The European Central Bank (ECB) has published a press release confirming its decision to expand its initiative to settle transactions recorded on distributed ledger technology (DLT) in central bank money. The press release confirms that the Eurosystem will develop a settlement platform that is interoperable with trans-European automated real-time gross settlement express transfer system (referred to as TARGET) services, and will also consider a more integrated, long-term solution for settling DLT transactions in central bank money which will include international considerations. This expansion follows the Eurosystem's work last year on new technologies for wholesale central bank money settlement, which comprised various settlement experiments and included bank, financial market and DLT platform participants.

The UK Financial Conduct Authority (FCA) and the UK Payment Systems Regulator (PSR) have issued a joint feedback statement on the usage and impact of big tech and digital wallets (FS25/1). The feedback statement was accompanied by a press release and joint letter to the UK Competition and Markets Authority (CMA) regarding the CMA's invitation to comment on investigations in relation to certain mobile ecosystems. The feedback statement highlights four potential issues around big tech and digital wallets:

• First, there are competition concerns as between different digital wallets (and mobile ecosystems).
• In addition, there are competition concerns as between payment systems within digital wallets, particularly where digital wallets do not provide a choice of payment methods except for cards.
• Operational resilience and consumer rights and protection are an issue, given that reliance on digital wallets could impact the financial system's resilience if consumers do not have other means of payment.
• Finally, there are regulatory perimeter questions around whether the regulatory framework should include digital wallets in order to be more effective (although some responses raised concerns that this approach may hinder innovation).

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The European Securities and Markets Authority (ESMA) has published a consultation paper on the guidelines for the criteria on the assessment of knowledge and competence under Markets in Crypto-Assets Regulation (MiCAR). The guidelines relate to natural persons giving advice or information about crypto-assets or a crypto-asset service. In terms of approach, ESMA has taken as a reference the Markets in Financial Instruments Directive guidelines on the assessment of knowledge and competence.

ESMA proposes four guidelines. The first guideline is a general guideline to ensure that crypto-asset service providers (CASPs) take sufficient steps to ensure that their staff providing information or advice on crypto-assets or crypto-asset services possess the necessary knowledge and competence to fulfil their obligations. This includes an understanding of how to apply the CASPs internal policies and procedures designed to comply with MiCAR. Guideline two concerns criteria for staff giving information about the relevant crypto-assets or crypto-asset services. Guideline three concerns criteria for staff giving advice about crypto-assets or crypto-asset services, and addresses the minimum requirements for professional qualification and professional experience, as well as the minimum number of hours of continuous professional development or training per year. Finally, guideline four on organisational requirements states that CASPs' organisational requirements should ensure that the knowledge and competence of the staff giving information and advice on crypto-assets or crypto-asset services is assessed, maintained and updated appropriately.

The deadline for comments is 22 April. ESMA will publish a final report and guidelines in Q3 this year.

Eight Delegated Regulations supplementing the Markets in Crypto-assets Regulation (MiCAR) have been published in the Official Journal of the European Union (OJ).

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The European Central Bank (ECB) has published Decision (EU) 2025/222 relating to access by non-bank payment service providers (NB-PSPs) to Eurosystem central bank operated payment systems and central bank accounts. The EU Instant Payments Regulation (Regulation (EU) 2024/886) introduced certain changes to the EU Settlement Finality Directive (SFD) and Payment Services Directive (PSD 2), including adding NB-PSPs to the list of institutions eligible to become participants in payment systems designated under the SFD and permitting NB-PSPs to deposit their clients' funds for safeguarding in a separate account in a bank or central bank, at the central bank's discretion.

The ECB's decision: (i) sets out the circumstances in which a Eurosystem central bank should provide access to central bank operated payment systems, (ii) prohibits Eurosystem central banks from offering or providing safeguarding accounts to NB-PSPs or crypto-asset services providers, (iii) determines the maximum amounts that may be held by an NB-PSP across its accounts at any given central bank operated payment system, and (iv) provides for penalties in the event that an NB-PSP fails to comply with the maximum holding amount limit or requirements for access to central bank operated payment systems.

The Decision will enter into force on 26 February 2025 and will apply from 9 April 2025.

For more information on the issues and developments relating to fintech, see our blog A&O Shearman on fintech and digital assets.

The Financial Services and Markets Act 2023 (Digital Securities Sandbox) (Amendment) Regulations 2025 were laid before parliament, together with an explanatory memorandum. The Regulations relate to the Digital Securities Sandbox, which is a temporary supervisory regime allowing firms to test certain innovative financial market infrastructure activities that launched on September 30, 2024. The Regulations amend the Sandbox by modifying the application of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 to Sandbox participants. This is to ensure that firms which may already be registered or authorized with the FCA for other activities need not register separately with the FCA as a cryptoasset business for the purpose of undertaking Sandbox activities. The explanatory memorandum accompanying the Regulations also confirms that a number of firms have successfully completed the approvals process for the Sandbox and passed through Gate 1 (the testing stage). The Regulations make certain other minor amendments, and come into force on March 3, 2025.

