It turns out the UK still wants to be a “global crypto hub”, which feels a bit like volunteering as the landing zone for the fiery wreckage of a plane crash.
Cryptocoins, crypto hype and the crypto bros went down in flames last year. About $2.2tn in market capitalisation of cryptoassets vanished globally in a 75 per cent drop from the November 2021 peak. There have been multiple failures, scandals or frauds, involving so-called stablecoins such as Terra, lending platforms including Celsius, and of course the collapse of Sam Bankman-Fried’s FTX crypto empire.
One school of thought is to let it all burn. The cryptoasset world, while interconnected within its own ecosystem of true believers, managed to implode without causing much aggro for the wider financial system. The message from regulators has generally been that you could lose all your money in this stuff.
But as this week’s government’s consultation makes clear, crypto is going to be regulated — and in a broad way. Up to a tenth of UK adults are estimated to own cryptoassets, says the government, a figure that has doubled over the past couple of years. “By taking a wide set of powers, the UK is trying to future proof itself for a rapidly changing market,” said EY’s Chris Woolard, formerly interim boss of the Financial Conduct Authority. “The question is whether there are things that should be done short term to protect consumers and make space for the industry to develop.”
Frankly, the drama of the last year has done the UK a favour in its policymaking. The worst of the political salivating over being a world-beating crypto innovator is gone. City minister and enthusiast Andrew Griffiths, while noting at a recent select committee hearing that EY had suggested a £60bn opportunity, couched the process in terms of being open-minded about new technology. The regulator and the politicians are, if not on the same page, apparently reading a similar (e) book.
Perhaps as a result, the framework for regulation in the UK looks broader and tougher than expected. Both the list of assets in scope of regulation, which for example include non-fungible tokens, and the activities cast a wide net. Geographically the UK watchdogs could also have a long reach: the intention is to oversee crypto activities provided in or to the UK, with seemingly few exceptions.
The proposals don’t always obviously live up to the aspiration of “same risk, same regulatory outcome”. The UK plans to fit crypto into its existing financial services regulation, unlike the EU’s bespoke approach.
That is partly pragmatism: where there is no issuer as such for a cryptoasset, as with bitcoin, trading venues would take on the disclosure responsibilities, as well as performing due diligence.
Elsewhere it is more questionable: businesses that have registered with the FCA for anti-money laundering standards will be a given a temporary exemption from crypto marketing restrictions. This may prompt more to jump through the AML hoops. But banks or stockbrokers aren’t generally offered a pass on one set of rules because they filled in the forms on a totally different matter.
A country with a recent preoccupation with being first to regulate has shown some of the virtues of coming in behind. “The UK has the benefit of second-mover advantage,” said George Morris, a partner at law firm Simmons and Simmons. “It has tried to plug the gaps seeing what the EU has done.” Elements also home in on recent ructions, such as the discussion of custody requirements for cryptoassets including restrictions on co-mingling, or the possibility of capital and liquidity requirements for crypto lenders.
This is simply the consultation on what will be a lengthy legislative process. But it could also result in a repeat failure by the industry: so far, 85 per cent of crypto companies have failed to make the grade on the FCA’s anti money laundering standards. “There was a complete underestimation of what is required to get regulatory approval,” said Blair Halliday, UK managing director of crypto exchange Kraken. “I don’t think it’s unreasonable to expect a similar fallout from this.”
For those who would still rather leave crypto to burn far outside the remit of regulators, don’t worry: on the current evidence, not many may be invited in.
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