A lot of countries around the world have started to shift their approach to crypto investments, and the United Kingdom is the latest to announce draft regulation regarding cryptocurrency, NFTs and other blockchain-based assets.
In an announcement made during UK Fintech Week, Chancellor of the Exchequer Rachel Reeves announced rules that would broadly bring decentralised financial business activities in line with existing UK financial legislation.
This approach, which amends the Financial Services and Markets Act, aims to bring clarity and security for customers, exchanges and DeFi businesses alike, but given that it is in the middle of two very different policy shifts, will it bring clarity or confusion for investors?
What Would The New Laws Mean For UK-Based Crypto Holders?
With the number of crypto users who either hold or have held what the law defines as ‘cryptoassets’ trebling in the UK from four per cent of British adults to 12 per cent according to official figures, the establishment of some type of regulatory framework was inevitable.
The UK’s approach, based on a set of proposals initially published in late 2023, would bring “qualifying cryptoassets”, including cryptocurrency, stablecoins and some other kids of tokens under the supervision of the Financial Conduct Authority, which manages banks, mortgage brokers, investors and other financial services.
This means that certain activities, such as crypto exchanges, would be classed as regulated activities and both individuals and businesses with customers in the UK would need to receive authorisation by the FCA for that purpose.
How Do The New Rules Compare To Other National Guidelines?
Conceptually, the rules bring crypto in line with the regulatory philosophy of the United States up until January 2025, which broadly classified many cryptocurrency tokens as “unregistered securities” in order to help the industry rebuild following the collapse of major exchanges such as FTX.
The results were significant and led to the integration of blockchain assets into traditional financial portfolios, most notably through the development of spot Bitcoin exchange-traded funds.
However, the United States is appearing to take a different, potentially less strict approach to cryptocurrency regulation, including a controversial executive order to create a strategic digital asset reserve, which as reported by the BBC was likened to a “pig in lipstick” by one cryptoassets hedge fund manager.
The European regulatory approach, Markets in Crypto Assets regulation (MiCA), is very different and more bespoke to DeFi rather than the draft UK legislation and the current US regulation.
It covers the use of what it defines as:
- Electronic money tokens (EMT, includes stablecoins and a lot of cryptocurrency tokens)
- Asset-referenced tokens (ART, includes some stablecoins not pegged to a single currency, similar to an ETF)
- Other crypto assets (OCAs) and utility tokens (which include everything else, such as Bitcoin itself, DAO governance tokens and play-to-earn crypto assets).
Clarity Or Confusion?
It is difficult to truly see the results of the UK’s new regulations until they are finalised, a process that is expected to take until the end of the year at least, but a major question that will be raised is if the new regulations provide clarity, boost investor confidence and help the entire sector or raise more questions than answers.
There are four wildly diverging regulatory paths that have emerged between the United States’ increasingly laissez-faire approach, the UK’s alignment between DeFi and traditional finance, the EU’s bespoke regulations, and the contentious outright ban in China.
This highlights the necessity of regulation to ensure that customers feel confident in the sector, bad actors (as small as Bitconnect and as large as FTX) are rooted out, and innovations in the sector are rewarded.
This means that there will be a need for cryptocurrency firms to be transparent, and have rules regarding customer protection and financial resilience in the same way that investment banks in traditional finance do.
Some have credited the UK’s approach as a straightforward legislative approach that will improve stability in the sector, although others have been more cautious as the true effectiveness of the regulations will depend on the details of how qualifying cryptoassets are defined.
By contrast, the United States’ approach to crypto and its effect on the markets is marred somewhat by other policy shifts that have, according to an article by The Independent caused the US economy to shrink and ignited fears of a recession.
This has, in a case of flight to quality, led to Bitcoin surging from a low of $75,000 earlier in April to relatively consistent valuations over $90,000 thanks at least in part to a depreciation of the value of the US Dollar.
All three regulatory policies are relatively new so it will take time to truly ascertain their effects on the ecosystem as a whole.