Financial advisers and lawyers have welcomed the UK government’s plans to regulate the crypto sector, which come amid turmoil in digital asset markets and calls for consumer protection following industry scandals.
The Treasury this week announced plans for new rules governing the issuance, lending and trading of crypto tokens. If implemented, crypto exchanges would have to ring fence retail funds in the face of insolvency, while undertaking due diligence and monitoring of assets listed on their platform.
The measures build on an earlier government initiative to regulate advertisements for crypto and bring the market into line with the wider regime for financial assets, including a requirement for “clear, fair and not misleading” promotions.
“Proposals are ambitious and a step in the right direction, but we’re talking a couple of years before this is implemented,” said Louise Abbott, a crypto fraud lawyer at Keystone Law. She noted measures would “tighten the regime around who is able to run these organisations”.
Planned regulations will make it more difficult to operate a crypto business, with retail investors benefiting from greater transparency over transactions and improved safeguarding measures.
Crypto companies will have to be registered with the Financial Conduct Authority. But with only a small number having done so, crypto businesses already registered for anti-money laundering purposes will be temporarily permitted to promote their services.
Crypto UK, the industry body, welcomed this “bespoke exemption” which would otherwise have seen crypto companies facing “a de facto ban” on promoting products in the UK.
Measures are to be phased in, with legislation covering stablecoin, tokens pegged in value against a fiat currency, proposed for later this year. Regulation covering broader activities such as trading are planned for soon afterwards.
The FCA has also been asked to consider what protections should be made available in the future under the Financial Services Compensation Scheme.
The latest plans follow a turbulent period for the sector in which a number of lenders and exchanges such as Celsius Network, FTX and Voyager Digital fell into difficulties, with the fallout from these events denting confidence in cryptocurrencies.
Abbott, who represents a number of clients who lost money following the collapse of FTX, US entrepreneur Sam Bankman-Fried’s popular crypto exchange, said the anonymity associated with crypto assets was attractive to users but efforts to track transactions would deliver a balance of protection.
FTX’s collapse amid allegations that it misused customer funds to prop up its venture capital arm has accelerated calls for regulation.
Though FTX was not registered in the UK at the time of its collapse it was in talks with the Financial Conduct Authority for licence approval as late as September. At the time, the regulator warned UK investors against using the exchange, stating it had targeted customers without authorisation.
Regulators have struggled to balance risk in the sector, with the FCA’s chief executive Nikhil Rathi revealing in December that 85 per cent of companies applying to join the regulator’s crypto register did not meet minimum money laundering standards.
Regulation will increase the barrier to entry for retail investors, according to Nimesh Shah of Blick Rothenberg. The accountancy firm’s chief executive said the bottom line of exchanges would be affected by regulation, with fees passed on to investors acting as a deterrent.
He added: “The choice of exchanges will be naturally diminished and minimums will increase . . . some will consider whether it is still a viable proposition.”
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