The UK government finally published its final proposals for regulating the crypto regime with formal legislation on October 30, which would introduce fiat-backed stablecoins as the first phase of the UK’s crypto regulation next year.
The proposal explains the stricter exchange rules, custodians responsible for storing cryptocurrencies on behalf of clients, and crypto lending companies. The government suggests rigorous regulations for preventing market abuse and crypto asset issuance and disclosures.
In the proposal, the government set out to regulate crypto activities under the regulation of banks and financial services firms. Therefore, the regulation will be within the Financial Conduct Authority (FCA) regulatory perimeter.
Response to FTX collapse, crypto winter
The collapse of FTX last year has shattered crypto businesses and investors. The crypto firms allegedly used customer funds for high-risk loans and trades. The incident caused a series of bankruptcies for digital asset lending firms, affecting the big crypto lending firms – BlockFi and Digital Currency Group.
In response, the government planned to create crypto regulations to prevent those activities. Previously in February, the HM Treasury proposed a consultation paper on regulating the crypto regime. It consisted of the regulatory landscape, definitions of different types, and geographic scope of crypto asset activities. The government also proposed considering crypto assets businesses similar to traditional finance firms.
At that time, crypto firms in the UK were experiencing a “crypto winter” after a severe downturn in cryptocurrencies. They saw the proposed regulation as the next step for the government. In April, the consultation closed after receiving positive feedback from government and non-government sectors. In June, the Financial Service and Markets Act 2023 approved the proposed regulation for crypto activities.
As the regulatory framework is being prepared, crypto firms are waiting for MiCA (Market in Crypto-Assets) to outline rules for crypto assets activities in the UK. MiCA enacts rules for the issuance, trading, and operation of crypto assets. More than 80 per cent of crypto firms have initiated the registration process with the FCA while awaiting formal legislation. They need to become registered to operate their businesses in the UK.
Additionally, as the government aims to prevent money laundering (AML) and counter-terrorist financing (CTF), crypto firms are required to follow the UK’s ‘Travel Rule’. It has required crypto assets businesses in the UK to collect, verify, and share information about crypto assets transfers earlier in September.
Global crypto hub ambition
The proposed plans are in line with Rishi Sunak’s ambition, the UK Prime Minister, to make the country a leader in crypto and blockchain technology. The ambition was first suggested in April 2022 when Sunak was still serving as Finance Minister. He created a plan to make the UK a global crypto hub, including regulated stablecoins and launched non-fungible tokens (NFTs).
Sunak has seen the opportunities and potential of the crypto market. Stablecoins have shown rapid growth in the UK in recent years due to the increasing use of cryptocurrencies. In 2022, the world’s largest stablecoins, Tether, generated revenue of up to $80 billion. Also, the crypto market in the UK generated a total of $232 billion in digital assets value. Additionally, cryptocurrency can be used as a digital payment method, including banks, retailers, e-commerce, entertainment and even the best metaverse casino.
Sunak’s plan received mixed reactions among the government, crypto investors and firms. The UK Treasury expressed a positive viewpoint toward the crypto market and stablecoins, engaging in discussion with several firms and trade groups, including Gemini, the crypto exchange founded by the Winklevoss brothers. Conversely, the investors wanted clarity from the prime minister’s plan, especially as the US and the European Union had moved towards establishing their own crypto laws.
After the government finalised its first phase of stablecoins regulation, Sunak faced challenges as the FCA regulation tried to protect the consumers. More than 300 crypto firms tried to obtain registration from the FCA, but only 41 firms became registered. Many of them did not meet the requirements of AML standards.
On October 8, the FCA also introduced a regulation restricting the promotion of crypto assets to prevent illegal promotion. While tight regulations affect many crypto firms, some support the FCA decisions. Crypto companies, like Luno and Zumo, have agreed that the rules are a significant step forward for the crypto industry and enhance the UK’s potential as a crypto hub.