The UK Treasury’s plans for cryptocurrency regulation have been met with caution from city lobby groups. The Treasury is currently considering proposals to regulate cryptocurrencies in line with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. The plans have been met with concern from the city, with lobby groups warning that hasty regulation could damage the UK’s position as a global center of cryptocurrency innovation.
On the surface, the Treasury’s plans are reasonable. Cryptocurrencies have gained increasing popularity in recent years, in part due to the relative anonymity they provide. However, this anonymity has led to concerns that they could be used for criminal purposes, particularly money laundering and terrorism financing. The proposed regulations would require cryptocurrency exchanges and wallet providers to comply with AML and CTF regulations, just as financial institutions must currently do.
However, the devil is in the detail. The UK has a thriving cryptocurrency industry, with many startups and established companies operating in the space. Hasty regulation could stifle this innovation, and potentially drive companies offshore to countries with more favorable regulatory environments. The city is therefore urging the Treasury to take a measured and collaborative approach.
In a letter addressed to Chancellor Philip Hammond, 47 City firms including EY, PwC, and HSBC, have called on the Treasury to consult with the industry before finalizing the regulations. The letter warns that imposing regulations that are out of step with other countries could hamper the UK’s ability to compete globally.
“The UK’s flourishing cryptocurrency sector risks being left behind globally if it is not a priority for policymakers,” the letter states. “Government and industry need to collaborate to ensure that the opportunities and risks in this sector are recognized and addressed together.”
The letter goes on to state that the industry is already aware of the risks associated with cryptocurrencies, and that “the vast majority” of those working in the sector are committed to compliance with AML and CTF regulations. It suggests that the Treasury consult with the sector to ensure that any regulations are proportionate and well-designed.
The City’s concerns are certainly understandable. Cryptocurrencies are a relatively new and rapidly-evolving field, and imposing heavy-handed regulations could have unintended consequences. Up-and-coming companies in the sector could be disproportionately impacted, as could established firms looking to innovate in the space.
At the same time, however, it is important to ensure that cryptocurrencies are used for legitimate purposes. Regulation is necessary to prevent criminal activity, and to protect consumers. Therefore, striking the right balance is key. Sensible regulation that addresses legitimate concerns without stifling innovation is the goal.
In this regard, the city’s suggestion of a collaborative approach is sensible. The Treasury should work with industry stakeholders to ensure that any regulations are tailored to the needs of the industry, and take into account the risks and opportunities presented by cryptocurrencies. It should also look to other countries with established cryptocurrency regulatory regimes to learn from their experiences.
The City lobby groups are right to urge caution over the Treasury’s plans. Cryptocurrencies are a rapidly-evolving and complex field, and hastily-imposed regulations could have unintended consequences. However, sensible regulation is necessary to prevent criminal activity and protect consumers. Therefore, the Treasury should work with industry stakeholders to achieve the right balance. A collaborative approach, taking account of the risks and opportunities presented by cryptocurrencies, is the way forward.
The UK government’s plans to regulate the cryptocurrency industry have been met with warnings from some of the most powerful lobby groups in traditional finance that it could offer legitimacy to a market which remains fraught with risks for consumers. The proposals, which were put forward in February, aim to bring the trading, issuance and lending of digital assets into a regulatory framework similar to that applied to stocks and bonds. The crypto market in the UK is currently regulated by the Financial Conduct Authority solely for compliance with money laundering rules, although the FCA will soon also be able to police adverts.
However, there are concerns that regulation would offer “to some extent, unearned trust with customers” according to the Institute of Chartered Accountants in England and Wales (ICAEW). They stress that “by expanding the perimeter and authorising firms for crypto-related activities, consumers might be justified in concluding that the perceived risks that are known about cryptoassets have been to some extent addressed or managed.” Such concerns have been voiced in regulatory circles for some time.
UK-based holders of cryptocurrency lost hundreds of millions to fraud last year, while others have suffered sharp falls in the value of their holdings or lost out as crypto firms imploded, most dramatically Bahamas-based FTX. While Treasury officials have described the UK’s approach as “more nimble and proportionate” than the EU’s incoming Markets in Crypto-Assets regulation, the International Regulatory Strategy Group, which represents finance lobby groups UK Finance and TheCityUK, said the definitions in the proposals needed to be “much more precise.”
The cryptocurrency industry was broadly supportive in its responses to the Treasury’s initiative, but called for refinements. CryptoUK, which describes itself as the sector’s “self regulatory trade association,” asked for an “indicative time” for how long it would take crypto businesses to be authorised under the new regime. Many companies have complained bitterly about the pace of the FCA’s system to process applications to join its register, and the regulator has turned down more than 80% of applicants.
Overall, the government’s proposed definition of cryptoassets covers not only cryptocurrencies and tokenised versions of “traditional” financial assets but also potentially any encrypted information that could be considered as having “value.” As such, the concerns of lobby groups are whether such a wide definition is appropriate and whether it could offer legitimacy to a market that remains fraught with risks for consumers.