Some of the most powerful lobby groups in traditional finance have warned the UK government that its plans to regulate the cryptocurrency industry could offer legitimacy to a market that remains fraught with risks for consumers.
The Treasury has been gathering feedback on its February proposals for rules on crypto, with City Minister Andrew Griffith promising “clear, effective, timely regulation” that would “strengthen our position as a world leader in fintech, unlock growth and boost innovation”.
Politicians want 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 regulated by the Financial Conduct Authority solely for compliance with money laundering rules, although the FCA will soon also be able to police adverts.
Regulation offers, “to some extent, unearned trust with customers”, ICAEW, the professional body for the UK’s Chartered Accountants, said in one of several dozens of responses to the Treasury’s consultation on the plans, which formally closed at the end of April.
“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,” the accountants stressed, voicing a concern that has long been aired in regulatory circles.
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.
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 group TheCityUK and The City of London Corporation, said the definitions in the proposals needed to be “much more precise”.
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”.
“Virtually every electronic system . . . relies on encryption to transmit data packets which arguably have ‘value’,” the IRSG said. “We would strongly suggest that further consideration is given as to whether such a wide definition is appropriate.”
The Chartered Institute of Taxation and Association of Taxation Technicians said its members were “finding it increasingly difficult to deal with crypto transactions in practice”. The tax lobby group called on the Treasury to address the tax treatment of cryptoasset transactions.
HM Revenue & Customs last month announced a separate consultation on taxing crypto assets and other decentralised finance activity so that the treatments better align “with the underlying economic substance” of the activities.
The cryptocurrency industry was broadly supportive in its responses to the Treasury’s initiative, but called for refinements.
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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 per cent of applicants.
CryptoUK also urged the Treasury to ensure that disclosure rules did not “put disproportionate liability on trading venues”.
The UK has not set an implementation date for the crypto package, which is part of the broader swath of Edinburgh reforms designed to reinvigorate a financial services sector that suffered heavy losses in the aftermath of Brexit.
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