Just under one week ago, HM Treasury announced its intention to bring cryptoassets under the same regulatory regime as traditional financial services, introducing rules which it hopes will position the UK as a global crypto hub.

The highly anticipated consultation paper discusses a breadth of topics, ranging from NFTs to stablecoins to exchange tokens among others, which would be subject to FCA oversight in keeping with standards held for other financial products such as stocks, shares, and insurance.

The document reads: "This approach delivers on the original policy intention of the measure to promote innovation, enhance consumer protection and ensure that cryptoasset promotions can be held to equivalent standards as promotions of financial services products with similar risk profiles."

The consultation will remain open until 30 April 2023, and feedback received will help to shape the legislative process. Once legislation has been laid, the Financial Conduct Authority will consult on detailed rules for the sector.

To gain a clearer picture of the industry’s reaction to last week’s update, we’ve compiled commentary from thought leaders across fintech and financial services, keen to share their perspectives on the latest update.

How can public/private sector collaboration help improve crypto regulation?

Andrew Whitworth, policy director, EMEA, for Ripple, observed that by publishing its crypto consultation, the UK government is taking a big step towards putting an appropriate regulatory framework in place for the industry. “From today, the government should encourage further collaboration with the private sector to devise a comprehensive, risk-based framework, which aligns with international best practice. That’s how the UK will showcase crypto leadership and reap the rewards promised by this technology.” 

Ian Taylor, board advisor of CryptoUK, welcomes this positive step towards greater regulatory clarity. However, Taylor added that given the provisions within the proposed legislation, consultation with the industry could not be more critical.

“As is customary we will convene a group of industry experts to formulate a response. We will analyse the main points in the proposals from the Government, as we have done in the past with new regulations, and offer direct engagement with our members to discuss the main areas of debate. We will then leverage our government relationships to advocate for regulation that is fit for purpose.” 

Do the proposals for cryptoasset regulation go far enough ?

Despite the length and detail of the 80-page document, the industry does not unanimously feel that the proposals have been perfected. Far from it in fact, with certain players expressing their concern that should the Government misinterpret, or not go far enough with its regulation, it could do significant damage to the vulnerable crypto space.

Richard Hay, UK head of fintech at law firm Linklaters, stated that this is merely the opening gambit and a lot of detail still needs fleshing out. “This is the first of likely several consultations from both the government and the regulators as they try to gauge the right level of regulation.

“The government is walking a tightrope act. It wants to help the UK crypto sector be competitive while also setting standards so that consumers are protected,” Hay continued. “Ultimately it will be down to the FCA to set the detailed rules for crypto firms and overall supervisory approach which is likely to focus on consumer protection given the FCA’s wider work on introducing a new consumer duty.”

While noting the “positive steps” being taken by the Treasury toward crypto regulation, Katharine Wooller, business unit director at Coincover stated that we need more action.

“It’s hard to judge as we don’t have the details of the proposals, but 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. Ultimately, if we want to get ahead as a global leader in digital assets, we need to introduce some governance standards to legitimise and safeguard the industry. We’re not the only ones who see the opportunity and currently other countries are further down the regulatory track.”

Jai Bifulco, chief commercial officer at Kinesis Money expressed his frustration at the slow pace of progress on crypto regulation in the UK. “The Treasury may have had its hands tied trying to develop a plan for the UK’s economic recovery, but we have to create a system of corporate governance in digital assets and implement stronger regulation and frameworks to avoid situations where companies can operate unethically without oversight.”

The whole crypto community in the UK is now waiting with anticipation because it’s imperative they get this right and take on the industry’s feedback. On stablecoins, Bifulco continued that for them to add value, there must be measures in place that ensure the asset is backed 1:1 by fiat or a commodity like precious metals, and isn’t being leveraged elsewhere, bringing further legitimacy and accountability to operations. “On that basis, any proposals on stablecoins must include stringent auditing, better regulation and more transparency to ensure all the assets are tracked responsibly and are fully redeemable on request.”

Will the proposed rules make the UK a ‘leading global crypto hub’?

While noting that the proposals will mark a step-change in the direction of UK regulatory policy relating to cryptoassets, and that a regulatory wave will hit the sector, Albert Weatherill, financial services partner at Norton Rose Fulbright, also raised a handful of concerns.  

“A number of these proposals are well trailed, but others perhaps less so and it is evident that the shadow cast by high profile failures through 2022 has influenced the extent and pace of implementation of these measures. Interestingly, but as expected given the general divergence agenda, these proposals do not constitute an entirely new regime in the same way that the European Commission has approached MiCA, rather HMT plans to work with what we already have and extend our existing framework to this asset class,” Weatherill added.

Ultimately, he continued, only time will tell whether the measures balance the drive for innovation and the oft-trumpeted growth agenda against the clear need to mitigate risks of consumer harm and financial stability, “but it is readily apparent that those players who can best adapt to this new landscape will have an inevitable competitive advantage in the ‘flight to quality’ that is expected to play out through the course of this year.”

