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UK regulators are looking to 2024 as a pivotal year for crypto, with the asset class set to be brought within existing financial service regulations for the first time.
On October 30, the Treasury published the Future Financial Services Regulatory Regime for Crypto-Assets, which outlines the UK’s likely path towards comprehensive crypto-asset regulation.
Introducing the proposals, Andrew Griffith, economic secretary to the Treasury, said the ultimate aim of the regulation is to make the UK a “global hub” for crypto-asset technologies.
“To realise this ambition, we must make the UK a place where crypto-asset firms have the clarity needed to invest and innovate, and where customers have the protections necessary for confidently using these technologies,” he said.
Trade association CryptoUK said it shares these aims and that clarifying the UK’s regulatory regime is “critical” to its realisation.
Support for crypto regulation
The Treasury document combines a response to a previous consultation with a call for further evidence from firms.
Based on 131 responses received following the previous consultation, the Treasury said about 80 percent of respondents are broadly supportive of its current direction on crypto-asset regulation.
The Treasury’s proposed rules would regulate “core activities”, such as custody and lending, and would also bring centralised crypto-assets exchanges into financial services regulation for the first time.
If the proposals are adopted, Griffith said the UK will be the “obvious choice” for starting and scaling a crypto-asset business.
The Treasury said the regulations would be introduced in two phases, with secondary legislation being laid before parliament in 2024.
What’s in the proposals?
Rather than develop a bespoke regime, the Treasury has proposed that crypto-asset activities be brought within the regulatory framework of the Financial Services and Markets Act (FSMA).
As such, this would require all crypto-asset firms to be authorised by the Financial Conduct Authority (FCA) under Part 4A of FSMA, and that the FCA’s general rule-making powers be applied to these firms.
This would close a major loophole that has long allowed non-authorised firms — including large players such as Binance — to conduct crypto-asset business activities in the UK.
The few dozen firms already authorised by the FCA under money laundering regulations (MLRs) would need to seek additional authorisation from the FCA under the new FSMA-based regime.
“This is because businesses will need to be assessed against a wider range of measures than they were as part of the MLR registration process,” the Treasury said.
However, to mitigate the burden of FSMA registration, firms that are already registered under the MLRs would be offered a temporary permissions regime and would not need to submit the same information twice.
Crypto risk bundled into an ‘investment’
The mechanism by which crypto-assets will be integrated into FSMA regulation is through a designation as a “specified investment” under a Regulated Activities Order (RAO).
This proposal found overwhelming support among consultation respondents (94 percent favoured it), but has been met with strong opposition from other key figures.
Charles Randell, former chair of both the FCA and the Payment Systems Regulator (PSR), warned against the designation, saying it would bring “crypto speculation” into the mainstream.
“Crypto will be badged as an ‘investment’, offered in UK markets on the basis of a document that will be deceptively similar to a prospectus for shares, but without many of the same rules,” he said.
Given the extent of consumer losses to crypto fraud in 2021 and 2022, Randell said the Treasury’s proposals fail to adequately weigh up the risk of formally recognising the asset class.
“The document doesn’t contain any of the cost-benefit analysis that the government requires from the FCA,” he said.
“Instead, it relies on the old numbers game (‘a majority of respondents said’) when the majority of the respondents stand to make money from boosting crypto.”
Randell also said the Treasury document leaves many of the finer details to be confirmed, after the proposals have been handed over to the FCA.
At that juncture, he said there is even a chance that the project could fail, due to a lack of qualified supervisors willing to help the FCA build out the regulations.
“By then, some more lessons about the realities of crypto may have arrived,” he said.
Treasury proposals a hit among big crypto players
However, as sign-posted throughout the Treasury document, the proposals have been strongly welcomed by stakeholders in the crypto industry.
Faryar Shirzad, chief policy officer at Coinbase, gave praise to numerous items in the proposals, including the section on staking.
“The government recognises that staking — and the ability of individuals to participate — is fundamental to the operation of blockchain technology,” he said.
“The UK may be among the first to set out a clear approach here, and [it is] setting a powerful example to the US and the world.”
With clear support from respondents, the Treasury said staking should be regulated separately from crypto-asset lending and separately from traditional collective investment schemes (CIS).
Shirzad also praised the Treasury’s exclusion of self-hosted wallets from the scope of proposed custody requirements.
“The government recognises that providing self-hosted wallets is a technology service,” he said.
“This will insulate self-hosted wallets from unnecessary regulations and preserve the critical role they play as the gateway to Web3.”
More than any other crypto firm, Coinbase has been keen to steer the development of future UK crypto regulation.
In April this year, during a trip to London, Coinbase co-founder and CEO Brian Armstrong met with Griffith to discuss UK regulation.
“The UK is moving fast on sensible crypto regulation to both drive economic growth and consumer protection,” Armstrong later said of the meeting. “Excited to keep investing in the UK.”