The Financial Stability Board has published its work program for 2025. Priority areas of work for 2025 include:

• supporting global cooperation on financial stability: the FSB will continue monitoring global financial stability developments and the implications of emerging financial innovation, and conduct in-depth analysis on vulnerabilities in non-bank financial intermediation and climate change;
• enhancing the resilience of NBFI: while preserving its benefits, the FSB workstream includes finalizing policy recommendations on NBFI leverage, developing and beginning implementation of a medium-term workplan to address issues relating to non-bank data availability, use and quality and analyzing the resilience and functioning of the repo market;
• harnessing the benefits of digital innovation while containing its risks: the FSB will produce a thematic peer review on implementation of its crypto-asset recommendations, a report on how financial authorities can monitor AI adoption and assess related vulnerabilities, and finalize the format for incident reporting exchange;

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The Financial Services and Markets Act 2000 (Collective Investment Schemes) (Amendment) Order 2025 has been published, alongside an explanatory memorandum. The Order includes a new paragraph 22 to the Schedule to the Financial Services and Markets Act 2000 (Collective Investment Schemes) Order 2001 (the "CIS Order"). The Schedule to the CIS Order specifies the kinds of arrangements which do not amount to a collective investment scheme. The new paragraph clarifies that arrangements for qualifying crypto-asset staking do not amount to a collective investment scheme. The aim of the instrument is to provide clarity to firms so that they are able to offer staking services to their U.K. customers without being subject to the collective investment scheme rules for this activity. The U.K. government has considered the need for an appropriate degree of consumer protection from the risks associated with the marketing of staking products and considers that this protection is delivered by communications on staking arrangements provided in compliance with the requirements of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 and relevant FCA rules and guidance. The Order comes into force on January 31, 2025.

For more information on the issues and developments relating to fintech, see our blog A&O Shearman on fintech and digital assets.

The European Banking Authority has published a consultation paper on its draft Regulatory Technical Standards on the calculation and aggregation of crypto-exposure values under the Capital Requirements Regulation 3. The RTS specify the technical elements necessary for institutions to calculate and aggregate crypto-asset exposures in relation to the prudential treatment of such exposures. The RTS aim to address implementation aspects and ensure harmonization of the capital requirements on crypto-assets exposures by institutions across the EU.

The draft RTS also further develop the relevant capital treatment for credit risk, counterparty credit risk, market risk and credit valuation adjustment risk for 'asset reference tokens' and 'other' crypto-assets exposures and align, to the extent possible, the capital treatment with the elements specified in the Basel standard on prudential treatment of crypto-asset exposures.

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The European Banking Authority has published a letter from the European Commission (dated December 6, 2024) to the EBA and the European Securities and Markets Authority regarding the interplay between Markets in Crypto Assets Regulation and the Payment Services Directive. The Commission notes the diverging interpretations among member states about the interplay between MiCAR and PSD2 and asks the EBA, with ESMA, to explore the possibility of issuing a "no action letter" on the enforcement of PSD2 authorization requirements as regards services with electronic money tokens provided by crypto asset service providers (or by entities benefiting from the transitional period under MiCAR) that may be inadvertently caught by PSD2. Where dual authorization would nevertheless be required, the Commission invites the EBA, with ESMA, to explore whether the PSD2 authorization process could be streamlined to reduce the operational burden on institutions. The EBA has responded (in a letter dated December 10, 2024), stating that it agrees with the concerns, and is assessing the issues in co-ordination with ESMA. The EBA aims to publish a response by April 2025.

For more information on the issues and developments relating to FinTech, see our blog A&O Shearman on fintech and digital assets.

The U.K. Financial Conduct Authority has published a policy statement on changes to its financial crime guide, following its consultation in April. The changes cover the following areas: (i) sanctions—to reflect information learnt from assessments of firms' sanctions' systems and controls following Russia's invasion of Ukraine in 2022; (ii) proliferation financing—to ensure that proliferation financing is explicitly referenced throughout the guide, where appropriate. This includes highlighting a 2022 change to the MLRs, which requires firms to conduct proliferation financing risk assessments; (iii) transaction monitoring—to provide further guidance on how firms can implement and monitor transaction monitoring systems. This includes supporting responsible innovation and new technological approaches; (iv) cryptoasset businesses—to make clear that cryptoasset businesses registered under the MLRs should refer to the guide; (v) Consumer Duty—to clarify that firms should consider whether their systems and controls are consistent with their obligations under the Duty; and (vi) consequential changes—includes replacing expired links, updating outdated references to EU rules and refreshing case studies based on more recent FCA enforcement notices.

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The U.K. Financial Conduct Authority has published a speech by Emily Shepperd, FCA Chief Operating Officer, on the FCA's strategy for 2025 to 2030. In the speech, Ms. Shepperd sets out the four main themes of the FCA's strategy. Ms. Shepperd emphasises that trust in both the FCA and the financial services sector underpins these themes and will be crucial as the FCA looks to pursue growth, alongside ensuring proportionality in regulation and encouraging innovation. She also explains that the FCA has decided to set its ambitions on 2030, a five-year strategy, learning from its first 3-year strategy that it takes time to deliver and cement change.

