Fintech, digital assets, payments and consumer credit | UK Regulatory Outlook February 2024

BoE and HM Treasury respond to consultation on case for digital pound

On 25 January 2024, the Bank of England (BoE) and HM Treasury published a response to their joint consultation paper regarding a retail central bank digital currency (CBDC) (a "digital pound"), which provides an update on their plans.

The February 2023 consultation sought feedback on the policy and technical work undertaken with a view to informing the decision on whether to build and launch a digital pound. Feedback was also sought on the proposed design of a digital pound.

There were over 50,000 respondents to the consultation, most of which were largely supportive of the proposed design, although some respondents raised concerns including the potential impact on privacy, access to cash and freedom of choice. The feedback will inform priorities during the design stage of future work to develop the digital pound.

The response confirms that no final decision has been made on whether to go ahead with a digital pound. Nevertheless, the authorities believe that the proposed design of a digital pound remains appropriate. They confirm that primary legislation to guarantee users' privacy and control is an important aspect of the proposals, and that neither the BoE nor the government would have access to users' personal data. They also commit to maintaining access to cash.

The next stage is the development of a detailed design for the digital pound. A decision on whether to build a digital pound will be made after the design phase (2025 at the earliest). If it proceeds, a timetable will be set for further consultation before the introduction of primary legislation and a potential launch.

On 31 January 2024, the House of Commons Treasury Committee published a report setting out the response of HM Treasury and the BoE to the committee's report on the digital pound. The committee's December 2023 report summarised its views on the need for a digital pound. In their response, HM Treasury and the BoE respond to each of the committee's recommendations in turn, as well as other priority considerations.

Points of interest include:

• HM Treasury and the BoE agree that strong privacy safeguards would be vital if a digital pound were introduced. The government has committed to guaranteeing users' privacy in primary legislation.
• The BoE acknowledges the committee's request for transparency around costs of the development of the digital pound. Costs on a CBDC are currently reported in the BoE's annual report in combination with its wider range of fintech work.
• The criteria that will inform the decision whether to proceed, together with the wider assessment framework, will be developed as part of the design phase.

European developments

ESMA consults on draft guidelines under MiCA on qualification of cryptoassets as financial instruments, and reverse solicitation

On 29 January 2024, the European Securities and Markets Authority (ESMA) published a consultation paper on draft guidelines on the conditions and criteria for the qualification of cryptoassets as financial instruments under the regulation on markets in cryptoassets (MiCA). The guidelines aim to provide clarity on the delineation between the scope of MiCA and the Second Markets in Financial Instruments Directive (MiFID II).

The draft guidelines outline ESMA's proposal on the conditions and criteria to be used for determining whether a cryptoasset qualifies as a financial instrument. ESMA highlights that, under the MiCA mandate, it is not expected to clarify the entire scope of what constitutes a financial instrument, but only products that comply with both the cryptoasset definition in MiCA and the financial instrument definition in MiFID II.

Also on 29 January 2024, ESMA published a consultation paper on draft guidelines on reverse solicitation under MiCA.

The guidelines are intended to provide clarity (especially for third country firms) on the limited situations where the offer or provision of cryptoasset services to a clients established or situated in the EU will be regarded as initiated at the client's exclusive own initiative. ESMA highlights that these situations should be understood as very limited and narrowly construed; reverse solicitation should not be assumed nor exploited to circumvent MiCA.

The draft guidelines focus on the means of solicitation, what "exclusive initiative" means, when a cryptoasset or a cryptoasset service is of the same type as another one, and supervision practices.

The consultations close on 29 April 2024. ESMA will consider the feedback and expects to publish final reports in Q4 2024.

EBA extends money laundering and counter terrorism financing risk factors guidelines to CASPs

On 16 January 2024, the European Banking Authority (EBA) published a final report setting out amending guidelines on customer due diligence (CDD) and the factors that credit and financial institutions should consider when assessing the money laundering (ML) and terrorist financing (TF) risk associated with individual business relationships and occasional transactions under the Fourth Money Laundering Directive (MLD4).

The original guidelines are being revised to extend their scope to cryptoasset service providers (CASPs), highlighting the ML and TF risk factors and mitigating measures CASPs need to consider. The guidelines are intended to help a CASP identify risks by providing a non-exhaustive list of factors that may indicate its exposure to higher or lower levels of ML and TF risk, for example due to its customers, products, delivery channels and geographical locations. This will allow them to develop an understanding of their customer base and identify which aspects of their business are most vulnerable to ML and TF.

The revised guidelines also explain how CASPs should adjust their mitigating measures, including the use of blockchain analytics tools.

The revised guidelines include guidance addressed to other credit and financial institutions that have CASPs as their customers or are exposed to cryptoassets.

The revised guidelines will apply from 30 December 2024.