The UK Treasury has drafted guidelines to regulate cryptoassets, citing the continued volatility of the market and the collapse of the FTX exchange as key dangers.
The regulations will apply to crypto businesses based in or supplying services to the United Kingdom. In addition to a licence, minimum capital and liquidity requirements would be imposed on businesses.
There is minimal direct global supervision of cryptoassets such as bitcoin, but regulators are taking a closer look after the collapse of FTX last year, which left millions of investors, including some in Britain, with losses of billions of dollars.
“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 regulations would encompass admission to a trading platform, making a public offer, performing payment transactions or remittances, structuring deals, administering a platform, custody, and mining transactions, as well as maintaining a blockchain node.
The Financial Conduct Authority would assess if a foreign operator requires a physical presence in the United Kingdom.
“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, partner at Norton Rose Fulbright law firm.
Currently, crypto businesses are merely required to demonstrate compliance with anti-money-laundering procedures; nevertheless, this has not prevented "black money" from flowing through the sector.
The largest cryptocurrency exchange, Binance, welcomed the public consultation on Wednesday, stating that it has "vocally backed the need for effective and proper regulation to facilitate the mainstream use of digital assets."
The ministry stated that surveys indicate 5-10% of British individuals already possess cryptoassets, an increase of more than 1000% over the past one-two years, and that participation by institutional investors is also expanding.
The sector shrunk substantially last year, with the overall worldwide market capitalisation plunging to below a trillion dollars from approximately three trillion dollars at its height.
Britain had initiated a consultation on regulating stablecoins, a subset of cryptoassets backed by currencies or other assets, in January 2021, but opted to expand the scope to cover the entire crypto industry.
After the three-month consultation period, the FCA will release secondary legislation and comprehensive rule proposals for public consultation later this year.
Britain intends to "recognise" comparable regulations in other nations so that enterprises licenced in other nations can service UK clients without a physical presence.
The European Union is completing its own crypto regulation, the Markets in Crypto Assets Regulation (MiCA).
“The wide scope of the (UK’s) planned set of rules is similar to the EU’s MiCA regulation, yet there are many differences in areas such as exchange or stablecoin regulation,” said Ivan Kachkovski, FX and crypto strategist at UBS.
By fLEXI tEAM