Efforts by the UK to knit together its future oversight of wide-ranging developments in financial technology were launched on Tuesday, including the goal of a Bank of England-backed crypto-currency.
As the British government announced its desire to design the digital currency by the end of the decade, it is undertaking a consultation process with the City of London on the trading, lending and custody across cryptoassets.
Essentially, the government wants to bring activity involving cryptoassets, including a digital pound, under the same financial rules that govern day-to-day activities in the financial centre.
This would cover a wide variety of areas, from a so-called Britcoin, to exchanges having requirements for admission standards for cryptoassets, plus all firms that buy and sell crypto having minimum standards on data reporting, consumer protection and operational resilience.
In other words, the trading and other activities involving cryptoassets would have to meet the same standards as other asset classes, in terms of freedom of trade, fairness of trade, transparency and solvency.
The UK government, the Bank of England and the regulators in the City of London are not alone in efforts to normalise the trade in cryptoassets. Authorities from Hong Kong to the Middle East and the EU to the US are looking into this area.
It comes after substantial losses and scandals in the world of crypto last year, including plummeting token values and platform failures.
The collapse of the major crypto exchange FTX and the subsequent criminal charges against former chief executive Sam Bankman-Fried sparked concerns over customer safeguards and book-keeping standards.
The UK government's consultation comes as the opinion remains divided over cryptoassets. At the recent World Economic Forum in Davos, JP Morgan chairman Jamie Dimon described Bitcoin as a “hyped-up fraud”. China banned transactions in Bitcoin in September 2021.
But the move to regulate crypto, and the accompanying desire for a digital pound, is part of a push by Prime Minister Rishi Sunak to attract more businesses and investment to the UK.
For years, crypto companies have complained that a lack of regulatory clarity has made it hard for them to do business in Britain.
Just 15 per cent of applicants successfully met the Financial Conduct Authority’s anti-money laundering requirements since it started monitoring registration in 2020.
On the one hand, the government wants the economic growth it feels crypto activity will bring, but it also needs to guard against some of the sector's less desirable events.
“We remain steadfast in our commitment to grow the economy and enable technological change and innovation — and this includes cryptoasset technology,” said Andrew Griffith, Economic Secretary to the Treasury.
“But we must also protect consumers who are embracing this new technology — ensuring robust, transparent, and fair standards.”
Crypto companies are broadly positive about the government's consultation, saying that it is a step in the right direction.
Tim Byun, head of government relations at crypto firm OK Group, which runs the OKX exchange. said it was a welcome “shift from a ‘wait-and-see’ approach” to a more comprehensive framework.
“The consultation has certainly been a long time coming and it represents several years of planning by the government. The plan is to make the UK the epicentre of the global cryptoasset market,” Professor Nicholas Ryder from Cardiff University told The National.
“However, the government must draw a very fine balancing act between encouraging financial innovation and tackling the threat presented by financial crime.”
The task of achieving that balancing act has led some economists to feel the game of regulating cryptoassets, especially cryptocurrencies, is too risky to make it worthwhile.
Deputy governor of the Bank of England Sir Jon Cunliffe counters this by saying that “people do not fly on unsafe planes”. He means that if cryptoasset regulation is robust and in place, people will avoid the riskiest exchanges and instead gravitate to ones that play by the rules.
If the government is serious about regulation, it needs to get a move on, Prof Ryder told The National.
“I think HM Treasury is playing catch up. Several other regions including the Middle East and Asia Pacific region are already ahead of the UK,” he said.
Meanwhile, the EU will move to a final vote on its wide-ranging Markets in Cryptoassets directive in April. The Biden administration is also pushing the US Congress regarding crypto laws, after several bills stalled at the end of last year.
“By the (UK) government’s own admission it will be two years before any meaningful change to the UK regulatory regime for cryptoassets,” said Zoe Wyatt, partner and head of crypto at tax advisory firm Andersen.
“We fear that the UK’s desire to be a global crypto hub will be usurped by another faster-acting jurisdiction.
“The UK is taking baby steps while the EU and US surge ahead.”
The UK government's consultation process will run until the end of April.