Continuing growth of the crypto asset market has prompted the government to publish proposals for crypto asset regulation to mitigate the risks of a “turbulent industry” that in November saw the collapse of crypto exchange and hedge fund FTX, which took $8bn of its customers’ money with it.

A Treasury consultation on how best to regulate a broad suite of crypto asset activities will close on 30 April 2023, consistent with its approach to traditional finance.

The Treasury says that its robust approach to regulation mitigates the most significant risks, while harnessing the advantages of crypto technologies, enabling a new and exciting sector to safely flourish and grow, boosting jobs and investment.

Economic Secretary to the Treasury Andrew Griffith says: “We remain steadfast in our commitment to grow the economy and enable technological change and innovation – and this includes crypto asset technology. But we must also protect consumers who are embracing this new technology – ensuring robust, transparent and fair standards.”

The proposals place responsibility on crypto trading venues for defining the detailed content requirements for admission and disclosure documents – ensuring crypto exchanges have fair and robust standards. The proposals also set out to strengthen the rules around financial intermediaries and custodians with responsibility for facilitating transactions and safely storing customer assets.

The government says its approach will help to deliver a robust world-first regime strengthening rules around the lending of crypto assets, while enhancing consumer protection and the operational resilience of firms. The consultation is also seeking views on improving market integrity and consumer protection by setting out a proposed crypto market abuse regime.

ICAEW’s Head of Tech policy Esther Mallowah welcomes the government taking steps to improve regulatory clarity in this space. “It is also positive to see that the proposed regulation covers more than cryptocurrency, and looks at wider crypto assets. For the regulation to make a real difference it needs to have the right scope and clear requirements, which effectively address the key risks associated with crypto assets, including consumer harm.

However, Mallowah warns that the proposed regulation needs to work alongside wider crypto asset regulation in other jurisdictions. “We look forward to reviewing the details of the proposed regulation and the extent to which it does this.” 

Reuben Wales, ICAEW’s Head of Financial Services, says the long list of failings in this sector – from money laundering and fraud to loss of investor assets and money – has reinforced the importance of setting clear guardrails for those that operate in this sector. “For crypto to have a future it needs a regulatory regime that engenders trust and protects investors,” he says.

The Treasury is also introducing a time-limited exemption to address industry concerns about the small number of Financial Conduct Authority (FCA) authorised crypto asset firms who can issue their own promotions. Crypto asset businesses that are registered with the FCA for anti-money laundering purposes will be allowed to issue their own promotions while the broader crypto asset regulatory regime is being introduced.

The government says this approach delivers on the original policy intention of the measure to promote innovation, enhance consumer protection and ensure that crypto asset promotions can be held to equivalent standards as promotions of financial services products with similar risk profiles.

Wales warns that the government’s crypto road map is ambitious. “Leaning heavily on the existing rule book for traditional financial activities, it looks to be comprehensive in scope, covering most crypto-related assets and activities. Issuance, intermediation, trading, custody, payments and lending are all in the mix. However, it remains to be seen whether existing regulations are fit for purpose and to what extent they will need a rethink when it comes to crypto.”

Future financial services regulatory regime for crypto assets

To learn more about cryptocurrencies, listen to the ICAEW Insights podcast: How can accountants make sense of crypto?