Partner Nicola McKinney explores the worrying inconsistencies in approaches towards UK crypto regulation, and argues for the need for increased collaboration among authorities and regulators.
High levels of public interest in crypto assets, together with recent high-profile reports of fraud, financial crime and investor losses in the digital assets industry, have led to a proliferation of consultations and reports examining how the sector should be both promoted and regulated in the UK. In the past 12 months the Law Commission, House of Commons Treasury Committee, and most recently the All-Party Parliamentary Group on Crypto & Digital Assets (APPG), have all published reports about the sector. This February, HM Treasury also launched a wide-reaching consultation into how effective regulation can be brought in to police this rapidly evolving sector.
Yet the tone and recommendations across regulators, policymakers and parliamentary bodies has been inconsistent thus far, with divergent attitudes and conflicting strategies emerging as to how digital assets should be treated if the UK is to realise its goal of becoming a global crypto hub.
In particular, the APPG’s June report takes a notably different view from that of the Treasury Committee about the potential benefits of digital assets. The report came out just weeks after the Treasury Committee’s ‘Regulating Crypto’ publication, which focussed on risks around the crypto sector, including consumer risks around price volatility in unbacked cryptocurrency investment, and the use of crypto assets in criminal activity.
The report from the Treasury Committee highlighted the limits of the approach recently set out in a Treasury Consultation paper, which proposed regulating crypto assets within the existing financial services regulatory framework, with the Financial Conduct Authority acting as regulator. One of the Treasury Committee Report’s headline-grabbing proposals was a strong recommendation for unbacked cryptocurrencies to be treated as speculative assets without intrinsic value, investment into which should be treated as gambling rather than a financial service.
In contrast with the relatively pessimistic tone of the Treasury Committee Report, the APPG report advances the government’s vision for the UK to become a global hub for cryptocurrency and digital asset investment, adopting a largely enthusiastic defence of the possibilities that the crypto asset industry holds for the UK economy.
Calling for a balanced response to identified risks, the report endorses the FCA’s proposals for regulation within the traditional financial services regulatory framework, which has a track record of mitigating the risks posed by crypto to consumers and investors. The report also stresses that risks should not be overstated, citing evidence that economic crime accounted for less than one percent of total cryptocurrency transaction volume in 2022. Consumer risk should, to a certain extent at least, also be addressed with improved education and awareness.
The APPG Report proposes 53 recommendations, including identifying the possible need for a ‘Crypto Tsar’ to draw together competing voices and the different approaches across regulatory bodies and different parts of government, as well as calling for swift and efficient regulation to be brought in within the next 12-18 months.
The report raises serious questions about how well-placed the UK is to achieve its stated industry leadership goal. Laying out (and finding funding for) a regulatory framework within a 12-18 month timeframe, one that has the requisite agility to respond to the fast pace of change within the sector, is likely to prove a significant challenge. The APPG Report further raises the question of whether authorities and regulatory bodies have sufficient skills and expertise in their workforce to deliver on their new responsibilities.
Some observers may consider that the APPG report does little to effectively progress the UK’s regulatory goals, and that the country is already far behind some of its competitors in seeking a leadership role on the global stage, particularly following the recent enactment of the EU’s Markets in Cryptoassets Regulation (MiCA). The APPG report’s recommendations – as well as the fault lines it exposes between different policymakers and advisors – instead serve to highlight that the UK is unlikely to demonstrate to the global crypto industry that it truly is ‘open for business’ unless it accelerates its efforts and produces a more coordinated vision.
In this sense, it is collaboration that will prove key in the UK’s race to establish itself as a world-leader in digital assets. Regulators, policymakers and the industry itself must coordinate to establish robust regulations that can both weather the recent proliferation of fraud and financial crime in the sector, while also being agile enough to respond to crypto’s constantly-evolving nature.
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