by Jason Tucker-Feltham, Global Head of Crypto and FinTech, IDnow
Even before he found himself resident in 10 Downing Street, Rishi Sunak wanted the UK to be a world leader in all things crypto. Now he’s in position, his resolve has strengthened as HM Treasury’s consultation paper ‘The Future Financial Services Regulatory Regime for Crypto Assets’ makes abundantly clear. The desire for the country’s status as a leader in terms of the openness, regulation and technological advancement in capital markets is laid out for all to see.
Strictly regulated market sectors implement safeguards as a means of reducing risk and fraud. Solutions which fulfil Know Your Customer (KYC) obligations under Anti-Money Laundering (AML) law are part of this – and broadening the list of specified investments to include crypto assets is a positive step to help further reduce fraud and ensure safeguards for investors.
Enhanced organisational requirements coupled with better traceability and recordkeeping, together with prudential rules or other admission standards, would significantly extend transparency. In a post-FTX world, investors and users alike would be aware of all potential risks.
While the HM Treasury’s consultation period ended on April 30, the story is long from being over. Crypto asset firms, technology companies, financial institutions and other invested stakeholders were invited to provide feedback on the paper and HM Treasury will now have to review the submissions.
From the viewpoint of a KYC service provider, there is unquestionably a need for further collaboration between firms, regulators and enforcement agencies to further develop regulatory technology (RegTech) solutions that can detect, prevent and disrupt market abuse.
Remote KYC applications that can be used in centralised (off-chain) and decentralised (on-chain) transactions would play an important role in this, so sandbox initiatives which can look at how to enhance them should be on the agenda.
It’s likely that centralised and decentralised finance platforms (DeFi) will converge towards having similar requirements for the safeguarding of trading activities, customer due diligence requirements and prudential requirements.
On-chain KYC platforms will allow for a previously impossible level of transparency and accountability on DeFi platforms. Similarly, on-chain KYC can mitigate money-laundering on platforms where there is a risk of the practice.
What the UK and other countries need to keep in mind is that DeFi has no borders and is a constantly evolving landscape. With evidence of increased risk and fraudulent activity in the decentralised space, extra safeguards together with ongoing collaboration and dialogue with regulators outside of the UK are all vital.
As all financial activities, including crypto transactions, become increasingly digital and cross-border, it is also just as important to consider national requirements and global standards which aim for the twin goal of interoperable activities and the minimum risk.
Perhaps then, Rishi Sunak’s vision will be realised in full.