The UK is considering introducing crypto regulation with the aim of protecting its consumers and promoting the growth of its economy. As the country strives to become a leading hub in the crypto industry, regulation is deemed necessary. Incidents such as the collapse of FTX have highlighted the urgency of regulation in this area. A clear and transparent regulatory framework will reduce the risks associated with crypto investments for consumers. The proposed regulation is still in the consultation stage and is expected to be finalized by the end of April.
Objectives of UK crypto regulation
The main policy objectives of doing the regulation include:
- To encourage crypto regulation
- Educate consumers about the risks associated with crypto investments
- Preserve financial stability of the UK
- Preserve market integrity of the UK
The proposed crypto regulations will be rolled out in two phases when they become law. Stablecoins will be addressed in the second phase, which will happen later in the year or early next year. At the moment, NFTs are not part of crypto regulation.
The UK has categorized crypto into different categories: Exchange cryptos, algorithmic tokens, governance tokens and fan tokens. Bitcoin and Ethereum fall under exchange tokens.
Initial governance method used
Crypto activities are currently not regulated by the Financial Conduct Authority (FCA). Decentralized finance makes it even harder to regulate, given its decentralized nature. Despite this, the UK introduced KYC and AML requirements for crypto exchanges in January 2020, requiring all exchanges to register with the FCA and subjecting violators to two years imprisonment. Many companies found the process lengthy and cumbersome, leading to some companies leaving the UK.
Brief summary of the proposed regulation
They were the main target of the regulation. There is, however, one rule for all cryptos. This may be ridiculous as the crypto options are many. It would also be better if the regulation would be tailored according to risk. It is hard to tell the crypto activities occurring within Britain’s borders.
Crypto regulation will apply to crypto assets occurring within the UK. There is still the risk of UK citizens acquiring crypto from less regulated areas outside the UK.
As mentioned earlier, regulation of crypto assets will take place in two phases. The activities under phase two will include ICOs, crypto borrowing and lending, crypto custody services.
Decentralized coins such as Dai will not be subject to regulation. They will be treated as unbanked assets like BTC and ETH since they are unbanked. Dai may be affected since it is backed by USDC since it is a stablecoin requiring regulation. The UK is not planning to ban algorithmic stablecoins. Decentralized, algorithmic and NFTs are favored as the regulation only applies to cryptos not crypto coins and tokens. Regulations will come later.
Regulations related to new crypto
New crypto includes coins and tokens listed on exchanges and not necessarily creation of coins and tokens. According to the new requirements:
- Investors are given accurate info
- Investors are compensated if misled
- Forging crypto offerings should be banned
- Exchanges to do a due diligence on all cryptos they list and give detailed info to users
- Exchanges act as issuers of crypto with no issuers such as BTC.
Cryptos already listed have not been addressed. It is unclear if they will be subject to the same disclosure rules.
Exchanges will be required to:
- Be More liquid and be resilient
- Be More transparent
- Have Accurate on and off chain data
Exchanges will also need to do detailed data reporting, and establish a bankruptcy process.
Regulation on other crypto intermediaries such as market makers
They will need to address conflict of interest, sufficient liquidity, and detecting market manipulation. Generally, market makers have the same requirements as exchanges.
General market abuse requirements
In crypto there are many market abuse incidents that are not covered under financial regulation. The new regulation will control market abuse such as pump and dump schemes and market manipulation. Defaulters will face punitive action. The public will also be taught how to identify market manipulation.
Regulation of crypto borrowing and lending
Some exchanges such as FTX were using customer funds and illiquid tokens as collateral for loans because crypto lending and borrowing is not regulated. The new regulation will ensure risk disclosure, balance sheet disclosure, and clear user contracts.
The United Kingdom is currently undergoing the consultation phase for the proposed crypto regulation aimed at protecting consumers, boosting the economy, and maintaining the financial stability and market integrity of the country. The regulation will aim to educate consumers about the risks associated with crypto, provide accurate information to investors, and control market abuse. The new regulation will bring clarity to the crypto industry and enhance the UK’s position as a crypto hub. Overall, the proposed crypto regulation is a significant step forward for the UK in establishing a fair, transparent, and secure environment for the growth and development of the crypto industry.
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