Recent Crypto Regulatory developments in the UK

The recommendations published by the UK Crypto and Digital Assets All Party Parliamentary Group (APPG), signal that yet another jurisdiction is taking significant steps to regulate the crypto asset industry. With SEC lawsuits in the U.S. looming large in the background, and prominent crypto exchanges such as Coinbase and Kraken seeking to expand their service elsewhere, the timing of the UK’s efforts to become a crypto hub is of great significance.

Confidence in the UK as a financial centre is long established, with crypto venture capital firm a16z opening an office in London on the basis that Britain is providing a “predictable environment” for crypto regulation. However, these are early days, and critical challenges will need to be overcome. The recommendations relayed

by the APPG outlined a number of regulatory areas that need further consideration.

System of Regulation

The UK must determine exactly what framework it intends to regulate crypto assets under. Previously, it had been mooted to regulate the industry through something akin to gambling legislation. Such a system would aim to protect consumers of crypto assets via safeguards such as mandatory customer fund segregation and strict advertising standards.

On the downside, this model could lead to higher compliance costs associated with these protections which may prove too burdensome for smaller firms, leading to market consolidation and the establishment of a few dominant firms.

Conversely, the UK will no doubt

With crypto companies ramping up international expansion plans amid an uncertain U.S. regulatory outlook, the UK must set the bar high when it comes to ensuring market integrity, writes Albert Isola, Minister for Digital & Financial Services

Gibraltar Finance Report

examine the EU’s recently voted-in Markets in Crypto Assets (MiCA) legislation, Dubai’s Virtual Assets Regulatory Authority (VARA), and perhaps learn what not to do based on recent SEC activity in the U.S. when informing its decision. The UK is well- positioned to capitalise on these experiences — and those of Gibraltar, which became the first jurisdiction in the world to introduce a bespoke regulatory framework for Distributed Ledger Technology (DLT) in 2018.

Lack of Alignment

For the UK to strike the right balance between a robust regulatory and legal framework and an innovative pro-crypto environment, its government must resolve the internal conflict apparent in its current discourses.

For instance, the APPG recommended the establishment of a “crypto tsar” to oversee the development and implementation of regulation. This was refused by the Economic Secretary to the Treasury, Andrew Griffith. Instead, he indicated that he felt his current role was sufficient in upholding the necessary crypto regulation. Whether a crypto tsar, as recommended by the APPG or by continuing to rely on the Economic Secretary to the Treasury, both recommendations seem to suggest a centralised figure to guide developments.

The SEC Stabilisation Bill introduced in June, proposes to redistribute the powers of the Chair to six commissioners. Under this Bill, no party would be able to control more than three seats. Consequently, the UK should consider approaching regulation on a cross-party, inclusive basis.

The difference in goals between the Treasury and APPG is further amplified by their differing classification of crypto assets. The Treasury advises that unbacked crypto assets be classified as having no intrinsic value and regulated per gambling legislation. Meanwhile, the APPG’s enthusiastic defence of the opportunities crypto assets may hold for the UK economy — and its potential to become the next crypto hub — signals it wants a more accommodating framework.

Concerns have also been raised by industry leaders, including a16w, warning

against the “same risk, same outcome” approach advocated by the UK Treasury. In not recognising the fundamental distinctions between CeFi and DeFi, the UK Government risks stifling innovation and failing to fully exploit the opportunity to be the next crypto hub.

What’s clear is that a unified approach on a cross-party basis with the requisite buy-in from industry and the private sector is required for Britain to continue to make any further progress.

Lessons from Gibraltar

An early promoter of crypto asset regulation, Gibraltar has positioned itself as a crypto hub that fosters innovations within a robust regulatory and legal framework. The creation of Gibraltar’s DLT Framework back in 2018 was informed by a dedicated working group. Industry representation within this group provided an inclusive environment for legislative innovation that put trust and transparency at the centre of the new crypto economy.

Guided by ten principles, the DLT

Framework created a flexible regulatory regime that can evolve alongside the technological developments in the crypto asset industry. Each crypto market operator must adhere to these principles, with the aim that consumers are protected from fraud and market abuses.

The recent addition of the tenth principle requires all DLT firms operating in Gibraltar to conduct themselves in a manner that maintains or enhances the integrity of the markets in which they participate. Market integrity is a crucial element of regulation that needs to be addressed to safeguard not only consumers but also the economic integrity of the financial markets. By upholding market integrity in this way, the UK — like Gibraltar — can rise to the forefront of crypto industry standards, best practice, and innovation.

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