The government has promised new crypto regulation in “ambitions plans” to “protect customers” and boost confidence in the sector.
Ministers are aiming to bring the sector closer in line with the regulation that governs how traditional financial institutions work, with details due to be published on Wednesday morning (1 February).
In a statement, the Treasury said its new “robust approach” to regulate the sector will mitigate “the most significant risks”, but will also allow the UK to tap into the advantages of crypto technologies.
It also said it “will seek to regulate a broad suite of cryptoasset activities”, in a way that is consistent with how it approached traditional finance.
The move comes after a series of high-profile global failures with companies collapsing, crypto values tumbling and customers losing huge sums of money.
The industry worldwide has been hit by a series of crises. Most recently the FTX exchange collapsed which prosecutors described as "one of the biggest financial frauds in US history".
The value of crypto assets has also fallen sharply, with Bitcoin now worth less than half of its highest price of more than $67,000.
How will the crypto sector be regulated?
The Treasury said its proposals will:
- ensure customer assets are returned to them if a crypto business goes bust
- lay down rules on crypto-asset promotions which are fair, clear and not misleading
- enhance data-reporting requirements, including with regulators
- implement new regulations to prevent so-called pump and dump, where an individual artificially inflates the value of a crypto asset before selling it
Crypto trading venues will be responsible for “defining the detailed content requirements for admission and disclosure documents”. The Treasury said this would ensure that “crypto exchanges have fair and robust standards”.
It also said it would strengthen rules around financial intermediaries and custodians, adding: “The consultation will seek views on improving market integrity and consumer protection by setting out a proposed crypto market abuse regime.”
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.”
The consultation will run until 30 April this year, the Treasury confirmed, but Labour has called for immediate action rather than more consultations.
Shadow city minister Tulip Siddiq said: “Labour has been calling for a crackdown on the crypto wild-west for months. All the Conservatives are promising is further consultations – we need action now.
“Under this incompetent government, millions of British consumers’ savings have been put at risk by the collapse of cryptocurrencies while crypto-related scams have hit record levels. Despite this, the Conservatives continue to promote cryptocurrency gimmicks.”
Why does the crypto industry need to be regulated?
The Treasury Committee launched an inquiry into the regulation of crypto firms and found parts of the industry resemble the “Wild West”.
Around 85% of crypto-asset firms who applied to the UK’s financial regulator, the Financial Conduct Authority (FCA), failed to meet the minimum standards required for authorisation under its anti-money laundering and counter-terrorist financing regime.
It means a high proportion of crypto businesses that applied to the regulator were rejected, with only 5% seeing their applications progressed at the first attempt.
Around three quarters of applications have been withdrawn or failed - the committee said this was the most significant withdrawal or failure rate they have seen when taking on a new remit.
The inquiry was launched last year and asked the FCA for evidence around the number of crypto businesses applying for a licence that it thought might be linked to criminal activity.
The regulator said it identified significant failures from applicants over things like customer due diligence, risk assessments, transaction and ongoing monitoring, and governance. But stressed that just because a company does not meet its standards, it “does not necessarily follow that there is criminal activity”.
The deputy governor for financial stability of the Bank of England, Sir Jon Cunliffe, said last month that the industry was “too dangerous” not to be regulated in the same way that other activities in the financial sector are.