UK to regulate cryptoassets to address turbulence

In a significant increase in oversight, HM Treasury has set out draft rules to regulate cryptoassets, citing ongoing turbulence in the sector and the collapse of exchange FTX as risks that need addressing.

Cryptoassets, such as bitcoin , have to date attracted little direct regulation globally, but regulators are increasingly taking notice following the high profile collapse of FTX last year.

“Our view is that this reinforces the case for clear, effective, timely regulation and proactive engagement with industry,” Financial Services Minister Andrew Griffith said in proposals put out to public consultation.

“This includes a proposal to bring centralised cryptoasset exchanges into financial services regulation for the first time, as well as other core activities like custody and lending,” Griffith added. 

The new rules would cover crypto-related admission to a trading platform, making a public offer, executing payment transactions or remittances, arranging deals, operating a platform, custody, and mining transactions, or operating a node on blockchain.

Currently, crypto firms need only show they can comply with anti-money-laundering safeguards.

“These proposals mark a step-change in the direction of UK regulatory policy relating to cryptoassets and it is now clear that a regulatory wave will hit the sector,” said Albert Weatherill, financial services partner at law firm Norton Rose Fulbright.

“A number of these proposals are well trailed, but others perhaps less so and it is evident that the shadow cast by high profile failures through 2022 has influenced the extent and pace of implementation of these measures. Interestingly, but as expected given the general divergence agenda, these proposals do not constitute an entirely new regime in the same way that the European Commission has approached MiCA, rather HMT plans to work with what we already have and extend our existing framework to this asset class.”

“Ultimately, only time will tell whether the measures balance the drive for innovation and the oft-trumpeted growth agenda against the clear need to mitigate risks of consumer harm and financial stability, but it is readily apparent that those players who can best adapt to this new landscape will have an inevitable competitive advantage in the ‘flight to quality’ that is expected to play out through the course of this year.”

Binance, the largest crypto exchange, said it welcomed the public consultation as it has “vocally supported the need for effective and appropriate regulation to help with the mainstream adoption of digital assets”.

The UK had launched a consultation on regulating stablecoins, a subset of cryptoassets which are backed by currencies or other assets, in January 2021, but has now decided to broaden the review out to include all of the crypto sector.

After the three-month consultation, there will be secondary legislation later this year along with detailed rule proposals for public consultation from the Financial Conduct Authority.

Cryptoassets, such as bitcoin , have to date attracted little direct regulation globally, but regulators are increasingly taking notice following the high profile collapse of FTX last year.

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