The U.K. will establish a comprehensive regulatory framework detailing how cryptocurrency businesses can set up shop and operate in the country.
The UK Treasury is set to unveil a plan to regulate cryptocurrencies in the coming weeks, and most in the crypto community welcome such a plan, hoping that the UK will follow a similar approach to that of the US and EU. CNBC first reported on plans to regulate cryptocurrencies in the UK earlier this week.
Humayun Sheikh, CEO of artificial intelligence platform Fetch.ai, told CoinDesk: “Of course it’s important to reduce financial risk for cryptocurrency holders, but we hope it doesn’t turn into over-regulation and we look forward to regulators How to address current opportunities and challenges.” The UK is the latest jurisdiction to accelerate efforts to fully regulate the industry in the face of rising cryptocurrency adoption.
The UK is Europe’s leading decentralized finance (DeFi) point in terms of adoption. According to a report by Chainalysis, between June 2020 and July 2021, cryptocurrency investors poured $170 billion into DeFi platforms, the most in Europe during this period.
The EU’s approach, in February, the Treasury Department released a report saying the UK needs to “move quickly” with a new framework to regulate cryptocurrencies in order to maintain its status as a cryptocurrency hub.
The report said the framework should be similar to the European Union’s (EU) Markets in Crypto Assets (MiCA) scheme, which is going through the legislative process of the European Parliament. The report also said that the Treasury’s regulatory framework should be a functional and technology-neutral approach, consistent with existing regulations, and taking into account cryptocurrency risks.
Nicholas du Cros, head of compliance and regulatory affairs at CoinShares, a leading European digital asset manager, said, “MiCA negotiations are likely to be completed by mid-2022, meaning the UK must quickly choose between a close copy or a divergence with MiCA.”
The MiCA Act is designed to apply to all 27 EU countries, with a primary focus on stablecoins.
MiCA defines three sub-categories of cryptoassets, including the following: centralized stablecoins, such as Facebook’s now-canceled project Libra, designed to be backed by a basket of currencies; algorithmic stablecoins, which are pegged to fiat currencies but are algorithmically determined to be stable stablecoins that are sexual in nature; and utility tokens, designed to provide access to goods or services, accepted only by their issuers.
In the EU, issuers of these types of cryptocurrencies will have to publish a white paper in the future.
At the same time, companies offering any services related to the defined crypto-assets must obtain approval from the regulatory authorities of the EU countries. Once they are approved by a local authority and comply with EU terms, they can operate anywhere in the EU.
MiCA does not apply to central bank-issued digital currencies (CBDCs) or security tokens such as securities, deposits, treasuries or derivatives.
According to CNBC, U.K. cryptocurrency regulations may focus on stablecoins, an issue the government has been consulting since the Treasury Department prioritized it in its March 2020 budget.
“Measures may include prior authorization of issuers to operate, capital and liquidity requirements, and audit and accounting requirements, including an obligation to High-quality liquid assets hold sufficient reserves.”
“These additional requirements, on top of the standard KYC/AML requirements, increase the regulatory burden and will naturally benefit large cryptocurrency companies that have the infrastructure and financial resources to meet these requirements,” Shea said, referring to understanding Your customers and anti-money laundering requirements.
DuCros said a comparison could be drawn with the recent executive order from U.S. President Joe Biden. In early March, Biden encouraged federal agencies to coordinate their approach to the cryptocurrency sector.
The U.K. already formed a joint working group on cryptoassets in 2018, made up of senior representatives from the U.K.’s top regulators, including the Bank of England, the Financial Conduct Authority (FCA), and the Treasury.
What the UK has done so far
The UK does not consider cryptocurrencies a currency or commodity and has been regulating the cryptocurrency industry in different ways.
The FCA became the UK’s Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regulator in 2020, and more than 100 companies have since registered to be supervised by the regulator. Companies awaiting approval from the FCA are included in its “Temporary Registration Regime” (TRR), which allows them to conduct business until April 1.
The FCA also announced in 2018 that cryptocurrency derivatives can become financial instruments under the Markets in Financial Instruments Directive II (MIFID II), subject to the regulator’s regulations for such products.
In 2019, it also issued “guidance on cryptoassets,” which set out three other ways cryptocurrencies might be regulated. Cryptocurrencies regarded as utility tokens grant access to a desired product or service in the UK and can be regulated under e-money regulations.
Cryptocurrency companies with digital assets used for cross-border payments can be subject to payment services regulations, but the tokens themselves will not be regulated.
The Treasury Department announced in January that cryptocurrency advertising would be subject to FCA rules. Meanwhile, the Advertising Standards Authority (ASA) has been scrutinizing cryptocurrency ads to ensure they comply with existing regulations and do not mislead consumers.
What will happen next?
What the UK really seems to be missing is a way to regulate cryptocurrencies.
Patrick Gruhn, head of FTX Europe, told Coindesk, “I think what’s really unregulated [in the UK] are other cryptoassets, especially cryptocurrencies like bitcoin or ethereum.”
The answer to what’s next also depends in part on what cryptocurrency companies and trade groups push to the UK Treasury. According to CNBC, the U.K. Treasury has been in discussions with a number of companies, including the Gemini exchange and cryptocurrency trading groups.