Hay also noted that the UK’s plans will “inevitably” be compared to the EU’s draft MiCA legislation. “The latest papers from the government help demystify the direction of travel for the UK, which has been influenced and informed by recent market developments. In the longer run, more legal certainty provides an opportunity to build confidence in the UK crypto market.”

Timo Lehes, co-founder, Swarm, added that while “the UK is obviously getting its skates on to meet this challenge, but is lagging peers such as the EU, which is well ahead with its own MiCA legislation. The UK Government will be at particular pains at the moment to prove it has a regulatory Brexit dividend to cash in, but in reality, thanks to the ‘Brussels Effect’ of regulatory innovation, it is still taking some cues from EU lawmakers despite its new-found rule-making powers.”

Lehes wants to see some defined rules emerge sooner rather than later: “Between the EU, US, Singapore and others there is very much a regulatory race underway now – to protect market participants, but also to attract the right kind of innovators in what is still a fast-moving and growing sector.

Lehes explained that while we have seen a proliferation of cryptoassets created using blockchain technology, the bigger opportunity lies in tokenising traditional financial instruments.

Regulatory certainty around stablecoins is crucial to the development of the decentralised finance (DeFi) ecosystem, particularly as the connection of fiat currencies to blockchain gains momentum.  

“Crypto has faced significant issues in the past year and much of this comes down to a loss of collateral confidence in digital tokens, which aren’t fundamentally backed by anything tangible. But stablecoins, with properly collateralised offerings, stand against this confidence issue and should form the cornerstone of regulatory policy,” Lehes added. “We’d like to see further development of the scope of regulations to encompass a wider set of RWAs than just stablecoins. The tokenisation of stocks, debt and other assets is well underway, and those jurisdictions that develop the right frameworks now will be the ones to benefit from what is a massive potential market.”

Will FTX continue to impact cryptoasset regulation?

The dumpster fire that is FTX and Sam Bankman-Fried’s extensive (alleged) fraud, has wreaked pure havoc on crypto markets and ripped investor appetite out of the industry, turning what was already a deep crypto winter into an ice age.

HM Treasury’s consultation document refers directly to the FTX scandal six times, mostly in context of the widespread implications and operational resilience factors that such a large failure can potentially inflict on a single industry.

Will Marwick, CEO at IFX Payments stated: “Whilst the FTX fraud highlights the need for crypto firms to be held to the same standards of financial institutions in order to protect end consumers, the Government needs to ensure that they don’t stifle innovation throughout the industry by tarnishing good players with the same brush as the bad. Digital assets, specifically stablecoins, and blockchain infrastructure have very beneficial use cases by making secure payment services accessible to all. To ensure the UK becomes the global crypto industry hub, the regulations need to balance protectionist measures with practical application.”

Dr Nils Bulling, head of strategic innovation, Ecosystem and Digital Assets at Avaloq argued that recent bankruptcies suffered by large crypto companies were often due to a lack of oversight and transparency, and poor risk management.

“Banking providers of crypto services are in a very different place and already operate within a highly regulated environment. This means banks and wealth managers have the potential to bridge the gap between the security and convenience needs of crypto investors while creating a one-stop shop for both conventional and cryptoassets.”

“This proposed regulatory regime provides a great opportunity for banks and wealth managers, which already have stringent investor protections in place..”

Coincover’s Wooller takes a slightly stronger stance: “Until regulation comes to fruition, the market will continue to be a Wild West with lax regulatory standards and due diligence. Not only does that present risks to those who hold digital assets, but the absence of proper governance directly enables the failures and corruption that creates broader market turbulence, as we saw with FTX.”

Having said that, Wooller argued that the industry doesn’t really need the Government to lead the way. “If the Government won’t step up, the crypto industry can and should set its own standards, moving towards a form of self-regulation. After all, the solutions to these problems already exist. For example, firms can go through independent audits, which would avoid controversies like the FTX collapse, and introduce transaction monitoring and other protective technology to mitigate against theft and loss.”

How will the crypto proposals impact UK consumers and business?

Kate Troup, partner, crypto and financial regulation at Fladgate noted that from the perspective of existing regulated firms, and their advisors, last week’s consultation paper is very familiar territory. However, for unregulated crypto firms it is going to be a substantial change, and in many cases it will require them to obtain authorisation and to comply with detailed rules in relation to how they run their businesses and communicate with their customers.

Harry Eddis, financial regulation partner and global co-head of Fintech, Linklaters was in agreement: “The proposals represent a significant step up in what some crypto businesses will be expected to do. In the future they will need to meet similar standards to those that apply to traditional financial services.

