The Treasury has outlined its proposed regulation of the crypto sector. Syed Rahman of Rahman Ravelli considers the size of the task and the possible implications.
It is perhaps no surprise that the UK has now come up with details of how it intends to regulate crypto. The only uncertainty, it could be argued, is whether the regulatory path that looks set to be taken is the right one.
HM Treasury has announced new regulations for crypto exchanges; claiming its planned measures will protect the increasing numbers of people who are looking to invest in such assets. And these are, after all, assets that have been associated with a fair amount of risk - not to mention notoriety and criminal activity - since they came into existence.
Yet the slightly soiled reputation of some corners of the crypto world does not appear to intimidate the government, which believes its course of action can go some way to cleaning up those grubby areas. Under the new regime, companies that offer trading and other services for crypto-assets will have to comply with rules regarding transparency, consumer protection and operational resilience.
Hurdles
In simple terms, the crypto world is being told it has to clear the same hurdles that the more traditional financial world has been facing for generations. Exchanges, dealers and other service providers in the crypto sector will have to prove they are as legit as those who sell the more conventional financial products. They too will be subject to the laws on matters such as money laundering and financial promotions.
This, according to Chancellor Rachel Reeves – whose pre-parliamentary career was solely in the traditional banking world – will make Britain “the safest place for consumers" and boost investor confidence. At the very least, the announcement is timely, given that 12% of UK adults have possessed crypto assets – three times more than was the case just four years ago. The big question now is just how effective the new crypto rulebook proves to be.
The government has said it will talk to the crypto sector about its plans before the necessary legislation is finalised. Exactly how much of a say the sector actually has in what becomes law could be telling. There is, after all, the challenge of protecting consumers while also being careful not to stifle what is becoming recognised as an area of innovation – one that could eventually swell the coffers and raise the reputation of UK PLC.
Innovation
The government has made it clear it is all in favour of innovation. But the precise details of how it reconciles this with consumers’ best interests remains to be seen. The measures announced so far can be viewed as a step on from the 2023 Treasury proposals for devising a financial services regulatory regime for crypto. So far, that has led to companies that provide crypto activities having to be subject to authorisation and supervision by the Financial Conduct Authority (FCA).
Yet the next moves are set to be much bigger. And for those serious players in the crypto market, legal certainty will be welcomed: it would be crucial for exchanges who want to base themselves in the UK as it will be a factor in long-term planning and product structuring. And if a crypto asset provider were licensed and supervised in the UK, it would boost trust and confidence among consumers and investors.
But there are some concerns. The FCA is overworked. It is gaining a reputation for being notoriously slow and bureaucratic – hardly the image required as the UK looks to take bold crypto-related steps. Added to this, the UK at present does not have a competitive advantage. Other jurisdictions, such as UAE and Hong Kong, are already ahead; with streamlined licensing regimes, including crypto-friendly tax environments and dedicated digital asset authorities.
The UK’s planned regulation of crypto will be a big step forward. But there is plenty to be thought about by those who dictate the exact direction of travel.
