Britain’s finance ministry laid out its first set of rules to regulate cryptoassets on Wednesday, saying ongoing turbulence in the sector and the collapse of exchange FTX highlighted risks that need addressing.
Cryptoassets, such as bitcoin, have little direct regulation globally, but regulators are taking a closer look after the downfall of FTX last year, which left millions of investors nursing losses totalling billions of dollars, some of them in Britain.
“Our view is that this reinforces the case for clear, effective, timely regulation and proactive engagement with industry,” Financial Services Minister Andrew Griffith said in proposals put out to public consultation.
“This includes a proposal to bring centralised cryptoasset exchanges into financial services regulation for the first time, as well as other core activities like custody and lending,” Griffith added.
The new rules would cover crypto-related admission to a trading platform, making a public offer, executing payment transactions or remittances, arranging deals, operating a platform, custody, and mining transactions, or operating a node on blockchain.
The rules will cover crypto firms in Britain or those providing services to the UK. Firms would need a licence, along with minimum capital and liquidity requirements.
It would be up to the Financial Conduct Authority to decide if a foreign operator needs a physical presence in the UK.
“These proposals mark a step-change in the direction of UK regulatory policy relating to cryptoassets and it is now clear that a regulatory wave will hit the sector,” said Albert Weatherill, partner at Norton Rose Fulbright law firm.
Currently, crypto firms need only show they can comply with anti-money-laundering safeguards, though this has not stopped “dark money” flowing through the sector.
Binance, the biggest crypto exchange, on Wednesday said it welcomed the public consultation as it has “vocally supported the need for effective and appropriate regulation to help with the mainstream adoption of digital assets”.
Surveys show that 5-10 per cent of adults in Britain now own cryptoassets, an increase of more than 100 per cent over the past one-two years, with participation by institutional investors also growing, the ministry said.
The sector shrank dramatically last year, with the total global market capitalisation falling to below a trillion dollars from a peak of roughly $3 trillion.
Britain had already launched a consultation on regulating stablecoins, a subset of cryptoassets which are backed by currencies or other assets, in January 2021, but decided to broaden out to include all of the crypto sector.
After the three-month consultation, there will be secondary legislation later this year along with detailed rule proposals for public consultation from the FCA.
Britain plans to ‘recognise’ similar rules in other countries so that firms authorised elsewhere could serve customers in the UK without a physical presence.
The EU is finalising its own set of crypto regulation, the Markets in Crypto Assets Regulation (MiCA).
“The wide scope of the (UK’s) planned set of rules is similar to the EU’s MiCA regulation, yet there are many differences in areas such as exchange or stablecoin regulation,” said Ivan Kachkovski, FX and crypto strategist at UBS.