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HM Treasury has published a speech given on November 21, 2024, by Tulip Siddiq, Economic Secretary to the Treasury, on the U.K. government's approach to tokenisation and regulation. In the speech, Ms. Siddiq confirms that HM Treasury intends to implement the proposal for the financial services regulation of cryptoassets in the U.K. in full. The proposals were published in October 2023 and included proposals for the creation of various new regulated activities for cryptoassets, as well as associated regimes for both admissions to trading and market abuse. HM Treasury also intends to proceed with removing the legal uncertainty over whether cryptoasset staking services constitute a collective investment scheme under financial services law. HM Treasury is also proceeding with the proposals for new regulated activities for stablecoin. Ms. Siddiq explains that the regulated activity for stablecoin issuance will ensure that the FCA can properly manage stablecoin specific risks, most notably those associated with management of the backing assets. This proposal will be implemented to the same timetable as the rest of the regulatory regime for cryptoassets.

For more information on the issues and developments relating to FinTech, see our blog A&O Shearman on fintech and digital assets.

The International Organization of Securities Commissions has launched a new roadmap for retail investor online safety. The strategic initiative aims to safeguard retail investors worldwide from fraud, excessive risk, and misinformation as digital trading and social media reshape the retail financial market.

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The Financial Stability Board has published a letter sent to the G20 leaders ahead of their meeting on November 18, 2024, together with the FSB 2024 annual report. The letter warns of ongoing vulnerabilities within the global financial system, illustrated by recent episodes of market turmoil and the failure of several banks and non-banks in recent years. The letter stresses the importance of effective implementation of the FSB's policies, emphasizing that authorities must not only put policies into national laws and regulations, but also build the capacity to operationalize them.

In the annual report, the FSB provides an overview of its work in its key priority areas, which include: (i) addressing lessons from the March 2023 banking turmoil; (ii) enhancing the resilience of non-bank financial intermediation; (iii) addressing financial risks from climate change; (iv) improving cross-border payments; (v) responding to technological innovation; and (vi) enhancing the resolvability of central counterparties. Looking ahead, the FSB will continue to focus on these priority areas and will also place an emphasis on: (a) implementation monitoring of its recommendations on crypto-asset activities and global stablecoin arrangements; (b) further work on resolution reforms; and (c) regular monitoring and progress reports on financial stability issues.

For more information on the issues and developments relating to FinTech, see our blog A&O Shearman on fintech and digital assets.

Rachel Reeves, the U.K. Chancellor has set out a package of reforms in her Mansion House speech. The reforms aim to drive growth and competitiveness in financial services. Ms. Reeves stated that the regulatory changes post-financial crisis created a system which sought to eliminate risk-taking that 'has gone too far' and has led to unintended consequences. Ms. Reeves hopes to maintain the U.K.'s high regulatory standards while rebalancing elements of the regulatory system to drive economic growth and competitiveness. 

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HM Treasury has launched a call for evidence on a proposed Financial Services Growth & Competitiveness Strategy, a key part of the latest Mansion House reforms. Once developed, the Strategy will serve as the central guiding framework for the next ten years through which the government aims to deliver sustainable, inclusive growth for the financial services sector and secure the U.K.'s competitiveness as an international financial center. To meet its objectives, the proposed strategy sets out five core policy pillars central to sustainable growth: innovation and technology, regulatory environment, regional growth, skills and access to talent, and international partnerships and trade. The proposed strategy also identified five priority growth areas within the financial services sector: fintech, sustainable finance, capital markets (including retail investment), insurance and reinsurance markets, and asset management and wholesale services. Responses to the call for evidence may be submitted is December 12, 2024. HM Treasury intends to publish the strategy in Spring 2025.

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The Economic Crime and Corporate Transparency Act 2023 (Commencement No. 3) Regulations 2024 have been published. The Regulations bring into force certain provisions of the Economic Crime and Corporate Transparency Act 2023. Regulation 2 brings measures relating to civil recovery of crypto-assets, which are already in force in England, Wales, and Northern Ireland, but only partially in force in Scotland, fully into force on November 7, 2024. Regulation 3 brings into force measures creating a new offense of failure to prevent fraud on September 1, 2025.

For more information on the issues and developments relating to FinTech, see our blog A&O Shearman on fintech and digital assets.

