The UK intends to regulate cryptoasset activities including trading, lending and custody under the same regime as traditional financial services.
(Bloomberg) — The UK intends to regulate cryptoasset activities including trading, lending and custody under the same regime as traditional financial services.
The government is opening a consultation on a series of sweeping new rules for the crypto sector, the country’s Treasury department said in a statement on Tuesday. The proposed guidelines would include a requirement for exchanges to write detailed requirements on admission standards and disclosures for token issuers when listing new assets.
The plans would make crypto exchanges akin to multilateral trading facilities as operated by LMAX Group and TP ICAP — a type of trading venue for alternative assets — a person familiar with the matter said, who was not authorized to discuss it publicly. The UK also plans to strengthen rules around financial intermediaries and custodians of digital assets, requiring all firms to meet prudential regulation and standards on data reporting, consumer protection and operational resilience.
The consultation was published on Wednesday and will seek responses until April 30.
The push to implement stricter rules in the UK comes during a period of turmoil in the crypto sector, which has been marked by a raft of high-profile collapses, bankruptcies and scandals. Plummeting token prices and platform failures last year resulted in investors nursing billions of dollars in losses and regulators across the globe tightening their scrutiny of the asset class.
Recent criminal charges against Sam Bankman-Fried, former CEO of major crypto exchange FTX, have further heightened concerns over whether crypto companies offer sufficient customer safeguards. Bankman-Fried allegedly permitted FTX’s sister trading platform Alameda Research unfettered access to customer assets for its own purposes, while also borrowing from the firm for his personal gain.
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The Treasury’s proposal will include a requirement for cryptoasset custodians to meet standards aimed at avoiding the commingling of customer and business assets, the person said, as well as traditional market expectations on bookkeeping and corporate governance. Crypto lenders, meanwhile, will need to provide clear contractual terms of service to users.
A new “crypto market abuse regime” will require intermediaries to demonstrate they can prevent conflicts of interest and carry out sufficient processes to detect market abuse in cryptoasset dealings, as well as submit suspicious transaction order reports (STORs) to the regulator, the person added.
This will seek to counteract the risks of so-called “pump and dump” fraud and insider trading within crypto companies, a problem that emerged on a greater scale in 2022 when former employees at trading firms such as Coinbase Global Inc. and OpenSea were accused or found guilty of the practice.
The UK government’s move to regulate crypto is part of a push by Prime Minister Rishi Sunak to attract more crypto businesses and investment to the country. Crypto companies have long lamented that a lack of regulatory clarity has made it hard for them to do business there, with only 15% of applicants having successfully met the Financial Conduct Authority’s anti-money laundering requirements since it started monitoring registration in 2020.
Andrew Griffith, economic secretary to the Treasury, said in the statement that crypto can help the government grow the country’s economy through technological innovation, but that it “must also protect consumers who are embracing this new technology — ensuring robust, transparent, and fair standards.”
The UK’s proposals signaled a welcome “shift from a ‘wait-and-see’ approach” to a more comprehensive framework, said Tim Byun, head of government relations at crypto firm OK Group, which runs the OKX exchange.
The government had already laid out several new crypto regulation proposals in 2022, but little headway was made while the crypto market and the UK government itself struggled to maintain stability. Griffith told MPs earlier this month that the UK is unlikely to pass any legislation on cryptoassets until at least 2024.
Those proposals included a move to limit the targeting of cryptoasset advertizing to only wealthy or professional investors, and to bring stablecoins — cryptoassets tied to the value of a currency like sterling or the dollar — under existing e-money rules. The Financial Conduct Authority is to be given a broader remit to oversee crypto companies as part of the Financial Services and Markets Bill, which is currently making its way through the House of Lords.
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Crypto companies voiced concerns about the government’s proposals on cryptoasset promotions last year, arguing that firms which had already met the FCA’s standards should be able to issue their own adverts without needing an authorized third party to sign off. The Treasury said that it will introduce a time-limited exemption to the rule, allowing those with FCA registration to issue their own promotions until the broader regime is introduced.
However that change will be “of no help” to the large number of crypto firms without registration, said Zoe Wyatt, partner and head of crypto at tax advisory firm Andersen LLP. Cryptocurrency companies have struggled to gain FCA approval over the past few years, leading some to relocate offshore.
“Making registration difficult in the UK runs against the government’s stated ambition to protect customers as action may need to be sought outside the UK courts system,” she added, noting the issues this has already caused with the bankruptcies of overseas firms like FTX and Celsius.
Other governments are moving ahead with their own legislation. The European Union will move to a final vote on its wide-ranging Markets in Cryptoassets directive (MiCA) in April, while the White House recently called on US Congress to “step up its efforts” to establish guardrails around crypto after several bills stalled at the end of last year.
“By the government’s own admission it will be two years before any meaningful change to the UK regulatory regime for cryptoassets and we fear that the UK’s desire to be a global crypto hub will be usurped by another faster acting jurisdiction,” Wyatt said. “The UK is taking baby steps whilst the EU and US surge ahead.”
–With assistance from Allyson Versprille and Lyubov Pronina.
(Updates to reflect consultation is open and with reaction from the 12th paragraph onward)
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