Crypto stakeholders in the UK have largely welcomed the proposed legislation for the crypto industry. However, they have expressed the need for the country to collaborate with regulators globally to avoid post-Brexit isolation, particularly in the wake of the European Union’s Markets in Crypto Assets (MiCA) regulation. The UK has been consulting the public on its proposed strategy for the crypto sector since February, and the consultation period closed on April 30 with global industry titans submitting their views.
Riccardo Tordera Ricchi, head of policy at UK-based The Payments Association, stated that “This constitutes a welcome step towards establishing regulatory clarity for crypto assets in the UK…Thoughtfully applied, these frameworks will accelerate the adoption of socially beneficial innovation, while reducing both criminal and financial risks”. Countries around the world have been looking to construct rules for the burgeoning crypto sector, and with MiCA in its final stages, the pressure is mounting for countries to decide on their own approach.
Instead of creating an entirely new set of rules for the crypto space like MiCA, the UK wants to bring crypto into the scope of its existing regulatory frameworks, and the government may publish crypto-specific rules in the next 12 months. The UK’s plan is to regulate crypto under the Financial Services Markets Act and have an authorization regime for digital asset companies. It also hopes to regulate stablecoins under the country’s payments rules and set up a market abuse regime to protect investors.
The Financial Services and Markets Bill, which will give regulators the power to oversee crypto by extending rules for financial instruments, is already making its way through Parliament. Meiran Shtibel, associate general counsel at US-based Fireblocks, stated that “If you compare it to MiCA, where the first analysis that you will do is look at the assets, and the asset will tell you if you’re falling into the regulatory perimeter or not… here, it’s a little bit different. It’s based on financial activity, which I have to say from a regulatory point of view is a hard thing to tackle”.
The lobby group CryptoUK supports the government’s “same risk, same regulatory outcome” approach. Su Carpenter, director of operations at the group, stated that “It solves for the desired outcome rather than applying generic rules – capturing the intricacies of novel innovations, and their unique benefits/risks”. Changpeng Zhao, CEO of Binance, tweeted recently that “It would make sense for the regulatory regime to harmonize [with global regulators], to the extent reasonably possible, to allow as seamless cross-jurisdictional operation as possible”.
The UK, which left the European Union in 2020 in the infamous “Brexit,” can’t go on its crypto regulation journey alone without global collaboration, according to the Association of Financial Markets (AFME) in Europe. When constructing a market abuse regime, the UK needs to ensure what it sets out is compatible with other jurisdictions that host global crypto companies and can work with standard-setters like the International Organization of Securities Commissions, Group of Seven (G7) and Group of 20 (G20), said Nick Taylor, head of policy in Europe, Middle East and Africa at UK-based exchange Luno.
Luno, like CoinDesk, is owned by Digital Currency Group. CryptoUK is also calling for the country to align with global regulators over disclosure requirements for crypto companies. Tordera said that “It would make sense for the regulatory regime to harmonize [with global regulators], to the extent reasonably possible, to allow as seamless cross-jurisdictional operation as possible”. In its response to the government’s proposals, AFME also warned that the UK’s planned crypto authorization regime could damage its reputation as an open market by making it difficult for foreign firms to access it.
The government suggested in its consultation that the regime would require firms serving UK clients – regardless of where they are based – to sign up with the Financial Conduct Authority to continue business in the country. The AFME doesn’t recommend this approach and says it steers too far from how the UK usually regulates financial institutions. CryptoUK called for overseas companies to be exempt from local authorization, and for the government to stick to regulating companies based in the UK.
The licensing regime should come with a transition period that allows crypto companies to continue operating while they go through the authorization process, AFME and Taylor suggested. CryptoUK recommended a quicker process for firms already registered with the FCA – something that France is mulling as it prepares to implement MiCA. Binance said in its response to the proposal that “It is critical that regulators urgently adopt a timely and proportionate authorization process for complete and accurate applications, and endeavor to avoid duplicative information requests of businesses, taking into account the supervisory history of businesses during the authorization process”.
AFME, CryptoUK, and Binance also asked for clarity on the scope of economic activities that fall under the existing rules, along with the treatment of assets like non-fungible tokens (NFTs). All three parties suggested that algorithmic stablecoins should fall within the UK’s rules – something that has been on regulators’ radar since the collapse of the Terra ecosystem in May 2022.
The UK’s Conservative government, under the leadership of Prime Minister Rishi Sunak, has said it wants to position the country as a hub for crypto, and may be pushing to finalize relevant rules ahead of general elections, which are set for 2025 but could occur sooner. CryptoUK expects proposed stablecoin legislation and rules for the broader crypto space – what the government refers to as the first two phases in its proposals – to be implemented by the end of 2024.
“We suggest taking a broader view at all of the enablers for the UK to deliver on its ambition to become a global hub for the crypto industry, which includes a proportionate application of FinProm [Financial Promotion] rules to trading venues, addressing concerns of de-banking by the…”