The UK government is pushing ahead with plans for new cryptocurrency regulations that would see some facets of decentralised finance come under the same spotlight as traditional financial services. A consultation has been launched on the plan, which one cryptocurrency investor told Tech Monitor should go further and cover all digital assets, rather than just stablecoins and DeFi.
Consultation on the proposed new rules is open now and will run until April. They have been published after a rocky few months for the crypto industry, which has seen several prominent cryptocurrencies collapse and FTX, one of the largest crypto exchanges, shut down amid claims of fraudulent transactions.
“Our robust approach to regulation mitigates the most significant risks, while harnessing the advantages of crypto technologies,” a Treasury spokesperson said. “This enables a new and exciting sector to safely flourish and grow, boosting jobs and investment.”
The crypto industry has been described as “incredibly volatile” by Sir John Cunliffe, deputy governor of the Bank of England. He told Sky News last month was “too dangerous” not to have mainstream regulation in place due to the risk to investors. Hundreds of thousands of investors have lost millions on the collapse of FTX and more as a result of the wider impact it had on the crypto-asset market as a whole.
The aim of the new legislation is to lay down “fair standards” including rules surrounding the promotion of crypto-assets, requiring them to be fair, clear and not misleading. There will also be a need for more enhanced reporting requirements placed on exchanges and regulations that ban “pump and dump” practices that allow individuals to artificially inflate an asset before selling it.
The Treasury says it wants exchanges to have fair and tighter standards that are robust and consistent with traditional finance. This will include making platforms responsible for defining demands a currency has to meet before it can be admitted for trading. They will also be responsible for facilitating transactions in a way that keeps customer assets safe.
The government will strive to balance the need to protect consumers with a commitment to grow the economy said Economic Secretary to the Treasury, Andrew Griffith. “We remain steadfast in our commitment to grow the economy and enable technological change and innovation – and this includes crypto-asset technology,” he said. “But we must also protect consumers who are embracing this new technology – ensuring robust, transparent, and fair standards.”
UK crypto regulation: balancing growth and security
The plans cover a “broad suite of crypto-asset activities” that are consistent with traditional finance regulation, placing some responsibility on exchanges and ensuring they have fair and robust standards. But it will also include tighter rules around financial intermediaries and custodians – which have responsibility for facilitating transactions and safely storing customer assets.
“These steps will help to deliver a robust world-first regime strengthening rules around the lending of crypto-assets, whilst enhancing consumer protection and the operational resilience of firms,” a spokesperson said. “As part of this approach, the consultation will seek views on improving market integrity and consumer protection by setting out a proposed crypto market abuse regime.”
Professor Sarah Green, the law commissioner for commercial and common law told Tech Monitor the consultation is recognition that distinct elements of some crypto-related activities are now appropriate for regulation. “We welcome HMT’s consultative approach to regulatory reform,” he said. “We anticipate that the outcome of HMT’s work and our forthcoming report on the private law aspects of digital assets will ensure that the law of England and Wales remains the most dynamic and competitive tool for crypto-market participants, whilst offering consistency and protection.”
Richard Hay, UK head of fintech at law firm Linklaters, said this is just the “opening gambit” from the government, with a lot of detail still needing fleshing out. “This is the first of likely several consultations from both the government and the regulators as they try to gauge the right level of regulation,” he says.
“The government is walking a tightrope act. It wants to help the UK crypto sector be competitive while also setting standards so that consumers are protected. Ultimately it will be down to the FCA to set the detailed rules for crypto firms and overall supervisory approach which is likely to focus on consumer protection given the FCA’s wider work on introducing a new consumer duty.”
Alan Vey, founder of crypto firm Aventus, said the proposals are a good move generally, but urged the government to be bolder. “It is important that lawmakers look to include other digital assets, such as utility tokens, as part of the bill in the future,” he says.
“Stablecoins and decentralised finance should not be where this all halts. An industry advisory board should be established and consulted with to deal with the tricky task of including different types of assets going forward. The key is to regulate different assets appropriately, while making sure smaller assets, such as NFTs, are not overlooked.”