Published: April 17th, 2024
The British government will table new legislation to allow the regulation of crypto staking, stablecoins, plus custody and exchange services in the UK, Economic Secretary Bim Afolami told a finance industry gathering in London on Tuesday.
Scheduled for June of 2024, the new legislation will ‘set out our final proposal for a comprehensive crypto regulation regime,’ Afolami said. ‘Once enacted, a range of crypto investment activities, including running an exchange and assuming custody of investors' digital assets will be subject to regulatory oversight for the first time.’
Last year, Westminster gave assent to a crypto in financial services bill. It constructed the legal scaffolding necessary for cryptocurrencies to be treated as regulated financial instruments in the UK.
In February of 2023, the Bank of England (BoE), Financial Conduct Authority (FCA) and regulators in the devolved assemblies of Scotland, Wales and Northern Ireland all consulted on what a stablecoin regime would look like in the country. The BoE said it would regulate any stablecoin provider big enough to have a systemic impact on the financial system, while the FCA agreed to assume oversight of the wider crypto market.
Afolami suggested that secondary stablecoin legislation was on the way, adding that Prime Minister Rishi Sunak wanted to see it enacted within six months.
Britain's Conservative government has previously said it had ambitions to regulate and legitimize crypto as part of a strategy to establish the UK as a crypto hub. National elections are expected in the UK later this year, which on current polling would see a Labour Government take power and leave some crypto plans in limbo.
After years of heel dragging on crypto regulation, in May 2023, the US Securities and Exchange Commission (SEC) responded to criticism that the agency wasn't giving crypto companies the guidance they needed to comply with federal finance law.
America's primary financial watchdog had faced ongoing criticism from the cryptocurrency industry for not setting out clear-cut rules that recognized the unique nature of digital assets.
According to Bloomberg, SEC chairman Gary Gensler told the 27th annual Financial Markets Conference in Atlanta, Georgia, that the rules for crypto companies ‘have already been published,’ adding that he doesn't think the SEC is behind the times.
A wave of enforcement actions was underway at the time that encompassed 140 cases, he said, many of them pre-dating the FTX meltdown. ‘This proves that the SEC is up to the job’, he said, and told event attendees that too many cryptocurrency companies have developed business models that amount to fraud.
In many cases, calling these businesses decentralized ‘is a false narrative,’ Gensler said. ‘Many have centralized aspects with most business and development activity focused in these areas.’ He went on to say that it's common for crypto business models to rely on ‘taking customer funds and commingling them,’ something FTX executives have been accused of.
When asked about the crypto industry's longstanding call for clearer regulations, Gensler said there was nothing about blockchain's status as a new technology gives crypto firms a pass from having to abide by established rules.
Picking up on a theme he had used before, most recently when speaking to a senate committee on finance reform, Gensler called financial intermediaries in traditional money markets ‘rent-collecting-nodes.’ The message for crypto companies was clear, he said. If a firm is holding what the SEC considers securities on a tech platform, then the rules around custody and trading must be followed to the letter.
If that's too difficult a concept to grasp, Gensler said, the SEC is ‘ready to help bring them into compliance.’
American crypto firms operating in the country's top financial jurisdiction were warned in February 2023 that they needed to manage their customers' digital assets with greater care.
In the wake of the FTX scandal, the New York Department of Financial Services (NYDFS) published an open letter to the industry outlining how investor assets should be kept separate from company funds. The letter also included guidelines for custodians, and explained the necessary disclosures that firms need to make when keeping custody of digital assets for clients is part of their business model.
NYDFS took the action as federal prosecutors were applying more scrutiny to collapsed crypto trading exchange FTX and its controversial founder Sam Bankman-Fried. Bankman-Fried, or ‘SBF’ as he is known colloquially, was accused of misusing billions of dollars in customer assets and funneling them from the exchange to fund dodgy trades at his recently shuttered hedge fund. He was recently sentenced to 25 years in prison for conspiracy to commit securities fraud.
‘As stewards of customer assets, crypto companies that act as custodians need to have rigorous processes in place that follow those relied on by traditional financial services firms,’ the NYDFS letter said.
The role of asset custodians in finance is to ‘hold on’ to customer assets for safe keeping. They could be funds, bonds, equities, or cryptocurrencies. In all cases custody has to be executed in a secure and transparent manner.
The new NYDFS guidelines are even more specific and provide detailed guidance on how digital assets should be handled.
Crucially, the agency said custodians must keep customers' digital assets completely separate from any assets that belong to the custodian itself. In crypto terms this could mean recording the assets both on-chain and on the custodian's own books, but maintaining appropriate records to avoid double counting.
The agency also said that assets under a custodian's control should only be held for the purpose of safekeeping. Specifically, there should not be a debtor-creditor relationship between custodian and customer when possession of a digital asset is transferred.
Custodians in New York are also required to give customers written disclosures that clarify what the custodial arrangement means and how the custodian operates. Disclosures should explain how the custodian ‘segregates and accounts for and digital currency held in custody,’ and clarify the customer's ‘retained property interest in it.’