UK’s upcoming crypto rules could undermine status quo of custody services

Rick Steves

Although regulating stablecoins is found as “a positive step”, the UK seems to be looking to enhance rules in the custody of other types of cryptoassets, including security tokens. According to the AFME, security tokens, which are inherently securities, should be treated as such throughout their lifecycle.

The Association for Financial Markets in Europe (AFME), an industry advocacy organization that represents wholesale market participants in Europe, including the EU and the UK, commented on the UK FCA and Bank of England consultations on the regulatory approach to stablecoins.

Through Managing Director of Technology and Operations James Kemp, AFME voiced its concerns regarding the UK’s intentions towards the regulation of fiat-backed stablecoins.

Although regulating stablecoins is found as “a positive step”, the UK seems to be looking to enhance rules in the custody of other types of cryptoassets, including security tokens.

The HM Treasury document states, “As addressed in the response to the Future Financial Services Regulatory Regime for Cryptoassets consultation, custody of security tokens will no longer be regulated in the same way as other specified investments and will instead be included in the new regulated activity for custody, alongside fiat-backed stablecoins issued in or from the UK.”

According to the AFME, security tokens, which are inherently securities, should be treated as such throughout their lifecycle. The takeaway is that the proposed custody rules would undermine the status quo for the provision of custody services, especially in wholesale markets.

AFME warns UK not to change custody rules for security tokens

“The UK’s plan to bring stablecoins into the regulatory perimeter is a positive step towards creating a safe and sound system for cryptoassets, and towards promoting confidence in DLT-based capital markets. However, AFME has concerns around the proposed design of a number of the rules, which in their current form will have negative consequences for wholesale markets and participants,” said AFME’s James Kemp.

“The FCA discussion paper goes beyond just regulating stablecoins, as it proposes enhanced rules in the custody of other types of cryptoassets, including those that currently meet the definition of specified investments. These instruments, which include security tokens, are inherently securities and should be treated as such throughout their lifecycle. To preserve market functioning, it is important that they are not subject to the separate regulatory treatment and territorial scope for custody proposed by the FCA,” Kemp continued.

AFME is greatly concerned that the proposed custody rules would undermine the status quo for the provision of custody services, especially in wholesale markets. We therefore urge the UK Treasury and FCA to reconsider their proposals: changes are needed to enable UK wholesale institutions to optimally access and provide custody services in the growing markets of security tokens. Without such changes, the proposals would negatively impact UK investors’ market access, hamper the UK’s role as a fintech hub and challenge the growth of DLT-based capital markets in the UK.”

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