A new proposal would put the oversight of cryptocurrencies, exchanges and lenders under traditional financial regulators, but offer rules tailored to their unique attributes.
The U.K. has proposed a new regulatory framework that would tighten the rules for cryptocurrency exchanges, lenders and custodians while increasing consumer protections, market abuse regulations and treating initial coin offerings as securities.
The framework is, at this point, a consultation that will run through the end of April.
The overarching goal, according to Andrew Griffith, the Economic Secretary to the Treasury, is to allow cryptoasset technology "to grow the economy and enable technological change and innovation" while also protecting "consumers who are embracing this new technology — ensuring robust, transparent, and fair standards."
Practically, that means crypto exchanges and lenders would be regulated by the Financial Conduct Authority but not placed under the existing regulatory regime for financial instruments and institutions.
Rather, the Treasury document said that "the government's view is that cryptoassets and the activities underpinning their use should follow the standards expected of other similar financial services activities, commensurate to the risks they pose, while harnessing potential benefits of the technology behind them."
It would be in line with the principle of 'same risk, same regulatory outcome.'"
Recognize the Differences
That means the rules governing things like market manipulation and insider trading would be the same without trying to fit the square peg of crypto into the round hole of last year's Financial Services and Markets Bill aimed at the traditional financial sector.
Instead, it seeks an "agile and flexible" approach that "will enable regulators to adapt to changes in the market and developments in international standards" that is necessary for cryptocurrencies that are, by their very nature, cross-border assets.
It also says that while the "same risk, same regulatory outcome" principles must apply to decentralized finance, there is a reality that the differences between DeFi and centralized finance mean it may take longer to clarify and codify them.
The "crypto regulation consultation is incredibly well-framed," Brian Quintenz, head of policy for venture firm a16z, the crypto arm of Andresseen Horowitz, and a former commissioner of the U.S. Commodity Futures Trading Commission (CFTC) said on Twitter. "It has a nuanced view of DeFi activities and structure, acknowledges potential risks, and affirms consistent DeFi regulatory outcomes, possibly by different means."
That means exchanges would need to be resilient and transparent, offer fair access, address conflicts of interest, ensure market data is accurate and follow applicable disclosure and anti-money-laundering regulations.
A cryptoasset custody regime would need to be created that is similar to traditional finance's rules, but would need to separately address private keys.
Initial coin offerings would have similar requirements of any prospectus to list traditional shares on an exchange, but tailored to cryptoassets.
Crypto lending is complex and distinct enough that while some principles like disclosure of margin, collateral and other rules apply, dealing with general risk, credit risk and liquidity risk will require a second phase of rulemaking.
Staking, validation and mining will have to be worked out, along with sustainability guidelines.
The consultation also lays out the way various types of coins — utility and security tokens, NFTs and governance tokens, and various others — will be defined and overseen. Fiat-backed payments stablecoins will be treated differently than algorithmic stablecoins, although the latter will not be banned.
Rather, it said, "activities relating to so-called algorithmic stablecoins should be subject to the same requirements as for unbacked cryptoassets."