The UK Treasury

The UK Treasury has recently released a consultation paper that details new rules for the crypto industry. The proposed framework will be based on the Financial Services and Markets Act 2000, which governs traditional trading venues. As a result, crypto exchanges operating in the UK will need to seek authorization from regulators before they can commence their operations.

The applications submitted by crypto firms to UK regulators must include their business plans, a description of their operations, and an outline of their controls and risk management processes. This is aimed at increasing the accountability and responsibility of crypto firms when it comes to their regulatory requirements.

Crypto custodians, entities that hold crypto assets to protect them from loss or theft, will also be impacted by the new rules. The Treasury has acknowledged that certain adjustments may need to be made to the proposed rules due to the limitations of applying an existing framework to a new asset class. This includes making provisions for unique features of cryptocurrencies such as private keys.

The New Belief

The UK government believes that cryptoassets and their related activities should comply with the same standards as other financial services activities. This is based on the potential risks and benefits of the technology. The establishment of a framework in this area will encourage growth and innovation, giving responsible actors the confidence to participate in the crypto asset markets and investors the assurance to invest in the UK for the long-term. This consultation is the latest stage of the government’s approach to regulating crypto assets and reflects its commitment to setting out proposals for the financial services regulation of crypto asset investment and trading activities. The government is inviting feedback from a wide range of market participants and users.

This consultation builds on previous publications by HM Treasury, including “UK Regulatory Approach to cryptoassets, Stablecoins, and Distributed Ledger Technology in Financial Markets” and “Cryptoasset Promotions”. The Financial Conduct Authority and Bank of England have also released several discussion papers and consultation papers on crypto assets. Additionally, international organizations such as the Financial Stability Board, the Bank for International Settlements, and the Financial Action Task Force are developing global standards for the regulation of crypto assets. This consultation specifically focuses on the future UK regulatory framework for crypto assets in financial services and does not address the wider application of distributed ledger technology or the use of crypto assets outside financial services. Figure 1.A provides a summary of the main initiatives and organizations involved in this area.

New Proposals

The new proposals also suggest measures to prevent market abuse and insider trading. Trading venues will be expected to identify offenders and collaborate with other platforms to blacklist such users. More comprehensive rules for lending platforms are also proposed, which include clear risk warnings for consumers lending to these platforms and clear contractual requirements to protect users in case of insolvencies.

The consultation paper also touches upon the environmental impact of proof-of-work cryptocurrencies such as Bitcoin. The Treasury suggests that current British ESG reporting requirements could be applied to crypto, though this may be challenging due to the decentralized nature of the crypto industry.

The consultation will close on April 30, 2023, after which the Treasury will consider feedback and provide its response. The UK government’s view is that the technology behind crypto assets could bring significant benefits, and with appropriate regulation and safeguards, crypto assets and associated activities can offer new financial services opportunities for users. The government aims to create a regulatory framework that would stimulate growth and innovation in the crypto sector by giving responsible actors the regulatory certainty and confidence to participate in crypto markets, and investors the confidence to invest in the UK for the long-term.

The New Rules

The UK Treasury’s new rules aim to increase the accountability and responsibility of crypto firms and provide a framework that balances the potential benefits of the crypto industry with the risks it poses. The government’s goal is to create a sustainable and innovative crypto industry that offers new financial services opportunities for users and gives investors the confidence to invest in the UK.