Cryptocurrency and cryptoassets are terms that refer to a broad and diverse range of digital instruments that use cryptography to secure transactions and control the creation of new units. Some of the most well-known examples are Bitcoin and Ether, which are unbacked by any physical asset or central authority and operate on decentralised networks of computers. However, there are also other types of cryptoassets, such as stablecoins, which are pegged to another asset or basket of assets, such as fiat currencies or commodities, to reduce volatility and increase usability.
The cryptocurrency and cryptoasset market has grown rapidly in recent years, reaching a total market capitalisation of over $2 trillion in April 2023. The market offers potential benefits for innovation, competition, financial inclusion and efficiency, but also poses significant risks for consumers, investors, financial stability, market integrity, monetary policy and the environment. These risks stem from the high volatility, complexity, opacity, fraud, cyberattacks, money laundering, tax evasion and environmental impact of some cryptoassets and related activities.
Given the cross-border nature and fast evolution of the cryptoasset market, there is a need for a clear and consistent regulatory framework at the national and international level. However, the current regulatory landscape is fragmented and uncertain, with different jurisdictions applying different definitions, classifications and rules to cryptoassets and related activities. This creates confusion for consumers and businesses, hampers innovation and growth, and undermines trust and confidence in the market.
The UK Financial Services and Markets Bill
The UK Financial Services and Markets Bill is a draft law that aims to update the UK’s financial regulatory framework after leaving the European Union (EU) and to address emerging challenges and opportunities in the financial sector. The bill was introduced in Parliament on 21 October 2022 and is expected to be passed by spring 2023.
One of the main objectives of the bill is to provide a comprehensive and robust regulatory regime for cryptocurrency and cryptoasset activities in the UK. The bill includes an amendment proposed by the UK financial services minister Andrew Griffith that would give the government the power to regulate all cryptoassets, not just stablecoins, as originally planned. The amendment would clarify that the existing powers relating to financial promotion and regulated activities can be used to regulate cryptoassets and activities relating to cryptoassets.
The bill would give the Financial Conduct Authority (FCA), the UK’s financial regulator, the authority to oversee the promotion of cryptoassets and to ensure that they are fair, clear and not misleading. The bill would also give the Bank of England (BoE), the UK’s central bank, the responsibility to create a regulatory framework for systemic digital settlement assets (DSA), which are a new term for stablecoins that have the potential to pose significant risks to financial stability or monetary policy.
The bill would place responsibility on crypto trading ventures (CTV), such as exchanges or platforms that facilitate transactions or trading of cryptoassets, for defining the detailed content requirements for admission and disclosure documents. These documents would provide information on the characteristics, risks and rights associated with different types of cryptoassets. The bill would also strengthen the rules around financial intermediaries (FIs) and custodians (Cs), which have responsibility for facilitating transactions and safely storing customer assets.
The bill would also introduce a new crypto market abuse regime (CMAR) to prevent insider dealing, market manipulation and dissemination of false or misleading information in relation to cryptoassets. The bill would also require CTVs, FIs and Cs to comply with anti-money laundering (AML) and counter-terrorism financing (CTF) rules, as well as operational resilience standards.
The Benefits of Regulating Cryptoassets
The UK’s approach to regulating cryptoassets aims to balance the potential benefits of innovation and growth with the protection of consumers, investors and financial stability. By providing clarity and certainty to consumers and businesses, the regulation would enhance trust and confidence in the market. By setting fair and robust standards for transparency, disclosure, authorisation and supervision of transactions, the regulation would ensure financial stability and consumer protection. By preventing market abuse, money laundering, tax evasion and environmental harm, the regulation would promote market integrity and social responsibility.
As one of the leading global financial centres, the UK has an opportunity to set an example for other jurisdictions and to influence the development of international standards and cooperation on cryptoasset regulation. By embracing technological change and innovation, the UK can also benefit from the economic opportunities and competitive advantages that cryptoassets offer.
