Treasury consultation points to a positive way forward for UK crypto
Satoshi Nakamoto’s idea was that there would be no need for oversight or regulation of his creation – Bitcoin. To a certain extent that remains true, though the purity of the original concept has been diluted over time by a number of offshoots.
In its purest form, the Bitcoin blockchain doesn’t care about anything or anyone – it just goes on churning out BTC and transferring the tokens between parties. It was conceived as a peer-to-peer cashless system, and if it sticks to that there are no problems – except in so far as know your customer (KYC) and anti-money laundering (AML) checks are required.
Where problems do arise tends to be because, in general terms, to transact in Bitcoin or to exchange fiat currency to and from BTC requires an exchange. BTC is distinct and on its own in the crypto world, whilst exchanges and all other constructs are, shall we say, contaminated by the world as we know it.
Some time ago, governments across the globe realised that crypto might be a wonderful way to achieve money-laundering. So, for some years now, every exchange has had to comply with its sovereign country’s rules on transparency.
But other offshoots have emerged – stablecoins, like Tether, and staking through decentralised finance (DeFi), all of which until very recently had no oversight at all. The disasters of 2022 in the crypto world have shown where regulation and oversight are needed, and the UK Treasury has now launched its consultation in this respect.
The single most interesting – and arguably most important – point is that customers will see their assets returned in the event of a crypto business going bust, rather like the £85,000 that you are promised you will get back through the Financial Services Compensation Scheme if a bank goes bust. This change on its own will almost certainly lead to a boom in investing in crypto.
Additionally, in a much-needed change, the promoting of crypto will have to be less ‘get in quick, we’re going to the moon’ and more along the lines of ‘investments can go down as well as up’, as we see with other financial products.
The fact that crypto is extremely volatile will also have to be properly stressed to potential investors. Businesses will have to report to regulators much more frequently and in a straightforward – as opposed to obscure – manner.
Moving on to DeFI and staking – in other words, lending – both will be properly regulated. Market manipulation and wash-trading will basically come under the same rules as they do in conventional financial markets.
Stablecoins will have to prove they have actual cash backing them, or at the very least instantly realisable assets. So-called algorithmic stablecoins – think Luna – are likely to be banned. After all, what is the stability of one coin if it relies on the value of another highly volatile asset?
Alongside this, in 2022, the UK Government asked the Law Commission to make recommendations for reform that would accommodate both crypto-tokens and other digital assets in a way which allows these technologies to grow. They will report later this year and at that point the UK will be at the forefront of crypto legitimacy and security.
If last year was crypto’ annus horribilis, this year is shaping up much more positively. The introduction of proper rules and regulations can only be a positive development, and can feed into the wider ambition of making the UK a world leader in the global crypto market.
Temple Melville is CEO of the Scotcoin Project community interest company (CIC)