A Closer Look at the Crypto Regulations Proposed in the UK

The UK is considering introducing crypto regulation to protect its consumers and promote the growth of its economy.

As the country strives to become a leading hub in the crypto industry, regulation is deemed necessary. Incidents such as the collapse of FTX have highlighted the urgency of regulation in this area. A clear and
transparent regulatory framework will reduce the risks associated with crypto investments for consumers. The proposed regulation is still in the consultation stage and is expected to be finalized by the end of April.

Objectives of UK crypto regulation

• To encourage crypto regulation
• Educate consumers about the risks associated with crypto investments
• Preserve the financial stability of the UK
• Preserve market integrity of the UK

The proposed crypto regulations will be rolled out in two phases when they become law. Stablecoins will be addressed in the second phase, which will happen later in the year or early next year. At the moment, NFTs are not part of crypto regulation.

Instead, the UK has categorized crypto into different categories: Exchange tokens, algorithmic tokens, governance tokens, and fan tokens. Bitcoin and Ethereum fall under exchange tokens.

Initial governance method used

Crypto activities are currently not regulated by the Financial Conduct Authority (FCA). Decentralized finance makes it even harder to regulate, given its decentralized nature. Despite this, the UK introduced KYC and AML requirements for crypto exchanges in January 2020, requiring all exchanges to register with the FCA and subjecting violators to two years imprisonment. Many companies found the process lengthy and cumbersome, leading to some companies leaving the UK.

A brief summary of the proposed  regulation

Crypto assets activities

They were the main target of the regulation. There is, however, one rule for all cryptos. This may be ridiculous as the crypto options are many. It would also be better if the regulation would be tailored according to risk. It is hard to tell the crypto activities occurring within Britain’s borders.

Crypto regulation will apply to crypto assets occurring within the UK. There is still the risk of UK citizens acquiring crypto from less regulated areas outside the UK.

As mentioned earlier, the regulation of crypto assets will take place in two phases. The activities under phase two will include ICOs, crypto borrowing and lending, and crypto custody services.

Decentralized coins such as Dai will not be subject to regulation. They will be treated as unbanked assets like BTC and ETH since they are unbanked. Dai may be affected since it is backed by USDC - a stablecoin requiring regulation. The UK is not planning to ban algorithmic stablecoins. Decentralized, algorithmic, and NFTs are favored as the regulation only applies to cryptos, not crypto coins and tokens. Regulations will come later.

Regulations related to new crypto

New crypto includes coins and tokens listed on exchanges and not necessarily the creation of coins and tokens. According to the new requirements:

• Investors are given accurate info
• Investors are compensated if misled
• Forging crypto offerings should be banned
• Exchanges to do due diligence on all cryptos they list and give detailed info to users
• Exchanges act as issuers of crypto with no issuers such as BTC.

Cryptos already listed have not been addressed. It is unclear if they will be subject to the same disclosure rules.

Regulations on Exchanges

Exchanges will be required to:

• Be More liquid and be resilient
• Be More Transparent
• Have Accurate on and off-chain data

Exchanges will also need to do detailed data reporting, and establish a bankruptcy process.

Regulation on other crypto intermediaries such as market makers

They will need to address conflicts of interest, sufficient liquidity, and detect market manipulation. Generally, market makers have the same requirements as exchanges.

General market abuse requirements

In crypto, there are many market abuse incidents that are not covered under financial regulation. The new regulation will control market abuse such as pump-and-dump schemes and market manipulation. Defaulters will face punitive action. The public will also be taught how to identify market manipulation.

Regulation of crypto borrowing and lending

Some exchanges such as FTX were using customer funds and illiquid tokens as collateral for loans because crypto lending and borrowing are not regulated. The new regulation will ensure risk disclosure, balance sheet disclosure, and clear user contracts.

Conclusion

The United Kingdom is currently undergoing the consultation phase for the proposed crypto regulation aimed at protecting consumers, boosting the economy, and maintaining the financial stability and market integrity of the country. The regulation will aim to educate consumers about the risks associated with crypto, provide accurate information to investors, and control market abuse. The new regulation will bring clarity to the crypto industry and enhance the UK's position as a crypto hub. Overall, the proposed crypto regulation is a significant step forward for the UK in establishing a fair, transparent, and secure environment for the growth and development of the crypto industry.