Chancellor Rachel Reeves last week unveiled draft legislation for a landmark bill that will define the regulatory landscape for cryptoassets in the UK.
The upcoming crypto bill has been long requested by the industry as businesses seek clarity for approved practices and regulators seek better ways to protect consumers from high-risk investments and scams.
The final bill, set to be introduced to parliament at an unknown date, is not yet complete, with the Treasury taking views from the industry first. However, the draft is the biggest indicator yet of what a regulated cryptoasset industry in the UK will look like.
So, what can the industry expect from the crypto bill?
Difficult to define
One of the reasons it has been so hard for watchdogs to monitor the industry within existing financial regulation is the term ‘cryptoasset’ itself can be subject to interpretation.
Therefore, the Treasury is starting with definitions that will clearly distinguish different elements of the sector.
The draft bill has introduced specific definitions for “qualifying cryptoassets” that include tradeable, fungible cryptocurrencies such as Bitcoin, as well as stablecoins which are cryptocurrencies pegged to the value of a fiat currency.
It does not include assets that come under existing forms of regulation, such as a crypto token that represents company shares or digitally held versions of fiat currencies.
The government has claimed it can establish a lucrative crypto sector in the country, but its definitions are in place to ensure the focus is on versions of cryptoassets that are more functional as they can hold a relatively stable value.
The draft also classifies qualifying assets as specified investments, which brings the trading of cryptoassets under existing financial regulation – the Financial Services and Markets Act 2000.
The definition of qualifying cryptoassets was described by Przemysław Kral, chief executive of the exchange service Zondacrypto, as the “most important” element of the legislation.
“Clear definitions are needed in order for the proper functioning of regulations,” Kral told UKTN.
Kral noted that the proposals for UK crypto rules position the country in a regulatory “middle ground” between the US – which is “starting to develop its rules from scratch” and the EU with a “bespoke, several hundred pages long piece rulebook”.
Authorisation needed
An unsurprising feature of the draft legislation is that various activities within the industry will officially become regulated, meaning they will require authorisation from the Financial Conduct Authority (FCA).
These activities include the issuing of stablecoins, the operating of cryptoasset trading platforms and arranging deals in cryptoassets.
This change aims to bring the activities of crypto investors in line with other forms of investment.
Similarly, companies operating in the crypto sector will be treated in a similar way to other financial services firms in a move that “works well for incumbents and other large players”, according to Jack Land, head of UK growth at MetaWealth.
“However, a key thread in the crypto industry is decentralisation, and decentralised autonomous organisations will have a difficult time complying with the regulatory regime in its current state,” Land noted.
Geographical limits
The draft bill also defines the geographical limits of the regulation of cryptoassets. Notably, the bill declares that any relevant firm serving UK customers are required to follow the requirements, even if they are located and authorised elsewhere.
The bill does, however, allow for unregulated firms to serve UK consumers if it is done so via an authorised intermediary, creating a pathway for less established companies to operate in Britain without going through the authorisation process.
Reeves has said she is keen to establish strong regulatory relationships with allied nations, so there could be room for more collaborative frameworks dealing with other countries.
“There is hope for co-operation agreements with international partners,” Land said. “A passporting deal – an understanding between regulators that authorisation in one jurisdiction is equivalent to authorisation in the other – with other leading crypto hubs would be a large incentive for crypto builders to move to or launch in the UK.”
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