The draft Financial Services and Markets Act 2023 (Addition of Relevant Enactments) Regulations 2024 have been published, together with an explanatory memorandum. The Regulations add to the list of "relevant enactments" for the purposes of sections 13 to 17 of the Financial Services and Markets Act 2023. Under section 13 of FSMA 2023, HM Treasury may make regulations which may modify the effect or application of such relevant enactments for the purpose of testing the efficiency or effectiveness of new technologies or practices in the carrying on of financial markets infrastructure activities, the FMI sandbox. The Regulations will bring the following relevant enactments into scope of the FMI Sandbox powers: (i) the Stock Transfer (Gilt-edged Securities) (CGO Service) Regulations 1985; (ii) the Government Stock Regulations 2004; (iii) the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017; and (iv) the Prospectus Regulation. The effect is to include new relevant enactments within the list at section 17(3) of FSMA 2023 so that these enactments can be modified by FMI sandboxes. Bringing the Stock Transfer Regulations, the Government Stock Regulations, and the Money Laundering Regulations into scope is intended to facilitate activity in the first FMI Sandbox, the "Digital Securities Sandbox" and relevant amendments will be set out in detail in a later statutory instrument and accompanying explanatory memorandum. Bringing the U.K. Prospectus Regulation into scope of the FMI Sandbox powers is designed to facilitate the creation of PISCES. The Regulations have been laid before Parliament and will come into force the day after the day on which they are made.

The U.K. Financial Conduct Authority has published its financial promotions quarterly data for Q3 2024. The FCA summarizes the data collected between July 1 and September 30, 2024 and the action it took against firms breaching financial promotion rules, and referrals and investigations into unregulated activity. The FCA also shows where it is working to improve standards across the market so that consumers are provided with clear and fair financial promotions which are not misleading.

Key messages include:

• the FCA's interventions in Q3 resulted in 10,593 promotions being amended or withdrawn by authorized firms, including one firm who withdrew 6,792 promotions, many of which were historical promotions withdrawn as a precaution;
• the FCA issued 552 alerts on unauthorized firms and individuals, 12% of which were clone scams;
• the cryptoasset financial promotions regime came into force on October 8, 2023 and has now been live for a year. Over the last year the FCA has issued 1,702 consumer alerts about illegal crypto promotions, which has resulted in the take down of over 900 scam crypto websites and the removal of 56 apps from U.K. apps stores. The FCA are continuing to work with social media companies to remove and block illegal content on their platforms; and
• the FCA is actively engaging with firms who appear to be providing and advertising unauthorized debt advice and debt solutions to consumers via online promotions. The FCA continues to observe trends of aggressive sponsored promotions placed by unauthorized firms, particularly through TikTok and paid-for Google advertisements.

For more information on the issues and developments relating to FinTech, see our blog A&O Shearman on fintech and digital assets.

The Bank of England and Financial Conduct Authority have published a joint policy statement providing feedback to responses received to the Digital Securities Sandbox joint consultation (CP24/5). We discussed the proposals in April in "UK Regulators Consult on Digital Securities Sandbox". The policy statement covers the following topics: (a) the approach to regulating DSS firms; (b) the scope of the DSS; (c) settlement of the payment leg; (d) operation of the DSS; (e) Gate 2 and end-state rules; (f) supervision of the DSS; and (g) other general issues relating to the DSS. Overall respondents welcomed the regulators proposals, with no respondents explicitly disagreeing with the creation of the DSS.

In response to feedback, the BoE and FCA have made some changes to their proposed approach and guidance, such as: (i) extending the scope of the DSS to include non-GDP (non-pound sterling) denominated assets; (ii) a more flexible approach to firm-specific limits at Gate 2, moving from fixed 'go-live' limits to a flexible range; and (iii) reducing the minimum capital requirement for a DSD from nine to six months of operating expenses.

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The U.K. Financial Conduct Authority's Chief Executive, Nikhil Rathi, gave a speech on April 22, 2024, setting out the priorities of the Digital Regulation Cooperation Forum. The DRCF brings together the FCA, the Competition and Markets Authority, the Information Commissioner's Office and Ofcom to facilitate collaboration on digital regulation.

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The UK Jurisdiction Taskforce (UKJT) has published a Legal Statement on Digital Assets and English Insolvency Law. The main findings are that digital assets are within the definition of "property" in the U.K. Insolvency Act 1986. Despite this, because digital assets are not treated as such, it is not possible to serve a valid statutory demand for a digital asset debt. Nevertheless, a claim to digital assets held by a company or bankrupt individual can (in principle) be a claim to recover property, depending on how the assets are held. In addition, where jurisdiction is to be determined by reference to the Centre of Main Interests, the English courts will apply the existing test to establish the COMI of a company dealing in digital assets. There are existing rules that can be applied to allocate any shortfalls where digital assets belonging to different persons have been pooled. Digital assets do not require a fundamental change to the legal analysis of tracing, mixed accounts and shortfalls (although the technical structure of digital assets may be relevant). The rules in the FCA's Client Assets Sourcebook are unlikely to apply since digital assets are not considered to be money.

The UKJT has previously published two other legal statements relevant to digital assets and cryptocurrencies. The Legal Statement on the Status of Cryptoassets and Smart Contracts was published in November 2019, the analysis of which has been adopted by the courts (e.g., AA v Persons Unknown & Ors, Re Bitcoin [2019] EWHC 3556 (Comm)). The Legal Statement on the Issuance and Transfer of Digital Securities under English private law was published in February 2023.

