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This article was originally published in Blockchain Industry Review - a Crypto Curry Club Magazine published monthly and available in soft copy and the printed version.
In the last two years, the UK has entirely revamped its approach to regulating cryptoasset providers and businesses. From amendments to the money laundering and terrorist financing regulations, to the introduction of an FCA registration regime and now a consultation paper on the regulatory approach to cryptoassets and stablecoins. The UK looks set to lead the global financial sector once again, this time with carefully crafted policy to encourage virtual currency adoption and innovation, while keeping consumer protection at the center of its legislative agenda.
A week after officially exiting from the EU, in the first week of this month, the Exchequer released a consultation paper to gather feedback from stakeholders concerning the government’s regulatory approach to cryptocurrencies and stablecoins.
The paper marks the second Treasury-led crypto consultation. The first, announced last summer and concluded in October, set out plans to increase oversight into cryptocurrency promotions in order to protect investors. The results of which will be published “in due course,”. as per Her Majesty’s Treasury’s latest update. Furthermore, the FCA, which is fully-funded by the firms it regulates, has also proposed to increase fees and levies from 2021/22 for all financial institutions that require FCA’s license/registration to operate, including cryptoasset businesses.
The latest consultation solicits opinion on how the UK can ensure that its cryptocurrency and stablecoin regulations are equipped to harness the ongoing advancements in technology, supporting innovation and competition while reducing risks to consumers.
Following are the key objectives of the Consultation Paper:
Protecting financial stability and market integrity. This includes maintaining the appropriate regulatory standards, ensuring infrastructure is operationally resilient and that safeguards are in place to mitigate any risks to financial stability.
Delivering robust consumer protections. This means ensuring consumers benefit from the same level of protection they would when other regulated instruments are being used for the same purpose (e.g. payments).
Promoting competition, innovation, and supporting UK competitiveness. This means continuing to encourage and support UK fintech firms, and ensuring consumers and businesses have access to a variety of high-quality services and products.
The government is planning to achieve the above objectives by following a set of principles which include “maintaining the current division of UK regulator responsibilities as far as possible and applying the principle of ‘same risk, same regulatory outcome’. The approach supports the government’s desire to ensure a level playing field and reduce opportunities for arbitrage. In practice, it means drawing on existing regulations and requirements insofar as they are applicable, with adjustments or additional requirements where needed to address specific characteristics or risks.”
The government is further attempting to ensure an agile approach that reflects international discussions and also has room for accommodating future financial services and payment regulation changes.
Proposed overarching approach and related initiatives
The Consultation Paper outlines a series of proposed regulatory changes with an objective to intensify the scrutiny of illegal cryptocurrency uses and developing a regulatory environment that not only allows the regime to keep pace and adapt as new models or innovations emerge but also ensures that the government has the flexibility to update regulation to take account of the outcomes of ongoing international efforts to develop appropriate global regulatory standards. Following are the key steps that the government is planning to implement in order to regulation cryptocurrency uses and virtual asset service providers:
The government is proposing an approach to cryptoasset regulation under which firm requirements are designed and implemented by the independent regulators. This would involve the independent regulators using agile powers to issue rules or codes of practice, within a framework of objectives and broader considerations set by Her Majesty’s Treasury (HMT) and Parliament.
In practice, this means that HMT will not seek to specify detailed firm requirements through legislation. Instead, the government aims to define the scope of the regulatory perimeter and the objectives and principles applicable under that new regime. Reflecting this, the government is seeking views on those areas only in this consultation. The UK’s financial services regulators will consult on detailed firm requirements should the government adopt this approach.
In July 2020 the government published a Call for Evidence to support a review of the UK payments landscape. The Payments Landscape Review (PLR) is taking a holistic stocktake of the payments landscape and is considering changes needed to keep pace with new innovations. The government will set out more detail in response to the PLR call for evidence shortly.
Changes under consideration through this consultation on crypto assets are intended to support and align with the government’s broader approach to payments through the PLR.
Further in the paper, the government has also highlighted the need for both FCA and Bank of England to work together. HM Treasury anticipates both organizations would need powers over any system widely used for payments, and that their approaches will follow their respective remit. The Consultation Paper also states that the proposed regime would take relevant aspects of the UK’s put approach to e-money and payments regulation.
Conclusion
The UK’s crypto assets market is relatively small when compared to other financial hubs like the US and Singapore, but rapidly growing. With the increased adoption of cryptoassets among consumers, according to the FCA’s own consumer research in 2019 approximately 2.6 million people in the UK hold or held digital assets, and the introduction of various stablecoins, the government now recognizes the need for a robust mechanism to regulate cryptocurrency uses and its service providers across all four countries of the United Kingdom. The government also wants to ensure that the adopted approach encourages adoption and innovation to occur while putting safeguards in place to prevent the illicit use of crypto, such as money laundering and terrorist financing.