The U.K. formally laid out plans to regulate the cryptocurrency industry, with the government looking to rein in some of the reckless business practices that emerged over the past year and contributed to the demise of FTX.
In a widely-anticipated industry consultation launched Tuesday, the government proposed a number of measures aimed at bringing regulation of crypto asset businesses in line with that of traditional financial firms.
Among the proposals unveiled Tuesday was a move that would strengthen rules targeting financial intermediaries and custodians that store crypto on behalf of clients.
A big theme that emerged in 2022 was the rise of risky loans made between multiple crypto firms and a lack of due diligence done on the counterparties involved in those transactions.
The U.K. proposals would crack down on such activities, seeking to establish a “robust world-first regime strengthening rules around the lending of cryptoassets, whilst enhancing consumer protection and the operational resilience of firms,” according to a statement out late Tuesday.
“We remain steadfast in our commitment to grow the economy and enable technological change and innovation — and this includes cryptoasset technology,” Andrew Griffith, economic secretary to the Treasury, said in a statement.
“But we must also protect consumers who are embracing this new technology — ensuring robust, transparent, and fair standards.”
The collapse of FTX has added urgency to global regulators’ attempts to govern the regulation-averse crypto space. The European Union and the U.S. have already made proposals of their own to improve consumer protections in crypto.
In a Dec. 2 speech, Griffith said that “recent events in the crypto market reinforce the case for timely, clear and effective regulation.”
The implosion of FTX, which allegedly used customer money to make risky loans and trades, set off a chain reaction of bankruptcies for digital asset lending firms with exposure to the crypto giant, including BlockFi and Digital Currency Group’s Genesis Trading.
The proposals unveiled Tuesday would also enforce tougher transparency requirements on crypto exchanges to ensure they publish relevant disclosure documents and set out clear admission requirements for trading digital tokens.
Another measure would relax strict rules on crypto advertisements, allowing firms with Financial Conduct Authority registration to issue their own promotions while the broader crypto regime is being introduced.
The regulatory move comes as crypto firms in both the U.K. and beyond are feeling the chill of a deep downturn known as “crypto winter.”
Companies are seeing their valuations slashed by investors after the blowup of FTX and a slump in crypto prices, while the industry has also been plagued by numerous rounds of layoffs. Last week, London-based crypto exchange Luno cut 35% of its workforce in a move impacting over 330 roles.
Regulation takes time. It will likely take years before the measures are approved by Parliament. The Financial Services and Markets Bill, which would recognize crypto assets as regulated products, is still making its way through Parliament. The law aims to make the country’s financial sector more competitive post-Brexit.
Nonetheless, even the simple display of being seen as taking action is important, according to some industry executives.
“Having a regulatory roadmap or regulatory direction of travel is going to be super useful for the UK in terms of being a crypto hub,” Julian Sawyer, CEO of Standard Chartered-backed crypto custody services firm Zodia Custody, told CNBC Tuesday in an interview.
Sawyer, who formerly co-founded British fintech firm Starling and led international expansion for crypto exchange Gemini, said it was also important to ensure “general alignment between global markets in terms of the approach to digital assets.”
He noted the European Union has gotten ahead of the game with its Markets in Crypto-Assets law, which is expected to come into force in 2024.
Bitcoin, which has stealthily climbed about 40% since the start of 2023, was trading flat Wednesday at a price of $23,103.
Global crypto hub ambitions
The U.K. wants to become a leader in crypto and blockchain technology on the global stage. However, those ambitions, which were first signposted in April 2022, have been beset by a chaotic revolving door of governments.
Rishi Sunak, who took the reins as U.K. leader in October 2022, is seen by market players as a crypto-friendly prime minister, having previously said he’s “determined” to make the U.K. “the jurisdiction of choice for crypto and blockchain technology.”
As London looks to compete with EU financial hubs after Brexit, crypto could be a way for it to improve its chances, industry insiders said previously.
“There is an opportunity to provide clarity to the industry and allow it to play its role in achieving their mandate to encourage businesses to invest, to innovate, and to create jobs in the U.K.,” Jordan Wain, U.K. public policy lead at Chainalysis, told CNBC in November.
Sunak’s administration will consult on plans to introduce a new set of rules tailored to crypto companies, with a view to closing the consultation by Apr. 30, after which it will formulate more detailed rules.