UK crypto regulation proposals: a move away from the “wild west”

The Treasury has launched a consultation on crypto asset activities in a welcome step forward to regulating an industry that has been called the “wild west” since its arrival on the finance scene. In this article, our cryptocurrency partner Louise Abbott outlines what is being proposed and the potential impact on the industry.

Regulating the crypto industry

The ambitious consultation proposes a staged introduction to the new regulatory regime for the crypto sector. The Government wants to establish the UK as “the most open, well-regulated and technologically advanced capital market in the world”. That is a big ask, and a long way from where we are, but most certainly heading in the right direction. By consulting with the industry, this should allow the Government to implement significant changes.

The proposals are pursuing four overarching policy objectives:

1. encourage growth, innovation, and competition in the UK
2. enable consumers to make well-informed decisions, with a clear understanding of the risks involved
3. protect UK financial stability, and
4. protect UK market integrity.

The proposals apply existing FCA frameworks to crypto assets, and this presents some challenges for multiple reasons. For a start, the crypto space is advancing rapidly. Regulators are struggling to acquire the skills to keep up pace given stretched resources and many other priorities. Monitoring crypto markets is difficult because data comes from a variety of sources, and regulators find it tricky to keep tabs on thousands of investors, both legitimate and those from organised crime, the latter being those who may not be subject to typical disclosure or reporting requirements.

Rules on crypto asset promotions being fair and clear, enhancing data reporting, and implementing new regulations to prevent assets being artificially inflated before a sale will all be consulted on. It will certainly mitigate significant risks of fraud, and also seeks to protect consumers who are using this technology. Having a solid regulatory framework is fundamental to win back consumer confidence after a turbulent year and multiple bankruptcies within the industry.

While technology won’t be the sole answer, addressing the cyber security problem requires a combined approach using technology, insurance, risk management, FCA oversight and cultural changes. The proposed regulations will not be an insurance policy for consumers that fraud or loss won’t occur, but it is a major step forward towards mainstream financial services. This space needs to be able to grow in a safer environment, that has more stability but still allows the industry to grow. Crypto remains the future and it is important that industry experts work with the Government to shape the regulatory regime and steer crypto through the significant changes to be made.

The consultation is open until 30 April 2023.

If you have any questions on the crypto regulation proposals, please contact Louise Abbott.