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Regulatory developments affecting cryptocurrencies are gathering pace. Including the European Union, where MiCA has received a favorable vote, and the United Kingdom. But as the former speeds ahead, can the latter keep up?
As of January 1, 2021, the United Kingdom has officially left the European Union. The country is now free to set its own rules and regulations, including those related to cryptocurrencies. This means that the UK government can draft laws and regulations around using crypto. And also decide how to approach issues such as taxation, money laundering, and consumer protection. Here we compare the UK’s efforts to those of its former bloc.
Playing the Crypto Game
In truth, the UK had already taken steps to regulate crypto even before leaving the EU. In 2019, the Financial Conduct Authority (FCA) published key guidance. It clarified that cryptocurrencies could be classified as “security tokens,” “e-money tokens,” or “unregulated tokens,” depending on their characteristics and intended use.
The UK is sure to continue developing its regulatory framework for crypto. This may involve further guidance from the FCA or new legislation. It’s also possible that the UK could work with other countries to develop international standards. Will the nation struggle to catch up to the EU in regulating cryptos, or overtake the EU altogether?
New Crypto Regime
Last month, the European Union (EU) voted to develop a new framework for crypto, the Markets in Crypto-assets (MiCA) regulation. With 517 in favor and 38 against, this legislation aims to provide a full set of rules and regulations for digital assets. To promote investor protection, market integrity, and financial stability.
The MiCA framework will apply to all issuers, holders, and service providers involved in crypto. Including exchanges, wallet providers, and token issuers. The framework will require these entities to comply with various disclosure, governance, capital requirements, and customer protection rules. It will also establish a licensing regime for service providers overseen by national authorities.
The European Securities and Markets Authority, or ESMA, the executive branch of the EU, leads the MiCA regulation. Once in operation, all crypto service providers operating in the EU must comply with its rules. Or face penalties.
MiCA is the most detailed legal scheme for digital assets to date. The official blessing paves the way for MiCA to become law in 2024. Putting the EU a step ahead of its former member, the UK. Whereas regulatory savvy in the US lags behind.
Crypto Regulations in the UK
The UK needs to catch up to the EU in rolling out its crypto asset regulatory framework. But now that the UK has left the EU, it is free to devise its own rules for crypto. Separate from the MiCA system set up by the EU.
The UK government has said that it is committed to an effective legal framework. Aiming to protect consumers, promote innovation, and stop financial crime.
In a recent interview, London city minister and Economic Secretary to the Treasury Andrew Griffith predicted that the UK’s regulatory framework for cryptocurrencies would roll out within the next 12 months. This suggests that the UK government is busily developing its regulatory approach to digital assets. And is keen to do so in a timely manner.
Griffith takes an aggressive stand on the UK’s “high-quality” yet “progressive” financial laws. A Financial News report says he expects “broader” rules than the EU will enforce. Also, he expects that a central bank digital currency (CBDC) will come out. And that the UK will take the lead in its development and rollout. Although, given the complex technology and privacy issues, “it’s not going to happen overnight.”
The Financial Services and Markets Bill (FSMB) is expected to become law in the spring. It will introduce new powers for HM Treasury (HMT) to bring crypto assets within the UK financial services’ domain.
Welcoming Change
On February 1, 2023, HMT put out its brief on a legal regime for crypto assets. (Other than fiat-referenced stablecoins.) This latest brief builds on previous discussions and talks. Including a January 2021 paper that focused on stablecoins.
It also adds to other proposals in the FSMB to introduce a regime that will govern “digital settlement assets.” These are defined as fiat-backed stablecoins used for payments. Furthermore, leaders like Binance in the domain have openly hailed the crypto regulation. The report added:
“It’s our strong belief that a stable regulatory environment helps to support innovation and is essential to establishing trust in the industry, as well as long-term growth.”
The UK Treasury has said it wants to make the country a crypto hub. New rules are needed to restore confidence after a tough 2022. The country has a growing need as more people become curious about the niche asset class. And, again, a plan for the space can help remove bad actors.
London-based lobby group CryptoUK, in a discussion with BeInCrypto, stated:
“With the adoption of MiCA, the EU has solidified its position as a regulatory leader for years to come. While not flawless, MiCA is an extremely relevant regulatory stack that puts significant pressure on the UK and the US in terms of delivering operational clarity for crypto.”
Spot the Difference
It’s still too early to say precisely how the UK’s regulatory framework for crypto will differ from the EU’s MiCA, as the UK still needs to release full proposals. However, there are a few areas where the UK may choose to take a different path.
For example, the UK may be more friendly towards the crypto industry to promote innovation and attract investment. This could mean that the UK takes a more flexible licensing and regulation stance or offers crypto companies tax lures.
On the other hand, the UK may also choose to be tougher in some areas. Such as anti-money laundering (AML) and counter-terrorist financing (CTF) laws.
Legal and industry experts have offered a range of opinions on how the UK’s plan for crypto is likely to differ from MiCA.
Lawyers at the law firm Norton Rose Fulbright firm have shared an analysis with BeInCrypto. Their note provides a comparison of some of the critical areas of MiCA and the HMT Proposals. It applies to players in the EU and UK crypto asset markets. Including service providers, issuers, big and small investors.
Some experts suggest that the UK take a more principles-based approach, focusing on outcomes rather than prescriptive rules. Others suggest that the UK may prioritize consumer protection and AML/CTF laws, given its leaders’ commitment to fighting financial crime.
Nonetheless, the head of the trade body CryptoUK, Ian Taylor, asserts that the bill “puts significant jurisdictional pressure” on Britain and the US to pass their frameworks.
“It is important to have minimum global regulatory standards for the crypto industry, and MiCA serves as a benchmark here.”
Overall, regulators are likely to strive for a balance between supporting innovation and protecting the public. The UK is not part of the EU. It will follow its own criteria. Its crypto framework will evolve based on the needs of the industry and the broader economy.