In perhaps the clearest sign to date that the UK government is taking the challenges and opportunities of the crypto industry seriously, HM Treasury has released a new consultation paper, ‘Future financial services regulatory regime for cryptoassets.’

In the Foreword, it states:

“The government’s firm ambition is for the UK to be home to the most open, well-regulated, and technologically advanced capital markets in the world. Delivering on this ambition means taking proactive steps to harness the opportunities of new financial technologies. We believe that crypto technologies can have a profound impact across financial services.”

Crypto conundrum: To regulate or not to regulate.

Over recent years, the crypto industry has become increasingly complex as the constantly evolving ecosystem continues to generate a myriad of opportunities and associated risks.

Although there are currently no crypto-related regulations in the UK, the FCA and Bank of England have issued usage guidelines and warnings about the lack of regulatory and monetary protection.

In a post-Brexit world, the crypto conundrum has been further compounded by the EU’s decision to create MiCA, one of the world’s first crypto regulatory frameworks. Although MiCA will not apply to UK crypto service providers (or any non-European provider), if UK providers plan on targeting EU investors or offering their services in the EU, then they will need to obtain MiCA authorization and follow TFR requirements, to ensure they are compliant with both UK and EU regulations.

FTX and the industry-wide wake-up call.

The collapse of FTX in late 2022 sent shockwaves through the industry, affecting global crypto asset markets and investors, and forcing regulators to re-examine its timeline for crypto asset regulation. In January 2023, the UK’s National Crime Agency (NCA) announced plans to form a brand-new division specifically designed to tackle crypto crime. The NCA’s ‘Crypto Cell’ will initially contain just five officers who will be solely responsible for providing support on new and existing crypto-related investigations.

The decision by HM Treasury to release a consultation paper covering a potential regulatory regime for cryptoassets, finally addresses the elephant in the room. Timing-wise the consultation could not have been opened at a more opportune moment. The crypto industry has endured numerous high-profile casualties these past months, making the case for crypto regulation that much more palatable.
Jason Tucker-Feltham, Head of Crypto Sales at IDnow

The 77-page paper features information on the current regulatory landscape for cryptoassets, definitions of different types of cryptoassets, and geographic scope of cryptoasset activities.

As well as more general guidelines regarding cryptoasset investment advice and portfolio management, the new consultation paper sets out a proposed policy approach to bringing cryptoasset activities into the UK regulatory perimeter. For example, it suggests that most initial coin offerings be considered securities offerings, which would mean the equivalent of client asset segregation requirements be applied to crypto firms. As such, future proposed crypto regulatory requirements would fall under the UK’s Financial Services and Markets Act 2000.

“Up until now, the direction of travel for UK cryptoasset regulation has been anything but clear. A balanced and well thought out regulatory framework will likely lay the foundations in support of the UK becoming a major global crypto hub.

The latest developments are music to the ears of traditional financial institutions, as clear rules for conducting crypto business in and out of the UK provides a level of certainty not yet demonstrated by the jurisdiction.
Jason Tucker-Feltham, Head of Crypto Sales at IDnow

As a consultation paper, ‘Future financial services regulatory regime for cryptoassets’ allows people inside and outside Parliament to provide feedback on policies and legislative proposals contained therein. Questions for respondents include the following:

Do you agree with the assessment of the challenges of applying a market abuse regime to crypto assets?
What steps can be taken to encourage the development of RegTech to prevent, detect and disrupt market abuse?
Do you agree with the proposal to require all regulated firms undertaking crypto asset activities to have obligations to manage inside information?

Next steps on the UK journey toward crypto regulation.

The UK government will now undertake a program of stakeholder engagement to gather views and feedback to establish a clear regulatory framework that supports innovation and protects consumers. How closely this will resemble the EU’s regulatory framework, MiCA, remains to be seen.

Putting the KYC into crypto.

KYC processes are an integral part in ensuring crypto exchanges can protect themselves and their customers from fraud and money laundering, even amid an evolving crypto regulatory landscape. Having these controls in place will protect investors from financial losses and add stability to a notoriously volatile market.

IDnow’s highly configurable identity verification solutions work across multiple regulations, industries and use cases, including crypto. Whether automated or expert-assisted, its online identity-proofing methods have been optimized to meet the strictest security standards and regulatory requirements without compromising on customer conversion or consumer experience.

For more insights into the world of crypto, including 2023 trends, check out our Fintech Spotlight Interview with Jason Tucker-Feltham.