A consultation published by the treasury on 1 February sets out the plans for cryptoasset regulation. The aim is clear, the treasury wants to make sure the UK doesn’t fall behind when it comes to cryptoassets and other fintech.
The treasury envisages that by regulating cryptoassets and therefore supporting them to a certain extent, the UK will be able to enjoy the potential benefits, growth and innovation boost.
Our crypto specialists at Forrester Boyd welcome this consultation. We feel that whether you are a crypto supporter or a crypto doubter, there are positives to be taken from the regulation of crypto.
What are the positives of regulating cryptoassets?
For the supporters of crypto, it’s a clear indication that crypto is going to start to be taken more seriously within government which will hopefully lead to clearer purpose-made tax legislation rather than the ‘shoe horn’ approach we currently have. The ‘shoe horn’ approach means that currently, legislation that is written and designed for traditional finance instruments, such as shares, is being used to try and tax crypto.
This has sometimes led to a disparity between the underlying economics of the transaction and the way it is taxed. The most controversial example is the DeFi guidance published in February 2022.
For the crypto doubters, regulation means that crypto can have added security and traceability. Therefore, the cryptoasset market can open up to institutional investors, providing stability. This will be welcomed following the controversial fall of FTX.
How will cryptoassets be regulated?
It has been very apparent for a while now that the crypto ‘bubble’ is not going to pop and it is not going away. Despite the volatility experienced last year with the failure of some of the major platforms such as Celsius Network and Voyager Digital, the growth of crypto is likely to continue.
This means that the regulatory framework needs to be considered. The overarching policies the treasury is trying to establish are:
encourage growth, innovation, and competition in the UK
enable consumers to make well-informed decisions, with a clear understanding of the risks involved
protect UK financial stability
protect UK market integrity
The plan is to regulate over different phases.
This aims to bring stablecoins into regulation by regulating the issue and holding of fiat-backed stablecoins.
It should be noted that only fiat-backed stablecoins will be considered and not algorithmic coins such as the infamous TerraUSD coin that collapsed in 2022 plunging the market into chaos. The treasury believes that these tokens are under collateralised and therefore cannot be considered ‘stable’, indeed if anything within crypto can be considered ‘stable’.
Phase two looks to regulate activities using unbacked cryptoassets. These are crypto coins that are not backed up by other assets and therefore are traditionally more volatile, such as Bitcoin.
The activities included in this phase are issuing, trading and holding the coins.
Will NFTs be regulated?
The government has confirmed that the non-fungible tokens (NFTs) will not be in the scope of this regulation as they represent a large variety of different assets which may not fall within the financial-services products that this regulation aims to capture.
Consultation
The full consultation document can be found here. This strategy is just the consultation process right now which is open for responses until 30 April 2023.
It is important to remember that now is the time for your voice to be heard. If you think there is a key area the government is not getting right or needs to improve its strategy on, now is your chance to tell them.
If you want to talk to our crypto specialist advisers, please get in touch or visit our dedicated crypto page here.
All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.