On April 19, 2024, the U.K.'s Joint Regulatory Oversight Committee published proposals on the design of the future entity for UK Open Banking. The JROC is composed of the Financial Conduct Authority, the Payment Systems Regulator, HM Treasury and the Competition and Markets Authority. Responses to the proposals may be submitted until May 20, 2024.

The U.K. is seeking to enhance its open banking framework so as to promote competition and innovation for the benefit of consumers and businesses. The JROC is seeking feedback on the structure, governance and funding for both its interim and longer-term model, which involves establishing an interim entity (in H2 2024) and then a "Future Entity" (in 2026). The long-term regulatory framework for open banking will be backed by legislation, including the Data Protection and Digital Information Bill. The Bill features the introduction of Smart Data schemes that would enable, at the customer's request, the secure sharing of data with authorized third parties. The "Future Entity" would replace Open Banking Limited, which was established pursuant to the Retail Banking Market Investigation Order 2017.

On April 3, 2024, the Bank of England and U.K. Financial Conduct Authority published a joint consultation paper on proposed rules for the incoming digital securities sandbox. The Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services) empowered HM Treasury to establish sandboxes to facilitate the use of digital assets in financial markets. HM Treasury confirmed its approach to the DSS, which is the first such sandbox, in December 2023. The DSS will offer eligible firms a modified set of rules and regulations for a period of five years, enabling them to test out services using technology such as distributed ledger technology and give the regulators time to finesse a regulatory regime. It is hoped that digital securities could bring advantages, such as streamlining processes and reducing settlement risk and settlement times.

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The Law Commission, a U.K. body which makes suggestions for legislative reform, is consulting on wording for a possible draft piece of legislation establishing a third category of personal property that would encompass "digital assets". English law currently recognizes "things in possession" (i.e., physical assets) and "things in action" (i.e., intangible assets). In case law to date, for example AA v Persons Unknown [2019] EWHC 3556 (Comm) and at least 23 other cases, the English courts have had no trouble in identifying, or accepting, various kinds of crypto-assets as constituting property, despite the fact they are neither things in possession nor things in action. However, coverage for asset classes is somewhat patchy, leading to some legal uncertainties. The Law Commission consulted on potential reforms to the law surrounding digital assets in July 2022, publishing a final report in June 2023 which found that, while the common law should be the primary forum for law reform in this area, it should be supplemented with legislation confirming that digital assets are capable of attracting personal property rights. This follows the approach in certain other jurisdictions, which have legislated on the topic - Japan, for example, has arguably brought crypto-tokens within the sphere of property law via amendments to its Payment Services Act, while Liechtenstein has enshrined tokens in legislation as a new form of legal object. A number of other jurisdictions, including Hong Kong, Singapore and New Zealand, have developed case law finding digital assets can attract property rights but have not so far confirmed this in legislation.

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The Law Commission, a U.K. body which makes suggestions for legislative reform, has published a call for evidence on the operation of English private international law (conflicts of law rules) in relation to digital assets and "electronic trade documents" (trade documents like bills of lading and bills of exchange that are in electronic form).

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The European Securities and Markets Authority has published two consultation papers on proposed guidelines under the EU Markets in Crypto Assets Regulation, one on reverse solicitation and the other on the classification of crypto-assets as financial instruments. Responses to the consultation papers should be submitted by April 29, 2024. ESMA plans to publish final reports on each of the guidelines by the end of 2024 at the latest.

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Legislation implementing the U.K.'s first digital sandbox – the Financial Services and Markets Act 2023 (Digital Securities Sandbox) Regulations 2023 – came into force on January 8, 2024. The DSS Regulations enable the Digital Securities Sandbox to be established. The regulators are expected to consult soon on the proposed application process and rule changes.

U.K. recognized investment exchanges, recognized central securities depositories and investment firms that are licensed to operate a multilateral trading facility or organised trading facility, as well as any other U.K. firms identified by the Financial Conduct Authority or Prudential Regulation Authority, may participate in the FMI sandbox as a "sandbox entrant". Sandbox arrangements carried out by a sandbox entrant must relate to either the activity of operating a trading venue or carrying on maintenance, notary or settlement functions in relation to in-scope instruments, or be ancillary to those activities. In addition to the ability of the primary sandbox entrant to carry out those activities within the sandbox, the following classes of firms may participate in FMI sandbox arrangements: firms using the services provided by the sandbox entrant; firms providing services to the sandbox entrant or its users; and firms carrying on activities or providing services in connection with an in-scope instrument used in connection with the FMI sandbox arrangements. By including this third class of firms, firms would be allowed to provide services that are ancillary or complementary to trading and settlement activities, such as clearing, within the sandbox.

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Following its consultation in 2023, the International Organization of Securities Commissions published its Policy Recommendations for Decentralized Finance on December 19, 2023. The nine recommendations are intended to promote consistency of global regulatory frameworks for DeFi in the interests of market integrity and investor protection.

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Following its consultation in 2023, the International Organization of Securities Commissions published its Policy Recommendations for Crypto and Digital Asset Markets on November 16, 2023. The 18 recommendations are intended to promote consistency of regulatory frameworks for cryptoasset service providers. The recommendations apply to both cryptoassets and stablecoins, although regulators are encouraged to consider any particular issues posed by stablecoin arrangements when applying the recommendations.