The Reaction of the Crypto Industry
The crypto industry has reacted to the UK’s plans for regulation with a mix of support and scepticism. Some industry players have welcomed the government’s intention to provide clarity and certainty to the market, as well as to foster innovation and growth. They have also praised the UK’s pragmatic and proportionate approach, which recognises the diversity and potential of cryptoassets, rather than imposing a one-size-fits-all regime.
For example, Changpeng Zhao, the CEO of Binance, one of the world’s largest cryptocurrency exchanges, said on Twitter: “Don’t fight crypto, regulate it. This is a better option for world governments as digital currencies become more mainstream.” He also said that he was “happy to see the UK taking a proactive approach to crypto regulation” and that he looked forward to “working with regulators and policymakers to build a sustainable future for this industry”.
However, some industry players have also expressed concerns about the possible impact of regulation on innovation, competition and consumer choice. They have argued that regulation could stifle creativity, impose unnecessary costs and barriers to entry, and favour incumbents over newcomers. They have also warned that regulation could drive some crypto businesses and users to offshore jurisdictions that offer more favourable conditions.
For instance, John O’Reilly, the founder and CEO of Bitstamp, another major cryptocurrency exchange, said on Twitter: “While I appreciate the UK’s efforts to provide clarity and certainty to the crypto market, I fear that some of the proposals could have unintended consequences for innovation and competition. Regulation should be balanced and proportionate, not overly restrictive or prescriptive.” He also said that he hoped that the UK would “engage with the industry and listen to its feedback before finalising its regulatory framework”.
The Relationship Between Regulated Cryptoassets and Monetary Policy
One of the key challenges that regulation of cryptoassets poses is how to deal with their implications for monetary policy. Monetary policy is the process by which central banks influence the supply and demand of money in an economy, in order to achieve their objectives of price stability and economic growth. Central banks typically use interest rates, quantitative easing and forward guidance as their main tools of monetary policy.
However, cryptoassets could potentially affect the effectiveness and transmission of monetary policy in various ways. For example, cryptoassets could reduce the demand for central bank money and weaken its role as a unit of account, medium of exchange and store of value. Cryptoassets could also increase the volatility of exchange rates and inflation expectations, as well as create financial stability risks due to their high leverage, contagion and spillover effects.
Therefore, regulation of cryptoassets needs to take into account their potential impact on monetary policy and coordinate with central banks. The UK Financial Services and Markets Bill recognises this challenge by giving the BoE the responsibility to create a regulatory framework for systemic DSA (Digital Settlement Assets), which are stablecoins that could pose significant risks to financial stability or monetary policy. The bill also requires Crypto Trading Ventures (CTVs), Financial Intermediaries (FIs) and Custodians (Cs) to comply with any rules or directions issued by the BoE in relation to DSA.
The BoE has stated that it supports innovation in payments and welcomes the potential benefits of stablecoins for efficiency and inclusion. However, it has also stressed that stablecoins must meet equivalent standards to those expected of commercial bank money in relation to stability of value, robustness of legal claim and ability to redeem at par in fiat. The BoE has also said that it is exploring the case for issuing its own central bank digital currency (CBDC), which would be a new form of digital money issued by the BoE and accessible to households and businesses.
In Summary
The UK Financial Services and Markets Bill is a draft law that aims to provide a comprehensive and robust regulatory regime for cryptocurrency and cryptoasset activities in the UK. The bill seeks to balance the potential benefits of innovation and growth with the protection of consumers, investors and financial stability. The bill also takes into account the implications of cryptoassets for monetary policy and coordinates with the BoE. The bill is expected to be passed by spring 2023, after a consultation period with stakeholders. The bill represents a significant step forward for the UK’s approach to regulating cryptoassets, which could set an example for other jurisdictions and influence the development of international standards. If and when the bill passes into UK law the next task for the crypto industry will be to see how it dovetails with the EU’s Markets in Crypto Act, especially in relation to distinguishing between different types of stablecoin.
