UK Sets Out Draft Rules To Regulate Crypto Assets

Techspace - Britain's finance ministry laid out its first rules to regulate crypto assets on Wednesday 16 May, saying the ongoing turbulence in the sector and the fall of FTX are risks that need to be addressed.

Parliament's treasury committee said in a report that Bitcoin, ether, and other cryptocurrencies should be regulated as gambling given that they have the potential to be used by fraudsters and pose a significant risk to consumers.

Crypto assets, like bitcoin, have little direct regulation globally, but regulators are looking closer after last year's FTX crash, which cost millions of investors billions of dollars in losses, some of them in the UK.

"Our view is that this reinforces clear, effective, timely rules and proactive engagement with industry," said Andrew Griffith, Minister for Financial Services in a proposal submitted to public consultation.

“This includes proposals to bring cryptocurrencies into financial services regulation for the first time, as well as other core activities such as custody and approvals,” he added.

The new rules will cover crypto-related acceptance to trading platforms, making public offerings, executing payment or remittance transactions, managing deals, managing platforms, storage, and mining transactions, or operating nodes on the blockchain.

The rules cover crypto companies in the UK or those providing services to the UK. The company will need a license, along with minimum capital and liquidity requirements.

Currently, crypto companies simply need to demonstrate that they can comply with anti-money laundering protections, although this does not stop the flow of "dark money" through the sector.

According to a report from the parliamentary treasury committee, Bitcoin and ether make up two-thirds of all crypto assets and are not backed by any currency or asset, leading to price volatility and the potential for all money invested in them to be wiped out.

"We therefore strongly recommend that the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome’," the report said.

Regulating trading contracts and investing in unbacked cryptocurrencies can create a 'halo' effect that makes consumers think the activity is more secure than it is, or protected when it is.

The Financial Conduct Authority has repeatedly informed consumers that they can lose all their money invested in cryptocurrencies.

Crypto assets globally have a total market capitalization of around $1.2 trillion, a small part of the financial system, but the collapse of crypto exchange firm FTX last year introduced an even greater urgency to regulate the sector.

“The events of 2022 have taken the risks that the crypto assets industry poses to consumers, most of whom remain liars,” said Harriett Baldwin, chair of the finance committee.

Currently, crypto companies simply need to demonstrate that they can comply with anti-money laundering protections, although this does not stop the flow of "dark money" through the sector.

Binance, the largest crypto exchange, welcomes the public consultation as it has "vocally supported the need for effective and appropriate regulation to assist mainstream adoption of digital assets".

Surveys show that 5-10% of adults in the UK own crypto assets, this has increased by over 100% over the last one-two years, with institutional investors also increasing. The sector shrank dramatically last year, with the total global market capitalization dropping to under a trillion dollars from a peak of around $3 trillion.

The UK had launched consultations on stablecoin regulation, the subset of crypto assets backed by another currency or assets in January 2021, but decided to expand to cover all crypto sectors.

The UK plans to 'recognize' similar rules in other countries so companies authorized elsewhere can service UK customers without a physical presence.

The EU is finalizing its own set of crypto regulations, the Markets in Crypto Assets Regulation (MiCA). The European Union approved the world's first comprehensive set of rules for crypto markets on Tuesday, 15 May.

“The broad scope of the (UK) planned rules is similar to the EU MiCA regulations, but there are many differences in areas such as exchange or stablecoin regulations,” said Ivan Kachkovski, FX and crypto strategist at UBS.