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Following its consultation earlier this year, HM Treasury has published a response to its consultation on the Digital Securities Sandbox, confirming that it will mostly adopt the approach consulted on to establish the DSS. The DSS, which will be the first sandbox to be established using new powers granted by the U.K. Financial Services and Markets Act 2023, is intended to facilitate the use of digital assets in financial markets. The DSS is designed to allow firms to: (i) establish and operate FMIs using digital asset technology; and (ii) perform the activities of central securities depositories and trading venues in relation to existing security classes.

HM Treasury intends to lay before Parliament draft legislation to implement the DSS, which will be run by the Financial Conduct Authority and the Bank of England. The regulators will be consulting soon on their proposed approaches to the DSS, including the application process and proposed rule changes.

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HM Treasury has published the Future of Payments Review report, setting out the Review's recommendations for HM Treasury, the regulators and industry that aim to improve the U.K.'s existing payments landscape for consumers. The report follows the July 2023 call for evidence. The main recommendation is for the government to develop a National Payments Vision and Strategy, which will provide high-level guidance on priorities and define guiding principles on safety, simplification, coordination, responsiveness, inclusivity and accountability.

The Review makes several other recommendations.

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The Bank of England has published a discussion paper on its proposed approach to developing a regulatory regime for systemic payment systems using stablecoins and related service providers. The BoE’s paper follows the government’s recent Policy Paper on Plans for the Regulation of Fiat-backed Stablecoins which confirmed that these types of stablecoins will be brought into the U.K. regulatory perimeter.

This is part of HM Treasury’s plan to regulate cryptoassets, focusing first on fiat-backed stablecoins. The BoE will be responsible for the financial stability of systemic payment systems using stablecoins. The Financial Conduct Authority will supervise non-systemic fiat backed stablecoins for prudential and conduct of business purposes, and systemic fiat-backed stablecoins for conduct purposes only, and has published a discussion paper alongside the BoE's discussion paper. Responses to both discussion papers may be submitted until February 6, 2024. The Prudential Regulation Authority will supervise banks' activities in tokenized deposits. The PRA has written to banks stating that any business in fiat-backed stablecoins will, among other things, need to be conducted from a separate legal entity under branding that is different to the bank' branding. The Payment Systems Regulator will supervise the competition aspects relating to systemic payment systems using fiat backed stablecoins.

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The U.K. Prudential Regulation Authority has published a Dear CEO letter, addressed to CEOs of banks, setting out its expectations of banks (deposit-takers) regarding the risks that arise from innovations in digital money and money-like instruments available to retail customers. The letter focuses on innovations in the use of deposits (and tokenized deposits), e-money and regulated stablecoins used for payment (which are being brought into the regulatory perimeter).

The PRA sets out how banks are expected to limit contagion arising from confusion regarding the different protections available to retail holders of bank deposits, e-money and regulated stablecoins. Where a bank or its group want to issue e-money or regulated stablecoins, that activity should be carried out from an insolvency-remote entity that is separate to the bank, with different branding from the bank to ensure that any failure of the e-money or stablecoin issuer would not impact the bank and the continuity of its deposit-taking services. The PRA also expects any tokenized deposit-taking to be undertaken in a way that ensures protection under the Financial Services Compensation Scheme. An e-money or stablecoin issuer that decides to accept traditional deposits would first need to establish a separate entity to obtain permission to operate as a bank.

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The U.K. Financial Conduct Authority has published a discussion paper regarding potential future proposals for regulating fiat-backed stablecoins, including when used as a means of payment. The FCA's paper follows the government's recent Policy Paper on Plans for the Regulation of Fiat-backed Stablecoins, which confirmed that changes to legislation would bring these types of stablecoins into the U.K. regulatory perimeter. This is part of HM Treasury's plan to regulate cryptoassets, focusing first on fiat-backed stablecoins.

The FCA will supervise non-systemic fiat-backed stablecoins for prudential and conduct of business purposes, and systemic fiat-backed stablecoins for conduct purposes only. The Bank of England is responsible for the financial stability of systemic payment systems using fiat-backed stablecoins and has published a discussion paper alongside the FCA's discussion paper. Responses to both discussion papers may be submitted until February 6, 2024. The Prudential Regulation Authority will supervise banks' activities in tokenized deposits. The PRA has written to banks stating that any business in fiat-backed stablecoins will, among other things, need to be conducted from a separate legal entity under branding that is different to the banks' branding. The Payment Systems Regulator will supervise the competition aspects relating to systemic payment systems that use fiat-backed stablecoins.

