UK launches open consultation to regulate crypto exchanges, custody, and lending

The Government has today published the “Future financial services regulatory regime for cryptoassets consultation and call for evidence”.

Built on previous HM Treasury proposals, which focussed on stablecoins and the financial promotion of cryptoassets, the consultation sets out proposals for the UK’s crypto regime and marks the next stage of the country’s phased approach.

The consultation closes at 9 am on 30 April 2023, one year after the government committed to introducing a new regulatory regime for cryptoassets, reflecting the risks and opportunities they present.

The proposals seek to deliver on the ambition to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation and create the conditions for cryptoasset service providers to operate and grow in the UK, whilst managing potential consumer and stability risks.

The government’s proposed measures have been informed by recent market events – including the failure of FTX – which reinforce the case for effective regulation and sector engagement.

A crypto framework that maintains financial stability and clear regulatory standards

Andrew Griffith MP, Economic Secretary to the Treasury, commented: “The government’s firm ambition is for the UK to be home to the most open, wellregulated, and technologically advanced capital markets in the world. Delivering on this ambition means taking proactive steps to harness the opportunities of new financial technologies. We believe that crypto technologies can have a profound impact across financial services. By capitalising on the potential benefits offered by crypto we can strengthen our position as a world-leader in fintech, unlock growth and boost innovation.

“Cryptoasset markets continue to develop with increasing pace and complexity. But this is a nascent sector and as with any emerging technology, this brings risk as well as opportunity. Risk taking is a desirable part of the cycle of innovation and we wish to manage, not stifle, this. Ongoing turbulence in cryptoasset markets has highlighted that risk, with the high widespread implications for global cryptoasset markets and investors.

“Our view is that this reinforces the case for clear, effective, timely regulation and proactive engagement with industry. Effective regulation will create the conditions for cryptoasset service providers to thrive in the UK, and give people and businesses the confidence to invest with an understanding of the often high risks involved.

“We have already begun to deliver on this ambition through the Financial Services and Markets Bill, by laying the legislative foundations to bring stablecoins and cryptoassets into financial services regulation. We are also exploring how Distributed Ledger Technology (DLT) could offer benefits to financial market infrastructures and the UK’s sovereign debt management.

“This document marks the next step in the government’s plans and sets out proposals for delivering a broader financial services regulatory regime for cryptoassets. Our objective is to establish a proportionate, clear regulatory framework which enables firms to innovate at pace, while maintaining financial stability and clear regulatory standards.

“This includes a proposal to bring centralised cryptoasset exchanges into financial services regulation for the first time, as well as other core activities like custody and lending. Through regular engagement I have already heard first the opportunities and challenges faced by industry in this sector, and I am keen to continue our important dialogue. Your responses will help inform the government’s approach and ensure the UK’s regulatory framework helps us achieve our ambition for this exciting new technology.”

“Consultation with the industry could not be more critical”

Ian Taylor, Board Avisor of CryptoUK, which represents the UK crypto industry, commented on the open consultation: “As the voice of the UK’s crypto sector we welcome this positive step towards greater regulatory clarity. Given the provisions within the proposed legislation, consultation with the industry could not be more critical. As is customary we will convene a group of industry experts to formulate a response.

“We will analyse the main points in the proposals from the Government, as we have done in the past with new regulations, and offer direct engagement with our members to discuss the main areas of debate. We will then leverage our government relationships to advocate for regulation that is fit for purpose.”