The UK government is not alone in its attempts to regulate and monitor the crypto industry. Many nations worldwide worry that decentralised networks, despite being influential and modern, have security vulnerabilities and significant limitations. The experts at Grapherex explored what the UK plans to do to regulate activities related to crypto assets and provide confidence to consumers and businesses.
How to Regulate the Crypto Industry
Crypto assets, also called “crypto”, are a modern and diverse class of assets that offer a whole range of benefits but also carry risks for consumers. Similar to many emerging technology markets, the crypto industry is highly volatile.
Cryptocurrency regulations are complex measures and processes that the industry must follow. There are some strict criteria applied by governmental agencies and crypto firms to make the entire crypto space user-friendly and safe. The most popular practices include:
- Obligatory licensing and registration of cryptocurrency exchanges and crypto service providers;
- Know Your Customer (KYC) verification;
- Compliance with Anti-Money Laundering (AML) policies;
- Compliance with consumer protection and data protection laws;
- Taxation policies;
- Prohibition of illegal activities and litigation against companies in violation of the rules.
To put it simply, the government usually tries to treat crypto companies the same way it treats other businesses. The closest example is regulation related to the financial industry: banks, insurance companies, and payment service providers.
Press Release from GOV.UK
The article we will talk about today was published by HM Treasury in February 2023. The main topic of the official publication is that the UK set out plans to manage the crypto sphere to protect consumers. We’ll discuss this ambitious government plan to ensure a controlled environment and, thus, contribute to economic growth.
Recent failures, for example, the fall of FTX, have highlighted the structural weakness of some business models that crypto companies have, so the government decided to strengthen the regulatory framework. Thanks to this rigorous new regulatory approach, they try to minimise the most significant risks related to crypto technologies while harnessing their benefits at the same time.
An Interview with Economic Secretary to the Treasury, Andrew Griffith
According to Andrew Griffith, the UK government is dedicated to promoting economic growth and innovation, and this includes crypto assets. However, he also emphasised the need to protect consumers who choose to use this new technology by applying strong, transparent and just standards.
In the latest plans announced on 1 February, the government aims to regulate crypto asset activities in line with the traditional financial system. Overall, the government believes that this new approach will enable the secure and prosperous development of this innovative industry, which will create more job opportunities and attract investment.
What Exactly Does the UK Plan to Do and Why?
The UK wants to do several things. Grapherex analysts decided to break them down into a list to make them more structured and understandable.
- Strengthen the rules regarding financial intermediaries and custodians, who are responsible for making transactions and safely storing customer assets. This helps create a reliable, world-first regime that tightens the rules for lending crypto assets while enabling better client protection and the operational sustainability of companies.
- Oblige crypto trading platforms to establish specific requirements for the content of admission and disclosure documents, thereby ensuring that exchanges operate following fair and strict standards.
- Implement strict rules on crypto advertisements. HM Treasury introduced a temporary exemption to address industry concerns about the decreased number of crypto asset companies authorised by the Financial Conduct Authority that can issue promotions. The FCA-registered crypto firms that meet AML requirements will be allowed to issue promotions while a broader and stricter regime of regulation is being introduced.
- For each activity related to crypto, the consultation outlines the main organisational features of the regime, covering the topics of prudential requirements, consumer protection, data reporting, location policy and operational resilience. It also plans to monitor market abuse and crypto asset issuance and disclosures.
This approach is consistent with the initial policy intent of these measures to support innovation and strengthen consumer protection. It also ensures that crypto asset promotions meet standards similar to promotions of financial services with an equivalent risk level.
Previous Crypto Asset Regulation vs New Regulations in 2023
In April 2022, Economic Secretary, John Glen MP, outlined aspiring plans to turn the UK into a global centre for crypto asset technology. The current governmental announcement contradicts that programme and positions the UK as a secure jurisdiction for activities with crypto assets, promoting innovation and providing firms with clarity on the newly formed regulatory model.
The regulation planned for 2023 is based on HM Treasury’s previous proposals focused on stablecoins, as well as the financial promotion of cryptocurrency assets. Current Prime Minister Rishi Sunak is considered by industry participants as a crypto-friendly leader. As the British capital must compete with EU business hubs, crypto may be a good way to improve its chances.
New Measures in the Wake of the FTX Collapse
The government is seeking to end some reckless business practices that have appeared over the past years and contributed to the decline of the FTX. For example, they mention a lack of due diligence on the part of counterparties participating in risky cryptocurrency lending.
The collapse of FTX has added urgency to the attempts of global regulators to manage a crypto space that is not prone to regulation. The European Union and the United States have already made their proposals to improve consumer protection. The new UK proposals would enforce tougher transparency requirements on crypto exchanges as well.
- The UK plans to regulate the cryptocurrency industry at a new level.
- The government proposals include strengthening rules on crypto lending.
- The measures are also related to documentation transparency, advertising, data reporting, location policy, and operational flexibility.
- The announcement sounds serious and friendly at the same time, as the regulations are still aimed at embracing technological change and innovation.