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HM Treasury has published a response to its consultation on cryptoasset regulation, setting out its final proposals for the U.K.'s cryptoasset regulatory regime. The U.K. plans to make cryptoassets a new category of "specified investment" under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 and regulate certain activities conducted in relation to them. Under the new regime:

• Firms conducting relevant activities and offering their services in or to the U.K. by way of business would need to apply for authorization by the U.K. Financial Conduct Authority. The relevant activities are: issuing or admitting cryptoassets to trading; operating cryptoasset trading venues; dealing as principal or arranging deals in cryptoassets; operating a cryptoasset lending platform; and safeguarding or safeguarding and administering cryptoassets (or arranging the same). Overseas firms offering their services into the U.K. may need to obtain FCA permission (although HM Treasury envisages equivalence/deference-type arrangements in the future and is considering alternative approaches to full authorization in the interim).
• Firms that are already authorized to conduct other activities will need to apply for a Variation of Permission if they wish to conduct regulated cryptoasset activities.
• Authorization under the new regime will not be automatically granted to cryptoasset firms registered with the U.K. Financial Conduct Authority for money laundering purposes, although the FCA will consider applicants' regulatory history when determining authorization applications.

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HM Treasury has published a Policy Paper on Plans for the Regulation of Fiat-backed Stablecoins, setting out the next steps for the implementation of stablecoin regulation in the U.K. Fiat-backed stablecoins are (under HM Treasury's proposed definition) those which seek or purport to maintain a stable value by reference to a fiat currency, and hold that currency, in whole or in part, as backing.

The Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services) empowers HM Treasury to bring certain activities related to the use of "digital settlement assets" (which may include fiat-backed stablecoins), within the regulatory perimeter and to establish a regime for the supervision of stablecoin issuers. DSAs are defined broadly under the FSM Act as digital assets that can be used for payment, can be transferred, stored or traded electronically and use technology (e.g., distributed ledger technology) to record or store data. HM Treasury plans to bring certain activities related to fiat-backed stablecoins within the scope of regulation ahead of other types of cryptoasset, due to their potential to become a widespread means of retail payment.

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HM Treasury has published a response to its consultation on managing the failure of systemic digital settlement asset firms. DSAs are defined broadly under the Financial Services and Markets Act 2023 as digital assets that can be used for payment, can be transferred, stored or traded electronically and use technology (e.g., distributed ledger technology) to record or store data. The FSM Act (discussed in our client note, A Boost for UK Financial Services) granted HM Treasury powers to supervise certain activities related to DSAs. This included the power to apply the Financial Market Infrastructure Special Administration Regime to systemic DSA firms (other than banks, which are covered by existing regulatory frameworks).

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The Basel Committee on Banking Supervision published a press release in early October in which it announced:

• That it would consult on disclosure frameworks for climate-related financial risks (in November 2023) and banks' cryptoasset exposures (soon).
• The publication of its report on the banking turmoil of 2023, which assesses the causes of the turmoil, the regulatory and supervisory responses, and the initial lessons learnt. The Basel Committee states that it will be undertaking some follow-up work, including prioritizing work to bolster supervisory effectiveness globally and assessing whether any aspects of the Basel Framework did not function as intended during the turmoil.
• That by mid-2024 it would publish a report on developments in the digitalisation of finance and their implications for banks and supervisors.

The U.K. Jurisdiction Taskforce has published a consultation relating to its proposed Legal Statement offering guidance on the application of English insolvency law principles to digital assets. The proposed Legal Statement will cover a range of areas which are listed in an Annex to the paper. Respondents are invited to submit comments on these areas, which include: (i) whether digital assets would constitute "property" under English insolvency legislation; (ii) which jurisdictional rules apply to determine the location of digital assets; and (iii) whether any difficulties can be perceived in applying English insolvency legislation to the avoidance of prior transactions to pre-insolvency dealings with digital assets. In addition, respondents are encouraged to inform the UKJT of any material issues of concern to stakeholders in relation to the application of English insolvency law to digital assets, other than those listed in the paper's Annex. Responses should be submitted by December 4, 2023.

The consultation paper follows a series of other publications by the UKJT on legal issues surrounding digital assets, including its Statement on the Issuance and Transfer of Digital Securities under English Law, published in February 2023.

The European Securities and Markets Authority has opened a call for evidence on shortening the settlement cycle in the EU. The existing EU settlement cycle for trades in transferable securities executed on trading venues is by no later than the second business day after the trade takes place, known as T+2. Responses to the call for evidence may be submitted by December 15, 2023. ESMA will report to the European Commission during 2024, although an earlier report may be produced if ESMA considers that regulatory action is needed in response to the move to T+1 or T+0 in other jurisdictions.

ESMA is asking for feedback from financial market participants on the impact on their operations of a reduced securities settlement cycle to T+1 or T+0, what benefits and costs it would bring, and how and when a shorter settlement cycle could be achieved. ESMA considers that the EU landscape is more complex than that in other jurisdictions because there is no centralized EU post-trade financial markets infrastructure and no harmonized securities law. Finally, ESMA seeks input on the impact of developments in other jurisdictions, such as the intended move by the U.S. and Canada to T+1 in mid-2024 and the U.K.'s assessment of changing to T+1 or T+0, an initial report on which is expected by the end of this year (announced as part of the Edinburgh Reforms which are discussed in our client note, "UK Government Publishes Edinburgh Reforms for Financial Services").

