🇬🇧 Crypto Regulation Wave in the UK

2024 is "the year"?

Dec 02, 2023

Hello again from Web3 Brew, this is Nesibe.

As we edge closer to 2024, the air is thick with anticipation and a bit of uncertainty in the crypto world. This isn't just another year; it's shaping up to be a watershed moment for digital currencies globally. With the European Union's Markets in Crypto-Assets (MiCA) regulation shaping the broader European landscape, the UK is gearing up to carve its path in the crypto regulatory space.

🇬🇧 UK's Crypto Economy

The UK's crypto sector is a standout in the global digital finance landscape, marked by significant growth and innovation. With a turnover of £81.99 billion, it ranks as the 18th largest in the Real-Time Industrial Classification (RTIC) and is among the fastest-growing sectors in the UK, according to data from TheDataCity.

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This sector is a beacon for investors, drawing top venture capital funding and substantial Innovate UK grants, reflecting strong government support and confidence in the UK's crypto market. The diverse ecosystem, comprising 1,476 companies in areas like Blockchain, Investment, and Legal Services, showcases the sector's dynamic nature and potential for technological advancement.

Projected to reach a value of around £88.8 billion by 2027, the UK's crypto economy is growing in financial terms and expanding its influence and capabilities. This growth is significant in the Central, Northern, and Western European (CNWE) region, where the UK leads with an estimated US$252.1 billion in crypto payments received last year, as reported by Chainalysis.

The sector's focus on Decentralized Finance (DeFi), which accounts for over half of the crypto value received, highlights the UK's commitment to innovative financial solutions. This aligns with global trends towards financial democratization and positions the UK as a key player in shaping the future of digital finance.

As the UK continues to lead in the global crypto wave, the evolving landscape underscores the need for comprehensive regulation. This will ensure the responsible harnessing of the sector's potential and maintain the UK's leading role in the digital finance arena.

📑 Wrapping Up: Recent Developments

Since the formation of the Cryptoassets Taskforce in 2018, which brought together HM Treasury, the Financial Conduct Authority (FCA), and the Bank of England (BoE), the focus has been on harnessing the potential of crypto technology and investment.

A Two-Pronged Approach

In the UK, the regulation of crypto is currently governed by two distinct frameworks, reflecting a nuanced approach to this evolving sector.

Money Laundering Risks Framework: This applies universally to all crypto, focusing on the activities involving these assets and their associated money laundering risks. Firms operating within this scope are mandated to register with the FCA under the Money Laundering Regulations (MLRs).
Specified Investment Framework: The second framework hinges on the specific characteristics of a cryptoasset. If a cryptoasset aligns with the definition of a “specified investment” under the Regulated Activities Order (RAO), it falls under this regulatory umbrella.

Additionally, the Financial Services and Markets Act 2000 (FSMA) and the Financial Promotion Order 2005 (FPO) play crucial roles. They regulate the advertisement of products or activities related to crypto, especially if they have an impact within the UK. This regulation is contingent on whether these activities are classified as “controlled investments” or “controlled activities” under the FSMA.

Recent Updates and Strategic Timing:

A Strategic Approach Amid Global Shifts

The UK government is gearing up for a significant legislative push in the crypto sector, aiming to introduce comprehensive laws by 2024. Their ongoing consultation is set to “revolutionize” crypto regulation. It plans to extend the Financial Services and Markets Act's (FSMA) reach to include crypto activities in the UK, aiming for stronger consumer protection and uniform standards. This approach aligns with the principle of 'same risk, same regulatory outcome', using existing frameworks. However, the specifics of these upcoming UK laws remain under wraps, creating a sense of anticipation and speculation within the crypto community.

In contrast, the EU has already laid down a clear regulatory path with its MiCA framework, setting a precedent for digital asset regulation, including a licensing process for crypto firms. The UK's strategy appears to be tactically aligned with observing MiCA's rollout and impact. This period of observation could offer critical insights, helping UK regulators to refine their approach by learning from the EU's experiences.

Recent months have seen significant regulatory developments in the UK, these steps indicate a growing momentum in the UK's regulatory landscape:

Implementation of the Travel Rule: The UK has enforced the Travel rule for digital asset transactions, enhancing transparency and accountability in crypto dealings.
Regulating Financial Promotions: A new rule outlines how digital assets are promoted, aiming to protect consumers from misleading advertisements and ensure responsible marketing practices.
DSA Framework and Systemic Failures: The UK has confirmed its approach to the Digital Services Act (DSA) framework, with legislation expected by early 2024. This move particularly emphasizes the role of fiat-backed stablecoins, recognizing them as viable payment options for both consumers and institutions.
Financial Services Framework for Digital Assets: Plans are in place to introduce a financial service-like framework for digital assets by 2024. This innovative approach seeks to integrate digital assets into existing financial regulations, balancing innovation with consumer protection.
Enhanced Law Enforcement Powers: New laws have been passed, expanding the powers of law enforcement agencies in dealing with digital assets linked to illicit activities. These provisions, effective in early 2023, will enable authorities to freeze, seize, and recover digital assets, thereby combating economic crime more effectively.
Additional Key Developments
- FSM Bill Becomes FSM Act: This sets new powers under the Designated Authorities Regime and brings stablecoins into the regulatory perimeter. It also extends the financial promotions regime to digital assets.
- UK Law Commission's Final Report on Digital Assets: Recommends legislation for a new category of personal property rights, a “digital object,” and a legal framework for security over cryptoassets.
- AML/CFT Consultation: Launched to consider reforms that strengthen AML/CFT supervision, which is crucial for the digital assets sector.
- MOU UK x EU: Formalizes future cooperation and information sharing on financial services regulation, including crypto.
FCA and BoE's Latest Publications
This month, the UK Government released new publications on digital assets:
- FCA on Non-Systemic Stablecoins: The Financial Conduct Authority outlined its approach to fiat-backed stablecoins, marking a significant step in the UK's digital asset regulation plan.
- BoE on Systemic Payment Systems Using Stablecoins: The Bank of England's proposals for fully backed assets aim to bolster confidence in the value of stablecoins, although achieving these standards may be challenging.

A Bright Future with Clouds on the Horizon:

The UK's proactive steps in digital asset regulation have garnered support from significant business entities, with firms like a16z crypto establishing their base in the UK, PayPal gets crypto green light in UK as sets up post-Brexit base, and others receiving FCA registrations. However, the regulatory landscape also brings complexity and cost, leading some firms to halt UK operations and banks to restrict customer access to digital assets due to fraud concerns.

Conclusion:

The UK Government, including HM Treasury, the BoE, and the FCA, has shown a commitment to creating a well-regulated environment for digital assets. This approach aims to encourage firms, serve as a model for other jurisdictions, and ensure consumer safety. As the UK closely observes the EU's MiCA implementation, it strategically positions itself to learn and adapt, potentially setting a global standard for digital asset regulation.