The British government has released new draft laws that extend pre-existing financial regulations to include cryptocurrencies. This aligns the British approach to digital assets with that of the United States, a novel approach that distances itself from European methods of regulation.
Rachel Reeves, UK financial minister, said that Britain was bringing crypto under compulsory regulation. The draft rules are a first for Britain. Meanwhile, a Trump presidency is introducing libertarian inspired laws for crypto deregulation. The European Union insists on distancing itself from American policies, which it sees as counterproductive to European interests.
The 27-page draft proposes laws that affect the cryptocurrency industry, requiring certain crypto activities to be approved by the Financial Conduct Authority (FCA). The draft covers various crypto activities, including stablecoin issuance, exchange trading, and custodial operations. Anyone who operates a crypto exchange or issues a new stablecoin will have to abide by strict British rules.
“Through our Plan for Change”, said UK finance minister Rachel Reeves, “we are making Britain the best place in the world to innovate- and the safest place for consumers. Robust rules around crypto will boost investor confidence, support the growth of fintech, and protect people across the UK”.
The laws will address custodial arrangements, such as those involving exchanges that hold a client’s funds. Many of these laws already exist in the financial system, but will be extended to crypto businesses. A possible downside to these laws is that people will be forced to use centralised entities, due to a long list of regulatory requirements, leaving behind smaller crypto operations. On the plus side, crypto exchanges will have to be upfront with their business practices and treat their customers’ funds with care. Future editions of the draft may include further requirements of transparency regarding crypto products. One purpose of the draft is to get feedback from the public and industry stakeholders. Feedback is open until 23 May 2025.
The draft laws aim to address any gaps in the current Financial Services and Markets Act, particularly sections related to financial regulation. The draft seeks to define stablecoins and other digital assets so that they can be classified and subject to the appropriate rules. The UK government wants to categorize digital assets based on their type of investment. When they have a clear understanding of the crypto industry, they will be better able to regulate certain activities associated with that digital asset. The UK government will essentially bring the crypto industry out of the cold, restricting bad actors and fraudulent blockchains, while hopefully rewarding honest traders and providing them with extra support if needed. The laws apply to crypto operations affecting UK customers. For this reason, the UK government seeks to extend the rights and protections of traditional finance to crypto consumers.
Nick Price, a finance specialist at Osborne Clarke, said that the legislation was straightforward, providing a great deal of certainty for the crypto industry. The UK approach is more similar to the American approach of classifying crypto projects as securities or non-securities. This approach contrasts with the EU’s strategy of tailoring regulation to fit industry requirements. The EU has a different set of rules under the MiCAR system, which diverges substantially from the American system. The UK government, meanwhile, will be drawing a line in the sand as to what classifies as a regulatory asset and what does not meet the standards for oversight.