Content
This insight examines the potential indications this gives for the future of UK crypto regulation. In January 2021, retail cryptocurrency derivatives were banned by the FCA in order to protect consumers from market volatility. Still, the regulatory uncertainty has continued to weigh on the U.S. crypto industry, which still awaits the sort of framework that has been proposed in the UK. The second of the published reports provided an update to the government’s approach to https://www.xcritical.com/ regulating fiat-backed stablecoins. The UK government has published a series of reports which indicate how the country intends to regulate the crypto sector.
Crypto-asset regulatory landscape: a comparative analysis of the crypto-asset regulation in the UK and Germany
Applicants must complete and submit relevant documents and information, including a business plan, risk management policy, and key employee information, and pay an application fee. Once the application is processed, the FCA will conduct an assessment and decide whether to issue a license allowing cryptocurrency activities in the UK. This could include cryptocurrency regulation uk whether Financial Conduct Authority (“FCA”) authorisation is required and a potential consideration of anti-money laundering (“AML”) regulations, data protection regulations, intellectual property issues and the rules relating to consumer advertising. To promote responsible trading and protect investors, crypto firms must be authorized or registered with the Financial Conduct Authority (FCA) to promote cryptoassets to retail customers, according to the report. Although cryptocurrency is legal in the UK, there are still some concerns that should be taken into consideration when you want to do activities that involve crypto assets.
Cryptocurrency Regulation UK – Is Crypto Legal?
Sometimes, hybrid forms of crypto-assets blur the lines between these categories, leading to further complexities in their treatment. This framework legalizes smart contracts, licensing for cryptocurrencies, property rights in tokens and their underlying assets, custody arrangements, transfer and exchange. Crypto assets may increase the financial inclusion and empowerment of individuals and businesses, by providing access to alternative sources of funding, payment and investment, especially for the unbanked or underbanked populations. Crypto assets may also foster the participation and collaboration of diverse and distributed stakeholders, by creating peer-to-peer networks and communities that are governed by consensus and incentives. Persons that engage in cryptoasset related activities, such as managing, arranging deals in, and promoting cryptoassets, will need to investigate whether such assets fall under the new statutory definition of “cryptoassets”. First, the activity which they engage in could be deemed a “regulated activity” under FSMA 2000.
What is the regulatory authority for crypto in the UK?
Because the exchange rate between a cryptocurrency and a fiat currency is governed by supply and demand, it is very volatile and unpredictable (Woebbeking 2021). This makes “investing” in cryptocurrencies a risky business, fuelling calls for regulations to safeguard people from deceptive ads and scams. The two countries have recently adopted and/or implemented regulatory approaches for regulating cryptocurrencies. However, while the regulatory frameworks for the two countries share many similarities, they are heterogeneous.
A report by Chainalysis shows that the UK ranked 14 in 2023 in terms of overall adoption index globally (Chainalysis 2023). In 2021, before regulatory changes, the country ranked 21 in terms of adoption index globally (de Best 2023). Germany also experienced a surge in the adoption of crypto-assets following the adoption of its regulatory framework in 2020. According to a bi-annual poll conducted by Ding, a top fintech business, Germany’s cryptocurrency adoption was 8% by 2021. The Latvia Central Bank now offers licensing consultations for any local crypto asset service providers (CASPs) seeking to obtain a MiCA-compliant license in the country.
Although the UK confirmed in 2020 that crypto assets are property, it has no specific cryptocurrency laws and cryptocurrencies are not considered legal tender. FCA also stated that it would take quick actions when businesses cannot reach the crypto sector’s desired standards and risk market integrity. It highlights the potential misuse of speculations resulting from the crypto sector’s unclarity.
The UK is seeking to develop a comprehensive and proportionate regulatory framework for crypto assets, aiming to foster innovation, competition and consumer protection. Therefore, clients and lawyers need to be aware and prepared for the current and future developments and trends in the sector, and to overcome the potential hurdles and difficulties that they may face when engaging in crypto assets activities in the UK. HM Treasury has set out its final proposals for the UK’s future financial services regulatory regime for cryptoassets, confirming its intention to bring a number of crypto activities into the regulatory perimeter for the first time.
Therefore, these tokens offer investors a novel means of investing (Allen et al. 2022; Ariesmansyah 2022). Crypto-assets have ushered in a new era for finance, with both exciting prospects and daunting challenges. By leveraging technology, they have simplified global commerce, broadened financial inclusiveness and created new investment avenues.