The U.K. Financial Conduct Authority published a Policy Statement on 12 September 2023 setting out how it intends to implement the new regulatory gateway for financial promotions. The Financial Services and Markets Act 2023 (which we discuss in our client note, "A Boost for U.K. Financial Services") amends the Financial Promotion Restriction, banning authorized firms from approving financial promotions of unauthorized firms unless they have received approval from the FCA to have the prohibition removed in whole or part. The gateway will apply from February 7, 2024, with authorized firms able to apply to the FCA for permission from November 6, 2023 until February 6, 2024. There are exemptions from the gateway, entering into force on September 27, 2023, which permit the approval of financial promotions by authorized firms, for communication by unauthorized firms, in certain circumstances.

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The Joint Money Laundering Steering Group has published revisions to its Sector 22 Guidance on Cryptoasset exchange providers and custodian wallet providers along with a new Annex I, setting out guidance on the U.K. Travel Rule for cryptoassets. The Travel Rule was introduced under the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022, amending the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and requires certain identification information on the sender and recipient to accompany a transfer of a cryptoasset. The Travel Rule requirements have applied since September 1, 2023.

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On September 7, 2023, the International Organisation of Securities Commissions launched a consultation on proposed policy recommendations on market integrity and investor protection issues in decentralized finance (DeFi). IOSCO is proposing that the final recommendations, which it aims to finalize before the end of 2023, will help IOSCO members to establish compliant markets. Responses to the consultation may be submitted until October 19, 2023.

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The U.K. Financial Conduct Authority announced on September 7, 2023, that firms may avail themselves of a delay to the application of some rules applying to cryptoasset financial promotions. The FCA published rules for cryptoasset financial promotions in June this year, which will apply from October 8, 2023 (the same date that the Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 brings the promotion of cryptoassets within scope of the U.K. regulatory regime). The reprieve is available, on application, to:

• firms registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 that intend to communicate cryptoasset financial promotions; and
• authorized firms that intend to communicate or approve cryptoasset financial promotions.

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The Financial Services and Markets Act 2000 (Exemptions from Financial Promotion General Requirement) Regulations 2023, which come into force on September 27, 2023, set out the exemptions to the new U.K. regulatory gateway for the approval by authorized firms of financial promotions of unauthorized firms. The Financial Services and Markets Act 2023 (which we discuss in our client note, "A Boost for U.K. Financial Services: The U.K. Financial Services and Markets Act 2023") amends the Financial Promotion Restriction, banning authorized firms from approving financial promotions of unauthorized firms unless they have received approval from the Financial Conduct Authority to have the prohibition removed in whole or part. The prohibition will apply from February 7, 2024, according to the Financial Services and Markets Act 2023 (Commencement No. 2 and Transitional Provisions) Regulations 2023, which also set out the following timeline for the new regime to come into effect:

• September 6, 2023: provisions will apply that enable the FCA to give directions and guidance and to make rules.
• November 6, 2023: provisions will apply that allow the FCA to receive (but not determine) applications to approve financial promotions that are made during the application period (November 6, 2023 to February 6, 2024).

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The U.K. Joint Money Laundering Steering Group opened a consultation on July 28, 2023 on guidance on the U.K. travel rule for cryptoasset transfers. The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 introduced the cryptoasset travel rule by amending the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, and firms will need to comply with the requirements from September 1, 2023. The travel rule requires certain identification information on the sender (originator) and recipient (beneficiary) to accompany a transfer of a cryptoasset. The JMLSG is proposing to add a new annex setting out guidance on the U.K. travel rule for cryptoassets, covering scope, information requirements, batch transfers, returns, unhosted wallet transfers, wallet attribution, linked transactions and use of a layer-2 solution such as the Lightning Network. The guidance also states that firms should consider communications from the Financial Conduct Authority on the sunrise issue, which refers to the impact of jurisdictions implementing the travel rule at different times. Firms may encounter issues when dealing with counterparties in jurisdictions that have not implemented the travel rule for cryptoassets, for example, when dealing with EU counterparties for which the EU travel rules for cryptoasset transfers will only apply from December 30, 2024. Responses to the JMLSG consultation may be submitted until August 25, 2023.

The Financial Stability Board has finalized its global regulatory framework for cryptoasset activities and markets and revised the framework for global stablecoin arrangements. Both frameworks, based on the principle of "same activity, same risk, same regulation" aim to provide a basis for consistent regulation across the globe that is proportionate to the risks.

Comprising nine high-level recommendations for the regulation, supervision and oversight of cryptoasset activities and markets, the cryptoasset framework sets out the key objectives for implementation of an effective regulatory and supervisory regime for mitigating the risks posed by cryptoassets. The recommendations are:

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HM Treasury has published a response to its consultation on payments regulation and the systemic perimeter. The consultation was prompted by the U.K. government's Payments Landscape Review and HM Treasury's concern that some payments services operators were not subject to systemic supervision but may pose systemic risks to the U.K. financial system.

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