The UK is starting to take crypto regulation seriously

of Jason Tucker-Felthamhead of crypto sales, IDnow

When he held the post of Chancellor of the Exchequer, one of Rishi Sunak’s main aims was to establish the UK as, in his words, “a global hub for crypto-asset technology”. When he announced his ambitions in early April 2022, few could have predicted he would be in the country’s top job less than seven months later.

Despite everything he’s had to deal with since moving to 10 Downing Street, crypto has remained a focus for Sunak. In the clearest sign yet that the government is serious about all matters relating to it, it has recently published a consultation document titled ‘The Future Financial Services Regulatory Regime for Crypto Assets’.

The article outlines the desire for the UK to be a world leader in the field, in terms of transparency, regulation and technological advances in the capital markets. Should the country succeed in meeting these targets, it would mark the beginning of the UK taking proactive steps to exploit the opportunities created by new financial technologies. In turn, there will be a ripple effect of positivity across the entire financial sector.

The problem of regulation

Regulation in crypto is notoriously difficult due to the new and ever-changing ecosystem, but the importance of investor safety is at the heart of the HM Treasury consultation paper.

Brexit has of course played a role in the UK having to take its own in-depth look at the issue, rather than taking an EU-wide stance. The union’s creation of its Markets in Crypto Assets (MiCA) regulatory framework marked a step change for the entire world, and was the most comprehensive of its kind anywhere on the planet.

The UK’s exit from the EU has subsequently had a double impact on regulation in this country; Firstly, the MiCA framework will of course not apply to service providers based on these shores, and secondly, any UK provider wishing to offer their services to EU investors will need MiCA authorization so that the continental investor is protected.

A question of timing

The recent spectacular and very public collapse of FTX has forced regulators to rethink their timelines around crypto-asset regulation. However, for the UK government, the timing of publishing the paper in the immediate aftermath of the FTX scandal could not have been much better. Publishing the consultation document immediately after such a major name collapse will reassure both investors and later suppliers.

In addition to information on the current regulatory landscape for the various forms of crypto-assets and how they are traded around the world, the paper also contains advice and guidelines for investment and portfolio management.

A path to crypto regulation

Vitally, the paper also contains a proposed policy approach to crypto assets in the UK. It suggests that most initial coin offerings should be classified as securities offerings, which would result in client asset segregation requirements being applied to crypto assets. This would mean that the future proposed regulatory requirements for crypto would fall under the UK’s Financial Services and Markets Act 2000.

Such a move would give the UK a much clearer direction of travel towards regulation. A balanced and well-thought-out framework can lay the foundations for the UK to achieve Rishi Sunak’s ambitions and become a major global hub for crypto-assets. It will also be welcomed by financial institutions too, as there would finally be clear rules for trading crypto assets in and out of the UK with a previously unmatched level of security.

The integration of know-your-customer (KYC) processes into the regulatory landscape is an important part of crypto exchanges protecting both their customers and themselves from fraud and money laundering, in whatever direction it may go. The reassuring presence of KYC protects investors from financial loss and helps bring a sense of stability to what is a notoriously volatile market. With scalable, advanced anti-fraud solutions, KYC can become an enabler for crypto exchanges, not a burden.

Use your voice to shape regulation

What is important to note about ‘The Future Financial Services Regulatory Regime for Crypto Assets’ is that it is a consultation document rather than something impenetrable surrounded by layers upon layers of bureaucracy.

Feedback on its policy and legislative proposals is encouraged from those inside and outside Westminster and will be collected under a program of stakeholder engagement. It is hoped that the establishment of a clear regulatory framework that both supports innovation and protects consumers will follow.

Its proximity to the MiCA framework will of course remain to be seen, but one thing is certain: it will bring the UK another step closer to achieving its ambition of becoming a global crypto-asset hub.