However, as the crypto industry is constantly changing, the regulatory environments in both countries may evolve during the research process. From simple stores of value to sophisticated smart contract platforms, crypto-assets offer a multifaceted array of features. While Bitcoin (BTC) and Ethereum (ETH) are prominent cryptocurrencies, others serve diverse roles, including acting as utility tokens or security tokens. Decentralized applications enable utility tokens to unlock access to services or goods for users. In comparison, security tokens operate similarly to conventional financial securities by representing ownership stakes in tangible assets.
The FCA may seek to enhance consumer protections in DeFi by focusing on smart contract auditing and ensuring AML/KYC compliance across DeFi protocols, such as Decentralized Exchanges (DEXs). The FCA ultimately has too much financial ground to cover to enact a comprehensive set of crypto regulations, particularly regulations that will attract firms ashore rather than usher them out. Although it has left the EU, it is likely that UK cryptocurrency regulations will remain largely consistent with the bloc in the short term. The UK will implement, for example, directives equivalent to the EU’s Markets in Crypto-assets (MiCA) and E-Money proposals, along with various AML directives. In this way, with Sanction Scanner, crypto businesses can comply with regulations and be protected from regulatory penalties. The FTX case demonstrated how important compliance is to protect both the crypto industry’s longevity and investors’ safety.
- Navigating the UK’s cryptocurrency market goes beyond simply understanding the ever-changing regulatory and ethical frameworks.
- At the heart of FCA regulations, businesses are obliged to identify and evaluate the risks related to AML and CFT.
- Consumers of cryptoasset services may wish to investigate whether the relevant persons, including cryptoasset exchange providers and custodian wallet providers, are compliant with the new legislation.
- Firstly, regulatory requirements such as AML/CFT, risk management policies, and customer due diligence procedures must be strictly adhered to, which can be a complex and time-consuming process.
- Collaborative efforts and harmonization of regulations on an international level could play a pivotal role in establishing a global framework that balances innovation, investor protection and financial stability.
These AML processes are known more broadly as a Know Your Customer workflow and are vital in safeguarding the national and international financial systems. Keep an eye out for our next blog, where we examine crypto regulation regimes in the APAC region and the UAE or download the full report here. The 2022 collapse of FTX, then the world’s second-largest crypto exchange, accelerated the US Government’s actions on crypto regulation. The European Union’s landmark crypto regulation, the Markets in Crypto-Asset (MiCA) Regulation, is being implemented gradually throughout the region.
Since they do not fall under the definition of securities, utility tokens generally have less stringent regulatory requirements in comparison with security tokens (Garanina et al. 2022). The UK’s classification of crypto-assets aims to strike a balance between promoting innovation protecting investors and maintaining stability. The FCA plays a central role in overseeing and enforcing regulations in the crypto-asset market. However, regulating this fast-paced and ever-evolving space poses challenges for regulators as they need to adapt their frameworks to address emerging risks and technologies. Furthermore, it is crucial to establish frameworks that aim to safeguard investors from harm. Given the limited investor protections and oversight in the market, compared to traditional financial markets, individuals face significant risks such as cyber theft, scams and fraudulent schemes.
While the UK has embraced a principles-based regulatory framework, fostering innovation and industry growth, Germany has adopted a more prescriptive and cautious approach, focusing on investor protection and market stability. The research identifies that the UK’s flexible approach has attracted a flourishing crypto-asset ecosystem, while Germany’s conservative stance has offered greater investor confidence. However, certain regulatory gaps and challenges persist in both jurisdictions, such as ambiguities in classification and tax treatment, requiring further attention. In conclusion, the UK and Germany have laid the groundwork for comprehensive regulatory frameworks concerning crypto-assets, each boasting its own set of merits and challenges. The UK’s categorization system and user-friendly registration process foster innovation and market participation. Conversely, Germany’s technology-neutral approach and rigorous licensing requirements prioritize investor protection but may pose barriers for smaller enterprises.
This article seeks to provide a comprehensive guide to the current and future landscape of UK crypto regulation. Last year, the FCA introduced new financial promotion rules around the marketing of cryptoassets in the UK (applicable to all firms regardless of whether they are based overseas or what technology is used to make the promotion). There are strict rules stating that all promotions must be fair, clear and not misleading, with prominent risk warnings. The FCA has been vigilant and clearly busy in enforcing these rules, issuing hundreds of warnings and stopping unauthorised promotions within a month of the restriction.
