The Treasury of the UK government published a consultation paper that brought in a new and revised regulatory framework. This framework has introduced stricter and tighter rules around trading and investing.
The government’s foremost goal is to establish a comprehensive regulatory framework for the crypto industry. The consultation paper attempts to address this by proposing regulations for various aspects of the crypto sector, including service providers, lending platforms, consumer protection, disclosures, and measures to prevent market abuse, along with prudential requirements.
What can we expect?
UK-based crypto exchanges are expected to increase their compliance efforts as they will come under the regulation of the Financial Conduct Authority (FCA). New exchanges must provide information on their operations, financial resources, risk management processes, and other relevant details. They must also establish systems to prevent and mitigate market abuse. Additionally, crypto lending platforms will require FCA authorization and the proposed rules outline the duties of crypto custodians.
Stablecoins are addressed in the Financial Services and Markets Bill, but they are not the central focus of the new regulations. However, the Treasury views activities related to algorithmic stablecoins as subject to the same requirements as unbacked crypto assets.
The tokens traded on UK crypto exchanges will be subject to market abuse rules similar to those in traditional finance, including insider trading, market manipulation, and unlawful disclosure of inside information. Service providers offering crypto trading must also comply with the European Union’s financial market trading rules, including obtaining the best outcome for executing client orders.
The proposed guidelines for initial coin offerings (ICOs) are likely to classify them as security offerings, and it will be the responsibility of crypto exchanges to conduct due diligence on the tokens and ensure the correct admission and disclosure documents are filed. ICOs will not require the extensive prospectus documents that are typically required for initial public offerings.
How did the industry react to these new developments?
Nick Taylor, head of EMEA public policy at Luno crypto exchange, conveyed to The Block in an email that “Regulation and innovation are not mutually exclusive.” He added that the recent blueprint presented by the government would provide businesses with a clear understanding of the medium-term functional environment, making the UK a more appealing place for conducting business. This, in turn, would enable companies to prepare beforehand, attract investments, and develop job opportunities in the UK.
On the other hand, Katharine Wooller the business unit director at Coincover expressed her opinions by saying that “the UK’s approach to digital assets so far has been sluggish despite the broad, cross-party support to become a crypto hub. This sounds a little like another announcement that merely kicks the can down the road.”
The recent failures of FTX and other companies have led to changes in regulatory approaches, and some are concerned about the impact. According to Albert Weatherill, a financial services partner at Norton Rose Fulbright, “There are proposals that have been widely anticipated, and others that have not been as noticeable. It is clear that the failures of high-profile companies in 2022 have affected the implementation of these measures, both in terms of the extent and speed.”