What to expect when UK, long-term US ally, announces details of crypto regulation

The UK is set to announce a crypto regulatory framework that it expects to encourage growth and financial stability. The framework will have two legislations, one focused on stablecoins and the other to provide clarity for staking services.

The UK’s push for the legislation follows a cascade of financial regulation milestones sparked by the US elections. The surge in the crypto market has also raised concerns that crypto startups in the UK might pivot to the US, where regulations are clearer or more accommodating. 

The UK’s convoluted path to crypto regulation

Crypto regulation initiatives started under former prime minister Rishi Sunak’s leadership in 2022. His government planned to make the UK a global hub for crypto assets by focusing on key areas such as stablecoins and clarifying which activities should fall under the Financial Conduct Authority (FCA). 

However, political changes delayed the regulatory timelines, which means the issue is now being revisited in 2024.

The new legislation is expected to allow the FCA to engage with the crypto industry to develop robust and specific regulations. Also, staking will be reclassified as a tech service, rather than assets management, which would have been subject to more scrutiny.

Although the UK treasury has yet to provide a specific timeline, the FCA is expected to release a regulatory roadmap sooner than later. The roadmap will include consulting on stablecoins in early 2025, followed by a phased approach to broader crypto regulations. 

Also, the UK government will update the industry on advancements in the digital securities sandbox, a joint initiative by the FCA and the Bank of England to support blockchain innovation.

The lack of clear and swift legislation has led to justifiable hesitance among crypto firms on UK investments, especially as the EU’s comprehensive Markets in Crypto-Assets (MiCA) regulations are near full implementation. Laura Navaratnam, policy lead at the Crypto Council for Innovation, said that the UK has a unique opportunity to benefit from a second-mover advantage if it acts decisively. 

Crypto regulation is taking shape everywhere else

In 2023, the US made some headway toward establishing a regulatory framework. Two proposed bills, the Financial Innovation and Technology for the 21st Century Act (FIT21) and the Blockchain Regulatory Certainty Act, helped clarify when a cryptocurrency should be treated as a security or commodity, broaden regulatory oversight, and define the roles of various agencies in overseeing crypto assets. 

Despite being introduced, these bills did not see significant progress through Congress. However, the newly elected US president, Trump has promised to create a friendly framework for crypto, which would make the United States a more appealing option for crypto startups compared to the UK.

The EU’s MiCA is perhaps the world’s most comprehensive, widely adopted crypto regulatory framework. With MiCA providing clear licensing requirements and strong anti-money laundering measures, UK firms could soon face competitive pressure from jurisdictions with more defined rules, especially from their neighbors still in the EU. 

As the UK develops its crypto policies, including frameworks for stablecoins and staking, it will need to strike a balance between innovation and regulation. The EU’s head start with MiCA has underscored the urgency for the UK to provide clarity, ensuring it remains competitive while safeguarding against risks highlighted by incidents like the FTX collapse.

The International Organization of Securities Commissions (IOSCO) recently issued 18 recommendations to establish global crypto regulation, emphasizing consistent oversight to address cross-border risks that could harm investors. 

Also, the World Economic Forum (WEF) advocates for international alignment in regulating crypto. The forum highlights the need for a global approach to harness blockchain’s benefits while managing risks. It also notes the varying regulatory capabilities and market maturities across jurisdictions, calling for collaboration among international organizations, regulators, and industry leaders to ensure responsible regulation.

As the FCA prepares a regulatory roadmap, the UK will be looking at Dubai’s Virtual Assets Regulatory Authority (VARA), which has been successful in attracting blockchain and Web3 companies with crypto-friendly policies. 

The focus on stablecoins and reclassifying staking suggests that the UK government is taking a balanced approach to regulation, which might offer crypto companies an alternative to the frenzy spreading through the US and the EU’s strict compliance framework, which has started to claim casualties already.