“Cryptoasset businesses that have already gone through a painful process of registering with the FCA for anti-money laundering purposes will not look forward to having to go through another process of seeking a full regulatory licence. However, those firms that have already registered with the FCA will breathe a sigh of relief about the government’s change in tack on financial promotions. A new exemption will allow them to continue communicating to retail investors despite incoming restrictions on crypto marketing.

Troup furthered that the geographical scope of the UK’s regulations is one of the most interesting aspects of the proposals: “The Treasury indicates in the paper that it intends the UK regulations to cover overseas firms who are providing services to UK-based customers. This could of course mean that a number of international firms may simply chose not to provide services to UK customers (thereby limiting the range of crypto available to UK customers) and some smaller operators may simply choose to ignore the UK regulations entirely on the assumption that they are unlikely to be pursued by the regulators.”

However, Troup added that a number of non-UK firms are likely to wish to seek authorisation to provide services to UK customers given the current appetite of UK customers for cryptoassets. “It is interesting that the Treasury is anticipating that there may be no need for a physical presence in order for a crypto firm to be authorised by the UK regulators.”

From a consumer perspective the regulation of custodians and exchanges should provide some welcome protection against the high profile collapses we have seen in this area. Troup stated that there is a need for anti-market abuse regulation for cryptoassets as currently, there is nothing to stop manipulative behaviour in the crypto space - such as high profile social media personalities  “pumping and dumping” or “trashing and cashing”. She qualified that this would be more effective if implemented at an international level rather than domestically.

Eddis’ added that firms will need to monitor where the line is being drawn between regulated and unregulated cryptoasset activities, including what exemptions will be available. “What is already clear is that moving business overseas will not be enough to avoid the rules if you conduct crypto business to UK customers.”

Dr Bulling also raised the issue of consumer protection, explained that regulation is needed in this volatile market not only to provide financial stability, but also to promote a level playing field for different market participants and ensure high standards of investor protection. “These proposals are a promising start and we believe they will transform the landscape for the provision of crypto services, with banks and wealth managers challenging crypto-native firms for market dominance.”

Positive industry reactions to the proposals

Adam Jackson, director of policy, Innovate Finance, expressed his pleasure that in line with Innovate Finance’s advocacy, rather than inventing a totally new approach, the Government applied the principle of ‘same risk, same regulatory outcome’ and started by assessing what existing rules for similar activities can be applied. "We welcome the declared aim of a proportionate and innovation-friendly approach. We will need to scrutinise the details to test this and ensure the UK becomes the world’s leading centre for digital assets.

"Setting out a detailed UK roadmap today provides greater clarity for the industry and is an important step to strengthen UK competitiveness.  We also welcome the announcement by HM Treasury to allow firms with anti-money laundering authorisation to issue their own financial promotions while the broader cryptoasset regulatory regime is being introduced. This addresses an issue that would otherwise have made firms unviable in the UK, and implements a solution we have been advocating for.”

CryptoUK’s Taylor, , is pleased that the Government “acknowledged these proposals would have been a de facto ban on promoting crypto in the UK. This proposed exemption comes after a sustained programme of advocacy by CryptoUK and its members […] As the crypto industry trade body, our Regulation Working Group will be crafting a unified and detailed response to the consultation paper. We will continue to work with regulators, including HMT, the Financial Conduct Authority and the Advertising Standards Agency to ensure that the UK has robust yet fair standards for the promotion of digital assets.”

Amanda Shoffel, Bitstamp’s chief compliance officer for the UK stated: “We’re delighted that the UK Government is taking steps to robustly regulate crypto and digital assets. Increased regulation will ensure that both customers and institutional investors are protected – whilst also taking advantage of what crypto, as an emerging sector, has to offer a growing economy. In order to thrive, crypto must be both secure and transparent, with the customer at the forefront of all industry concerns.”

CEO and co-founder of Zumo, Nick Jones, explained that as a business that has prioritised regulatory compliance from the outset, anything that brings regulatory clarity and can define clear and proportionate rules of engagement, on a level playing field, is a long-term positive for the sector. 

“This is the UK's opportunity to show it is open for business, and do so in a way that recognises the needs both of the industry and the people and businesses it serves,” Jones added. “Ultimately we all want the same thing, a country that is innovating and has plenty of opportunities whilst remaining safe and fair for people […] Now comes the careful and detailed task of making sure those provisions are carefully examined, and to provide the critical review needed to deliver a considered and balanced framework.”

Chris Ford, head of government affairs, EMEA, at R3, said that the introduction of regulatory measures are a welcome step in enhancing trust and confidence in the distributed ledger technology behind it. “Regulatory and legal certainty are fundamental ingredients for the success of any emerging technology, so it’s pleasing to see the government recognise the role that DLT can play in driving growth and helping to set the UK apart amidst rising international competition. Sensible, proportionate regulation can provide clear guidelines on how DLT should be applied, who may use it and for what purpose.”