UK finds its way to a harder line on crypto

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It turns out the UK still wants to be a global crypto hub, which is a bit like volunteering as a landing zone for flaming wreckage from a plane crash.

Cryptocoins, crypto hype and crypto bros crashed last year. Around $2.2 billion in crypto-asset market capitalization has disappeared globally in a 75% drop from the November 2021 peak. There have been multiple failures, scandals or frauds, involving so-called stablecoins such as Terra, lending platforms such as Celsius, and of course the collapse of the Sam Bankman-Frieds FTX crypto empire.

One school of thought is to let it all burn. The crypto-asset world, while interconnected within its own ecosystem of true believers, has managed to implode without causing much aggro for the wider financial system. The message from regulators has generally been that you could lose all your money on this stuff.

But as this week’s government consultation clearly shows, crypto is going to be regulated, and broadly. It is estimated that up to a tenth of UK adults own crypto-assets, according to the government, a figure that has doubled in the past two years. By taking on a wide range of powers, the UK is trying to prepare for the future for a rapidly changing market, said Chris Woolard of EY, former acting director of the Financial Conduct Authority. The question is whether there are things that should be done in the short term to protect consumers and allow the industry to grow.

Frankly, last year’s drama has done the UK a service in shaping its policies. The worst political saliva about being a world-class crypto innovator is gone. City minister and enthusiast Andrew Griffiths, while noting at a recent select committee hearing that EY had suggested a 60 billion opportunity, framed the process in terms of being open-minded about new technologies. Regulator and politicians are, if not on the same page, apparently reading a similar book.

Perhaps as a result, the regulatory framework in the UK seems broader and stricter than expected. The list of assets within the scope of regulation, which include for example non-fungible tokens, and activities casts a wide net. Geographically, UK watchdogs could also be far-reaching: the intent is to oversee crypto business supplied in or destined for the UK, with a few exceptions.

The proposals obviously do not always live up to the aspiration to the same risk, to the same regulatory result. The UK plans to incorporate crypto into its existing financial services regulations, unlike the EU’s bespoke approach.

This is partly pragmatism: where there is no issuer as such for a crypto-asset, such as bitcoin, trading venues would assume disclosure responsibilities, as well as due diligence. within reason.

Elsewhere, it’s more debatable: Companies that have registered with the FCA for anti-money laundering standards will get a temporary exemption from crypto marketing restrictions. This may provide more incentive to jump through AML hoops. But banks or stock brokers usually aren’t offered a pass on one set of rules because they filled out the forms on an entirely different issue.

A country that has recently become preoccupied with being first to regulate has shown some of the virtues of being left behind. The UK enjoys second mover advantage, said George Morris, a partner at law firm Simmons and Simmons. He tried to fill in the gaps by seeing what the EU has done. Elements also focus on recent ructions, such as the discussion of custody requirements for crypto-assets, including restrictions on mixing, or the possibility of capital and liquidity requirements for crypto lenders.

This is simply consultation on what will be a lengthy legislative process. But it could also lead to repeated industry failure: so far, 85% of crypto companies have failed to meet FCA anti-money laundering standards. There was a complete understatement of what is needed to gain regulatory approval, said Blair Halliday, UK managing director of crypto exchange Kraken. I don’t think it’s unreasonable to expect similar fallout.

For those who still prefer to let crypto burn away from the remit of regulators, fret not: based on current evidence, few may be invited.

[email protected]@helentbiz

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