The United Kingdom is aiming to become a hub for cryptocurrency, and the government is currently in the consultation phase, which is set to end in April 2023. With an estimated 5-10% of the British population owning cryptocurrencies, the government is working to establish a clear regulatory framework for crypto assets.
And you know the drill: the clearer the regulatory framework, the higher the institutional investors streaming into crypto, the bigger the potential the crypto market can reach because of those investments. You can read all about it in this previous article.
Without further ado, let’s dive into it. I will summarize the boring draft regulatory framework for you in this article.
Objectives and Principles
The regulations are being developed with four main policy objectives in mind: to encourage crypto innovation, educate consumers about the risks involved, protect financial stability, and maintain market integrity. The framework is being designed with three principles in mind:
- regulations should be equal for equal risk,
- proportional to the specific crypto activity, and
- flexible enough to adapt to changes in the market.
Existing regulations for crypto assets include KYC (know your customer) and oversight by the Financial Conduct Authority (FCA), which has led to some crypto companies leaving the UK.
A second batch of regulations is also in the planning. This will be included in the financial services and market bill and will focus on stable coins and is set to become law later in 2023.
What Qualifies As Crypto Assets
The definition of a crypto asset is a cryptographically-secured digital representation of value or contractual rights that can be transferred, stored, or traded electronically and uses technology such as distributed ledger technology (DLT) to support data recording and storage.
Digital currencies used for payment services fall under a different category, regulated by the financial services and market bill, while non-fungible tokens (NFTs) are currently not included in the regulations.
What The UK Crypto Regulations Will Cover
The proposed regulations cover a range of crypto activities, including initial coin offerings (ICOs), crypto trading, trading cryptos for other assets, crypto lending and borrowing, and crypto custody services.
Decentralized stable coins like DAI will not be subject to stable coin regulations, but they may still be affected if they are backed by a stable coin that requires regulation. The UK is not planning to ban algorithmic stable coins.
For new cryptocurrencies, extensive background checks and detailed information about projects will be required before they can be listed for trading. The regulations for crypto exchanges will include more transparent disclosure requirements, accurate on- and off-chain data reporting, and a bankruptcy process.
Other crypto intermediaries, such as market makers, will face regulations addressing conflicts of interest, capital requirements, and the ability to detect market manipulations. The regulations for crypto custody will adjust existing laws to accommodate crypto assets.
The Challenging Cases To Regulate
To protect against market abuse, regulations will address wash trading and pump and dumps, which are unique threats to the crypto market. However, it is unclear which regulator will be responsible for enforcing these regulations. Regulations for crypto lending and borrowing will include requirements for balance sheet disclosure, collateral disclosure, and clear lending contracts.
The decentralized nature of DeFi (decentralized finance) makes it difficult to regulate, but platforms that are too centralized will face scrutiny. Other crypto activities, such as crypto mining, staking, forks, and miner extractable value, may also be subject to future regulations.
Final Considerations
These regulations are being developed with the intention of supporting a growing crypto market in the UK. While the specific regulations may change, the overall sentiment is bullish for the future of crypto in the UK. Institutional investors will play a large role in the success of the crypto market, and these regulations may act as a catalyst for the next bull market.
Newsletter
Stay up-to-date with the latest developments in the stock and crypto market., fund, and crypto market.
Disclosure
These are unqualified opinions, and this newsletter, is meant for informational purposes only. It is not meant to serve as investment advice. Please consult with your investment, tax, or legal advisor, and do your own research.
No comment yet, add your voice below!