Camomile Shumba is a CoinDesk regulatory reporter based in the UK. She previously worked as an intern for Business Insider and Bloomberg News. She does not currently hold value in any digital currencies or projects.
The United Kingdom is set to create a broad regulatory framework detailing how cryptocurrency businesses can set up shop and operate in the country.
The U.K. Treasury is due to unveil a package for regulating crypto in the coming weeks. Many in the crypto community welcome such a plan, hoping the U.K. will take a similar approach to what the U.S. and European Union have done.
CNBC first reported the U.K.’s plan to regulate crypto earlier this week.
“Of course reducing financial risk for crypto holders is important, but we hope it does not become over-regulated,” Humayun Sheikh, CEO of artificial intelligence platform Fetch.ai, wrote in an email to CoinDesk. “We look forward to how the regulations plan to address the current opportunities and challenges.”
The U.K. is the latest jurisdiction to speed up efforts to regulate the industry in a comprehensive way in the face of the rising adoption of cryptocurrencies.
The country is a leading decentralized finance (DeFi) spot in Europe in terms of adoption. Crypto investors poured $170 billion into DeFi platforms between June 2020 and July 2021, the most in Europe during that period, according to a Chainalysis report.
The EU approach
In February, the Treasury released a report saying that the U.K. needed to “act quickly” to preserve its position as a crypto hub by having a new framework to regulate crypto.
The report said that the framework should be similar to the European Union’s (EU) Markets in Crypto-Assets (MiCA) package that is making its way through the bloc’s legislative process. The report also said that the Treasury’s regulatory framework should be a functional and technology-neutral approach that would be in line with current regulations and that would factor in crypto risks.
“MiCA negotiations may be finished by the middle of 2022, meaning the U.K. must quickly choose how closely it replicates or diverges from MiCA,” Nicholas du Cros, head of compliance and regulatory affairs at CoinShares, a leading digital asset management firm in Europe, said in an email to CoinDesk.
The MiCA bill, which is meant to be applicable to all 27 EU nations, has a heavy focus on stablecoins.
MiCA defines three subcategories of crypto assets, including the following: asset-referenced tokens, which are stablecoins like Facebook’s now-canceled project Libra that were designed to be backed by a basket of currencies; e-money tokens, which are stablecoins pegged to a fiat currency; and utility tokens, which are intended to provide access to a good or service and are accepted only by their issuers.
Issuers of those kinds of cryptos in the EU must, in the future, publish a white paper.
Meanwhile, firms that provide any service related to the defined crypto assets must obtain approval from regulatory authorities in an EU country. Once they have approval from one local authority and are in accordance with the EU regulations, they can operate anywhere in the EU.
MiCA doesn’t apply to digital currencies issued by central banks or security tokens like securities, deposits, treasury bills or derivatives.
According to CNBC, the U.K. crypto regulations would likely focus on stablecoins, something the government has been consulting on since the Treasury’s March 2020 budget prioritized the issue.
“Measures are likely to include prior authorization for issuers to operate, capital and liquidity requirements as well as auditing and accounting requirements including the obligation to have sufficient reserves held in high-quality liquid assets,” Ryan Shea, a crypto economist at Trakx, a U.K.-based digital-assets company, said in an email to CoinDesk.
“These additional requirements, on top of standard KYC/AML requirements, increase the regulatory burden and will naturally favor larger crypto firms who have the infrastructure and financial resources to satisfy these demands,” Shea said, referring to know-your-customer and anti-money-laundering requirements.
The U.S. approach
A parallel can be drawn with U.S. President Joe Biden’s recent executive order, du Cross said. In early March, Biden encouraged federal agencies to coordinate their approach to the crypto sector.
The U.K. already set up a joint crypto asset task force in 2018 that consisted of senior representatives from top U.K. regulators, including the Bank of England, Financial Conduct Authority (FCA) and Treasury.
What the U.K. has done so far
The U.K. doesn’t consider crypto as a currency or commodity, and has been regulating the crypto industry in different ways.
The FCA became the U.K.’s regulator for anti-money laundering and countering financing of terrorism (AML/CFT) in 2020, and more than 100 firms have registered to be supervised by the regulator since then. Firms waiting for approval by the FCA were put on its “Temporary Registration Regime” (TRR), which enabled them to do business until April 1.
A small number of firms will be allowed to have temporary registration, beyond that date, the FCA said.
The FCA also announced in 2018 that cryptocurrency derivatives are capable of being financial instruments under the Markets in Financial Instruments Directive II (MIFID II) and must comply with the regulator’s rules for such products.
In 2019, it also published its “Guidance on Crypto Assets,” which set out three other ways crypto could be regulated. Crypto regarded as utility tokens that grant access to prospective products or services in the U.K. can be regulated under e-money regulations. Crypto firms with digital assets for cross-border payments could be subject to payments services regulations, but the tokens themselves wouldn’t be regulated.
The Treasury announced in January that crypto adverts will be subject to FCA rules. Meanwhile, the Advertising Standards Authority (ASA) has been clamping down on crypto ads to make sure they comply with current regulations and don’t mislead consumers.
What is next?
What the U.K. really seems to be missing are ways to regulate cryptocurrencies themselves.
“I think the real unregulated aspects [in the U.K.] are other crypto assets, especially cryptocurrencies like bitcoin or ethereum,” Patrick Gruhn, head of FTX Europe, which has been considering expanding to the U.K., said in an interview with CoinDesk.
The answer to what is next also partly depends on what crypto companies and trade groups have pushed to the U.K. Treasury. The Treasury has been in discussions with a number of firms, including the Gemini exchange and crypto trade groups, CNBC reported.
The U.K. Treasury didn’t respond to a request for comment.