The government’s consultation on crypto regulations closed over the weekend with figures in the crypto industry welcoming proposals for greater oversight of the sector.
The government hopes the regulations will turn the UK into a digital hub. The plans follow soon after a series of high-profile problems in the crypto industry, such as the collapse of FTX, bolstered calls for greater scrutiny and consumer protection.
Historically, crypto firms have shown scepticism about plans to regulate a sector that was set up to exist outside of mainstream regulations. More recently, the industry has welcomed the possibility of regulation as a way to further develop the sector.
Su Carpenter, Director of Operations at CryptoUK, said: “A regulatory regime for cryptoassets is key to enabling the UK to be competitive as a destination for the fast growing cryptoasset market.
“We would welcome the UK taking a leading role in promoting safe and orderly cryptoasset markets given that this will both support the further development of the crypto industry as well as the competitiveness of the UK as a destination for crypto firms,” she continued.
Keith Bear at the Cambridge University Centre for Alternative Finance said “most parts of the ecosystem in the crypto asset world and digital asset world welcome regulation because of the certainty and the transparency it gives.”
Stablecoins, particularly those backed by fiat currencies, will be the main focus in the first phase of regulation. A number of stablecoins are available in the UK, many of which are backed by the dollar but some of which are backed by the pound.
Bear said the crucial questions for stablecoins are “the nature of the reserves and the ability to redeem, particularly in times of stress.”
“The ability to demonstrate resilience at times of stress is particularly important given recent examples of the depegging of some stablecoins. (Those examples) give an illustration of where those risks are,” he continued.
Bear also argued crypto firms needed to be subject to rigorous audits to ensure customers can get their money when they need it.
While the regulations are unlikely to authorise stablecoins not backed by fiat currency, Carpenter said “a broader stablecoin category or regime that includes algorithmic stablecoins and crypto-backed tokens could be prudent.”
The second phase of regulation will focus on broader crypto activities, such as the trading of and investment of cryptoassets.
Ludovico Lugnani, Solicitor at BDB Pitmans said: “This phase will target key activities including public offers of cryptoassets, the operation of trading venues, investment management services, cryptoasset lending platforms, and custody services in the UK.”
The government’s plans follow hot on the heels of the EU’s new Market in Crypto-Assets (MiCA) regulations, which was passed earlier in April. MiCA imposed strict rules and limitations on stablecoins issuers and required exchanges to keep client funds separate from company funds.
While there will be variations, Bear suggested there will be “a large amount of consistency” between the two regulatory systems.
Ashurst’s Bradley Rice said that while the UK could not afford to move too slowly, there could be advantages to following others.
“Maybe the UK just has a good poker face and is waiting to let Europe go first with MiCA in mid-2024, early 2025 to see how that impacts the market. The UK could then learn from any teething issues or mistakes and play its hand,” he said.