The United Kingdom has proposed a comprehensive framework to regulate centralized crypto exchanges and entities like custodians.
They lay out proposals in regards to crypto trading venues, intermediaries, crypto lending and much else.
Overall the aim is to facilitate crypto activities, while preventing abuses like FTX or Celsius which sold customers’ bitcoin and eth to prop up its own token. The Economic Secretary to the Treasury, Andrew Griffith said:
“We remain steadfast in our commitment to grow the economy and enable technological change and innovation – and this includes cryptoasset technology.
But we must also protect consumers who are embracing this new technology – ensuring robust, transparent, and fair standards.”
In regards to crypto trading venues and intermediaries, much is as you’d expect with the only interesting aspect for crypto lending being that they want information sharing with the Treasury regarding collateral levels so as to manage risk.
For crypto custodians, and presumably that can include exchanges, they require that customers’ assets legally remain those of the customer even in the case of insolvency, in addition to measures to be taken “for redress in the event that cryptoassets held in custody are lost.”
Decentralized finance (DeFi) is seemingly left out with the Treasury stating that “some parts of the value chain may not be practical to regulate, for example the underlying protocol if that has become truly opensourced and decentralised over time.”
The most interesting part of this proposal is on crypto issuance where UK is breaking ground to some extent with this document by seemingly making a distinction between what we are calling crypto securities and traditional securities.
They generally prohibit ICOs and public offerings unless it is listed on a crypto trading venue or a regulated market, the latter being a “public offer platform” to facilitate crowdfunding.
A prospectus would be required with disclosures and some level of due diligence to verify such disclosures.
Crucially, it is the trading venue that administers these requirements with the proposal stating:
“The FCA would include principles in their rule book for admission and disclosure
requirements that cryptoasset trading venues would then be responsible for administering.”
This is self-regulation to some extent in as far as unlike in US, there will be no requirement for FCA to deem the prospectus adequate, the trading venues instead do that.
There’s naturally a distinction between cryptos like bitcoin, which do not fall within such requirements, and tokens that are more akin to securities.
This proposal therefore seems to suggest that the process Coinbase used to have by engaging in significant scrutiny before listing an asset, is sufficient in line with FCA guidelines, so striking a balance.
“The government does not expect these admission disclosure documents to take the same shape and form as a traditional prospectus given specific characteristics and investor profiles of cryptoassets,” the Treasury said.
The proposal opened to consultation today with it to continue until April 30th afterwhich legislation may follow.
This would make crypto a regulated market in UK, addressing some of the risks of fiduciary relationships where an entity is in a position of trust, while not interfering with actual crypto like smart contracts.