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4th September 2023 | Insights

How should the UK regulate cryptoassets?

The UK government is currently in the process of developing a regulatory framework for the trading and issuance of cryptoassets. Last month, Acuiti published Competitive Advantage: Charting the Path Ahead for UK Cryptoassets Regulation in conjunction with Portofino Technologies, Zodia Markets and Zodia Custody. The paper explores ways in which the UK can use the regulatory framework to establish a world-leading hub for innovation in this fast-growing market.

The paper argues that the development of the UK’s regulatory framework marks an opportunity for the UK to gain a competitive edge in the development of this market. The opportunity lies not just in the trading and issuance of cryptoassets, but also the evolution of distributed ledger technology as a whole.

Jurisdictions across the globe are already developing rules and regulations covering cryptoassets.  Both the EU and Dubai are among the key pioneers in the market.

The EU’s Markets in Crypto Assets Regulation was adopted earlier this year and comes into force from June 2024. While the EU has a lead over the UK in getting its regulatory framework in place, it was developed prior to the collapse of FTX.  The framework has also attracted criticism from some corners of the market for being too prescriptive and heavy handed in certain areas, such as its coverage of stablecoins.

Meanwhile, in the US, a hardline approach from the SEC and delay in the development of any sort of comprehensive framework is stymying innovation and the pace of development.

The UK has the opportunity to create a competitive edge through its framework. The approach the government is taking is encouraging. Rather than put into place an entirely new regulation, the UK government is developing the rules in secondary legislation, which will grant the Financial Conduct Authority greater flexibility when formulating policies.

In addition, the UK is seeking where possible to link the framework to existing rules, for example basing regulation of crypto custodians where possible on the rules set out in the existing Client Assets Sourcebook (CASS) and the issuance of new coins on the reformed UK prospectus regime for traditional securities. This will make the adoption of the new rules easier for firms in traditional markets.

Post-Brexit opportunities for the UK have proved few and far between, but cryptoasset regulation provides a meaningful opportunity. Some firms are urging the government to stick as closely as possible to EU rules, in a bid to secure equivalence. Others, however, are arguing that with the US far behind in its institutional regulation, a greater prize is on offer. They are pushing for the rules to focus purely on optimizing the opportunity for innovation.

The Acuiti paper was based on a roundtable held in May, with several key firms in the UK cryptoassets market as well as regulators.

The paper looks at two key angles that will inform the UK’s approach. Firstly, its second mover advantage and how to develop different environments for retail and institutional investors. Secondly, it explores how to optimise regulation for issuance, trading, lending and custody of cryptoassets.

To download the whitepaper, visit: https://www.acuiti.io/the-future-of-uk-cryptoasset-regulation/