UK unveils plans to regulate crypto industry in wake of FTX collapse

The UK formally made plans to regulate the cryptocurrency industry, with the government looking to rein in some of the reckless business practices that emerged over the past year and contributed to the demise of FTX.

In a long-awaited industry consultation launched on Tuesday, the government proposed a series of measures aimed at bringing the regulation of crypto-asset firms in line with traditional financial firms.

Among the proposals unveiled on Tuesday was a move that would strengthen rules targeting financial intermediaries and custodians who store crypto on behalf of clients.

A major theme that emerged in 2022 was the rise of risky loans made between multiple crypto firms and the lack of due diligence performed on the counterparties involved in these transactions.

The UK proposals would crack down on such activities, seeking to establish a “robust world-first regime that strengthens rules around crypto-asset lending, while improving consumer protection and the operational resilience of firms,” ​​according to a statement late Tuesday.

“We remain steadfast in our commitment to growing the economy and enabling technological change and innovation – and this includes crypto-asset technology,” Andrew Griffith, financial secretary at the Treasury, said in a statement.

“But we must also protect consumers who embrace this new technology – to ensure robust, transparent and fair standards.”

The collapse of FTX has added urgency to global regulators’ attempts to manage the regulation-averse crypto space. The European Union and the United States have already come up with their own proposals to improve consumer protection in crypto.

Speaking on December 2, Griffith said that “recent events in the crypto market reinforce the case for timely, clear and effective regulation.”

The implosion of FTX, which allegedly used customer money to make risky loans and trades, set off a chain reaction of bankruptcies for digital asset lending firms with exposure to the crypto giant, including BlockFi and Digital Currency Group’s Genesis lending arm.

The proposals unveiled on Tuesday would also enforce stricter transparency requirements on crypto exchanges to ensure they publish relevant disclosure documents and set clear admission requirements for trading digital tokens.

Another measure would relax strict rules on crypto advertising, allowing firms with Financial Conduct Authority registration to issue their own campaigns while the wider crypto regime is introduced.

The regulatory move comes as crypto firms both in the UK and beyond are feeling the chill of a deep downturn known as “crypto winter.”

Companies are seeing their valuations cut by investors following the explosion of FTX and a decline in crypto prices, while the industry has also been plagued by many rounds of layoffs. Last week, London-based crypto exchange Luno cut 35% of its workforce in a move that affected over 330 roles.

Regulation takes time. It will probably take years before the measures are approved by the Storting. The Financial Services and Markets Bill, which would recognize crypto-assets as regulated products, is still making its way through parliament. The law aims to make the country’s financial sector more competitive after Brexit.

Nevertheless, even the simple display of being seen as taking action is important, according to some industry leaders.

“Having a regulatory road map or regulatory direction of travel is going to be very helpful for the UK in terms of being a crypto hub,” Julian Sawyer, CEO of Standard Chartered-backed crypto custody services firm Zodia Custody, told CNBC on Tuesday in an interview. .

Sawyer, who previously co-founded UK fintech firm Starling and led international expansion for crypto exchange Gemini, said it was also important to ensure “general alignment between global markets in terms of the approach to digital assets”.

He noted that the EU has moved forward with the Crypto Asset Markets Act, which is expected to enter into force in 2024.

Bitcoin, which has stealthily climbed around 40% since the start of 2023, was trading flat on Wednesday at a price of $23,103.

Rishi Sunak, who took the reins as UK leader in October 2022, is seen by market players as a crypto-friendly Prime Minister, having previously said he is “determined” to make the UK “the jurisdiction of choice for crypto and blockchain technology ».

As London looks to compete with financial hubs in the EU after Brexit, crypto could be a way to improve its chances, industry insiders previously said.

“It’s an opportunity to bring clarity to the industry and allow it to play its part in achieving their mandate to encourage businesses to invest, to innovate and create jobs in the UK,” said Jordan Wain, head of UK Public Policy by Chainalysis. told CNBC in November.

Sunak’s administration will consult on plans to introduce a new regulatory framework tailored to crypto companies, with the aim of concluding the consultation by April 30, after which it will draft more detailed rules.

SEE: Has the crypto winter thawed?