The UK’s proposed crypto regulatory regime has been a hot topic of discussion lately, and for good reason. It’s a divisive issue, with some people supporting it and others opposing it. The full impact of such sweeping regulations on the market is not yet fully understood, but one thing is certain: the UK’s crypto industry is poised for significant change.
In October 2023, HM Treasury published its long-awaited response to its consultation and a call for evidence on a proposed financial services regulatory framework for crypto assets. The consultation set out extensive proposals for the UK’s crypto regime, including plans to regulate core activities such as custody and lending, and to bring centralised crypto asset exchanges into financial services regulation for the first time.
While the vast majority (80%) of respondents were positive about the proposals, 10% had mixed feedback, and the other 10% was ‘largely critical’ about the plans. The main objections were from those who fundamentally disagreed with bringing cryptoassets within the financial services regulatory perimeter. Objections fell into three camps: crypto should either be banned; treated in line with gambling regulation; or regulated on assets, not activities.
During the consultation process, 20 themes and topics were identified, and it’s worth noting the five most prominent among respondents:
- Clarify the proposed treatment of NFTs and utility tokens, especially on what constitutes a financial services’ use case.
- Consider the treatment of overseas firms, including making clear when to apply Overseas Person Exclusion, reverse solicitation, and intra-group exemptions.
- Delineate phase 1 vs phase 2 activities in more detail and consider potential challenges for firms and consumers.
- Make stronger distinctions between wholesale versus retail i.e., services provided to professional investors versus retail consumers.
- Provide more clarity on the timelines for phase 1 and 2 and seek to accelerate the overall implementation programme of the new regime.
Given the diverse range of consultation responses, it’s not surprising that a phased approach is required. The UK has set its sights on becoming a world leader in crypto asset technology and innovation, and the future could be bright for crypto asset service providers looking to operate and grow in the UK. However, for any regulatory framework to have a fighting chance of being effectively implemented, ease of interpretation is generally a prerequisite. Regulators clearly have their work cut out.
Andrew Griffith MP, Economic Secretary to the Treasury, spoke positively of the invaluable lessons that industry engagement during the consultation provided the government.
He said: “‘With the future regulatory framework now taking clear shape and the Financial Services and Markets Act now passed, the UK is the obvious choice for starting and scaling a crypto asset business.”
This statement shows strong support for the UK crypto industry.
The latest developments are indeed music to the ears of traditional financial institutions, as clear rules for conducting crypto business in and out of the UK provides a level of certainty not yet demonstrated by the jurisdiction.
However, not all firms have the runway required to adapt to significant regulatory change. Without additional support and funding, smaller crypto asset firms may have no option other than to cease operating in the UK, with many having already chosen to move their operations offshore. Dubai is particularly benefiting from UK departures.
With so much at stake, it’s imperative that regulators continue to engage in regular dialogue with industry thought leaders.
Were we to see regulation that ultimately alienates promising crypto start-ups, innovators will seek a new home and many opportunities afforded by this emerging asset class will be lost.
Conversely, should the finalised regime be balanced, transparent, and effective, the UK will have a chance to regain lost ground.
Jason Tucker-Feltham is Global Head of Crypto and Fintech at IDnow