Britain sets out plans to regulate crypto industry in wake of FTX collapse

The UK has formally unveiled plans to regulate the cryptocurrency industry, and the government is seeking to curb some of the reckless business practices that have emerged over the past year and contributed to the disappearance of FTX.

In a highly anticipated industry consultation launched on Tuesday, the government proposed a series of measures aimed at bringing regulation of crypto asset businesses in line with that of traditional financial firms.

Among the proposals put forward Tuesday was a measure that would strengthen rules targeting financial intermediaries and custodians that store cryptocurrency on behalf of clients.

A big topic emerging in 2022 was the rise in risky lending made between multiple cryptocurrency companies and the lack of due diligence with the counterparties involved in those transactions.

The UK proposals would crack down on such activities, seeking to establish a “robust world-first regime that strengthens rules on crypto asset lending, while improving consumer protection and the operational resilience of businesses,” according to a statement. Posted Tuesday night.

“We remain steadfast in our commitment to grow the economy and enable technological change and innovation, and this includes crypto-asset technology,” Andrew Griffith, the Treasury's economic secretary, said in a statement.

"But we must also protect consumers who are embracing this new technology by ensuring robust, transparent and fair standards."

The FTX collapse has added urgency to attempts by global regulators to govern the regulation-averse crypto space. The European Union and the US have already made their own proposals to improve consumer protection in crypto.

In a Dec. 2 speech, Griffith said that “recent events in the crypto market reinforce the case for timely, clear, and effective regulation.”

He FTX Implosionwhich allegedly used client money to make risky loans and trades, set off a chain reaction of bankruptcies for digital asset lending firms with exposure to the cryptocurrency giant, including FiBlock and Digital Currency Group's Genesis Trade.

The proposals put forward on Tuesday would also impose stricter transparency requirements on crypto exchanges to ensure they publish relevant disclosure documents and establish clear admission requirements for trading digital tokens.

Another move would relax strict rules on crypto ads, allowing companies registered with the Financial Conduct Authority to issue their own promotions while the broader crypto regime is introduced.

The regulatory move comes as crypto companies, both in the UK and elsewhere, feel the chill of a deep recession known as "crypto winter."

Companies are seeing their valuations slashed by investors after the FTX explosion and a drop in cryptocurrency prices, while the industry has also been hit by numerous rounds of layoffs. Last week, London-based crypto exchange Luno cut 35% of its workforce in a movement that impacts more than 330 roles.

Regulation takes time. It is likely that it will be years before Parliament approves the measures. The Financial Services and Markets Bill, which would recognize crypto assets as regulated products, is still pending in Parliament. The law aims to make the country's financial sector more competitive after Brexit.

However, according to some industry executives, even the simple demonstration of action is important.

“Having a regulatory roadmap or regulatory direction of travel will be very helpful for the UK in terms of being a crypto hub,” Julian Sawyer, chief executive of Standard Chartered-backed crypto custody services firm, told CNBC. Zodia Custody, Tuesday in an interview. .

Sawyer, who previously co-founded British fintech firm Starling and led the international expansion of cryptocurrency exchange Gemini, said it was also important to ensure "overall alignment between global markets in terms of approach to digital assets."

He noted that the European Union has been ahead of the game with its Markets in Crypto Assets law, which is expected to come into force in 2024.

Bitcoin, which has been stealthily up around 40% since the start of 2023, was trading flat on Wednesday at a price of $23,103.

Rishi Sunak, who took the reins as UK leader in October 2022, is seen by market players as a Crypto-friendly Prime Ministerhaving previously said that he is "determined" to make the UK "the jurisdiction of choice for crypto and blockchain technology."

As London looks to compete with EU financial centers post-Brexit, cryptocurrencies could be a way to improve its chances, industry experts previously said.

"There is an opportunity to bring clarity to the industry and allow it to play its part in delivering on its mandate to encourage business to invest, innovate and create jobs in the UK," Jordan Wain, UK public policy leader at Chainalysis told CNBC in November.

Sunak's management will consult on plans to introduce a new set of rules tailored to crypto companies, with a view to closing the consultation by April 30, after which it will formulate more detailed rules.

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