As government consultation ends, what next for UK regulation?

The government’s consultation on crypto regulations concluded at the weekend with crypto industry figures welcoming proposals for greater oversight of the sector.

The government hopes the regulations will make the UK a digital hub. The plans come shortly after a series of high-profile issues in the crypto industry, such as the collapse of FTX, fueled calls for greater scrutiny and consumer protection.

Historically, crypto firms have shown skepticism about plans to regulate a sector that was set up to exist outside of mainstream regulation. Recently, the industry has welcomed the possibility of regulation as a way to further develop the sector.

Su Carpenter, Chief Operating Officer at CryptoUK, said: “A regulatory regime for cryptoassets is key to enabling the UK to be competitive as a destination for the rapidly growing cryptoasset market.

“We would like the UK to take a leading role in promoting safe and orderly markets for crypto assets, given that this will both support the further development of the crypto industry as well as the UK’s competitiveness as a destination for crypto firms,” ​​she continued.

Keith Bear of the Cambridge University Center for Alternative Finance said “most parts of the ecosystem in the crypto-asset world and the digital asset world welcome regulation because of the security and transparency it brings.”

Stablecoins, especially those backed by fiat currencies, will be the main focus of the first phase of regulation. A number of stablecoins are available in the UK, many of which are backed by the dollar, but some of which are backed by the pound.

Bear said the crucial questions for stablecoins are “the nature of the reserves and the ability to redeem, especially in times of stress.”

“The ability to demonstrate resilience during periods of stress is particularly important given recent examples of the depegging of some stablecoins. (These examples) provide an illustration of where those risks are,” he continued.

Bear also argued that crypto firms must be subject to strict audits to ensure that customers can get their money when they need it.

While regulations are unlikely to approve stablecoins that are not backed by fiat currency, Carpenter said “a broader stablecoin category or regime that includes algorithmic stablecoins and crypto-backed tokens may be warranted.”

The second phase of regulation will focus on broader crypto activities, such as the trading and investment of crypto assets.

Ludovico Lugnani, lawyer at BDB Pitmans said: “This phase will target key activities including public offerings of cryptoassets, operation of trading venues, investment management services, cryptoasset lending platforms and custody services in the UK.”

The government’s plans follow on the heels of the EU’s new Market in Crypto-Assets (MiCA) regulations, which were adopted earlier in April. MiCA imposed strict rules and restrictions on issuers of stablecoins and required exchanges to keep client funds separate from company funds.

While there will be variations, Bear suggested there will be “a great deal of consistency” between the two regulatory systems.

Ashurst’s Bradley Rice said that while the UK could not afford to go too slowly, there could be benefits in following others.

“Maybe the UK is just putting on a good poker face and waiting to let Europe go first with MiCA in mid-2024, early 2025 to see how it affects the market. The UK can then learn from any teething problems or mistakes and play its hand,” he said .