the call for evidence.


Karen Anderson
Karen Anderson
Partner, London
+44 20 7466 2404
Vicky Man
Vicky Man
Senior Associate, London
+44 20 7466 3861

Feedback Statement: Distributed Ledger Technology

The FCA has today published the Feedback Statement (FS) to its April 2017 Discussion Paper (DP) DP17/03 on Distributed Ledger Technology (DLT).

  • In its introduction to the FS, the FCA articulates its position on DLT as follows: “Our aim is to be alive to current and potential developments involving DLT, to keep pace with them, and to strike a proportionate regulatory balance between the risks and opportunities they present. We see regulation as an enabler of positive innovation based on new technologies as well as a means of containing undue risk. Our regulatory philosophy (subject to any risks to our objectives) is to be ‘technology-neutral’.”
  • The FS covers the following areas (key points for each topic are summarised below):
  •  Operational risk, including outsourcing and network security;
  • Digital currency, including derivatives and Initial Coin Offerings (ICOs);
  •   Digital asset trading and smart contracts;
  • Regulatory reporting;
  •    Financial crime; and
  • The General Data Protection Regulation (GDPR).
  • The FCA says that the DP was positively received, with particular support expressed for the FCA’s ‘technology-neutral’ position.
  • Feedback received to the DP also supported the view that the FCA’s current rules are sufficiently flexible to accommodate various technology, including DLT. Rules were said to present ‘no substantial barriers’ to adopting DLT. Although, some respondents doubted the compatibility of permissionless networks with the regulatory regime.
  • Some 47 responses were received to the DP, ranging from regulated firms, trade associations, technology providers, law firms and consultancies.
  • As next steps, the FCA will continue to monitor DLT-related market developments and engage both internationally and nationally to help shape the regulatory response.

Operational Risk

  • Use of DLT may affect firms’ exposure to operational risk via changes to/potentially reduced control over people, processes and systems.
  • Permissioned and permissionless DLT does, however, have the potential to enhance operational soundness.
  • Specific operational risks will be dependent on the actual application of DLT.
  • Use of DLT might affect how individual responsibility and accountability is allocated; firms are reminded of the requirements under the SMCR.


  • FCA says that use of permissionless and public networks is not inherently incompatible with the regulatory regime.
  • Firms will need to assess each case to see whether using a DLT network amounts to ‘outsourcing’ in the context of FCA’s regulatory requirements. FCA states that it does not consider that using a permissionless network always necessarily amounts to outsourcing in that context

Network Security

  • Whatever technology is deployed, the FCA expects firms to actively manage their operational risks.
  • Where technology is core to the delivery of a regulated service, FCA expects firms to give their full attention to operational risk management.

Digital Currencies

  • FCA recognises a positive competitive potential in the context of value transmission.
  • With sound risk management, digital currencies may enhance the delivery of financial services, but volatility risk posed by the magnitude and mercurial nature of price fluctuations is one of the risks firms must adequately address.

ICOs and Derivatives

  • FCA says that it is unlikely for most ICOs that investors will have access to UK regulatory protections such as the FSCS or the FOS.
  • FCA comments on the high potential for ICO-related fraudulent activities and the inadequate documentation in so-called white papers that projects (often only in very early stages of development).
  • Whether an ICO falls within the regulatory perimeter needs to be considered on a case-by-case basis.
  • As the ICO market is evolving at a great speed, the FCA will continue to monitor it and engage with the industry, regulators nationally and internationally, and global standard setters to determine whether there is a need for regulatory action. The regulator points to:
  • Its recent consumer alert; and
  • The information it set out on designing an ICO-related business proposition to satisfy the ‘consumer benefit’ criterion for access to the FCA’s Innovation Hub.
  • An Annex to the FS provides detailed regulatory analysis of ICOs.

Digital asset trading and smart contracts

  • DLT could bring several benefits to securities markets, e.g., more efficient post-trade processes and enhanced reporting and data management capabilities. It has the potential to form the core of a central securities depository.
  • It might also help to improve straight-through processing, offer real-time settlement and the elimination of settlement risk, and lead to disintermediation such as the possible removal of the roles played by custodians and settlement agents.
  • A number of challenges need to be addressed before substantial benefits can materialise:

o   It is unclear whether DLT might be adopted broadly across securities markets or remain limited to niche uses.

  • Central banks deciding in future to issue or support a digital currency might spur market participants to invest more resources in DLT.
  • Since it is unlikely that DLT will replace existing market infrastructure for some time, a combination of multiple DLT systems and legacy systems would need to operate with one another.
  • Legal issues such as the legal status of digital assets and the enforceability of smart contracts, would have to be clarified.
  • DLT-based real-time settlement could eliminate the need for equity clearing, but market users might have a limited appetite for such a development because of the potential loss of opportunities for netting and the absence of the anonymity.
  • The continued existence of materialised securities may pose challenges to the adoption of DLT.
  • At this juncture, the FCA does not intend to propose DLT-driven rule changes in the context of asset management or securities markets. It will continue to monitor market developments.

Regulatory Reporting

  • The FCA agrees with the potential benefits of adopting DLT as a RegTech solution and also acknowledge the associated risks.
  • DLT is not the only technology that could improve regulatory reporting. So the FCA continues to explore other possibilities, such as model-driven machine-executable regulatory reporting.
  • Encouraged by the strong level of interest in RegTech by industry stakeholders, FCA will continue to prioritise our RegTech initiatives as part of FCA Innovate.

Financial Crime

  • DLT has the potential to provide a more robust, tamper-proof record of transactions and, as a result, improve data quality while reducing the likelihood of fraud.  Using DLT does not automatically introduce or increase fundamental financial crime risks.
  • The FCA has however observed the denial of banking services to a number of firms, particularly those who leveraged DLT to facilitate their services. Deploying DLT should not result in a wholesale denial of access to traditional banking services.
  • FCA is keen to explore how DLT can support firms and regulators in fighting financial crime.
  • FCA notes that in some instances, the current regime may need to evolve as more sophisticated tools become available. One of the challenges is the current reliance provisions in the Money Laundering Regulations (MLRs).  However, this is a longer-term reform which would require renegotiation of international standards, e.g., FATF recommendations.


  • The FCA underscores that the Information Commissioner’s Office regulates and enforces GDPR, and encourages firms to follow the Office’s available guidance.  It says it will continue to work with the Office as further use cases emerge.
  • The FCA has not identified any substantial incompatibilities between the Handbook and the GDPR’s requirements, and does not see a material need for further FCA guidance on this issue.


Cat Dankos
Cat Dankos
Consultant, London
+44 20 7466 7494