The UK’s cryptocurrency industry has come a long way over several years. What was once a fledgling unregulated sector is continuously becoming a strong, well-regulated piece of the UK’s financial industry. However, the path forward has not always been straight and narrow.
Finance Magnates recently sat down with Ian Taylor, chair of CryptoUK, to discuss how cryptocurrency regulations have changed in the UK over these past years, as well as what is happening today. CryptoUK describes itself as “the self-regulatory trade association for the UK cryptoasset industry, established to promote higher standards of conduct.”
CryptoUK recently published an open letter to the Financial Conduct Authority (FCA) regarding a new ‘registration authorisation’ requirement for cryptocurrency companies in the UK. Under the rules of the authorization, cryptocurrency companies were required to apply for the right to continue their operations by January 9th, 2021. The deadline has since been extended to July of 2021; however, with less than three months to go, less than 5% of applicants have received a decision.
As a result, the cryptocurrency industry in the UK has reached a sort of ‘tipping point’. Here is what is happening.
Much Progress Has Been Made since 2018 – There’s a Lot More Work to Be Done
At the time, “there was a lot of focus from policymakers on the new industry,” Ian said, “also, the government wanted to understand such things as ‘what’s the difference between a payment token and a security token?’ So, CryptoUK and other market participants worked with the government on the so-called ‘Crypto Asset Task Force’ to come up with a taxonomy.”
Three years later, in 2021, the things that CryptoUK is advocating for look quite different. “We’re at a tipping point for regulatory clarity in the UK,” Ian said. In other words, quite a lot has happened within the past three years, but there’s a lot more work to be done.
Cryptocurrency Regulations in the UK: An Overview
“Today, the regulatory landscape in the UK has three prongs,” Ian said. The first of these is “the money laundering regime.”
“This is the European AMLD5 that required European countries (prior to Brexit) to implement KYC and AML requirements for cryptocurrency businesses, similar to how lawyers, banks, and other institutions have to ensure that their customers’ money is ‘clean.’” As a result of AMLD5, “all of the crypto businesses in the UK are applying to the FCA.”
The second “prong” of the UK’s regulatory landscape is that “the UK has come out and said that they’re going to require companies that want to promote crypto assets in the UK to have that promotion signed off by a regulated entity. That will be an organization that is already known to the FCA and will have a regulatory license.”
This second prong is not live yet, but Ian explained that: “the consultation closed at the end of last year, and we expect that to come out in the second half of 2021.”
Open letter to @RishiSunak: 200+ #crypto businesses are seeking admission to the @TheFCA's #AML register. Many report an opaque & arduous process which is restricting innovation, job creation & revenue generation. Please read our open letter & intervene. https://t.co/dcQBfprQb8 pic.twitter.com/GrdaC7fUBh
— CryptoUK (@CryptoUKAssoc) March 15, 2021
The third prong of this regulatory scenery is the upcoming regulation of stablecoins. “If deemed systemic in the UK economy as used for payments,” regulators in the UK will build and enforce a regulatory framework.
What will it take for stablecoins to be deemed systemic? The qualifications are unsure, Ian said. However, “one would assume that it’s when something bad has happened; that’s usually when policymakers step in and get involved.”
For the time being, however, “nobody’s using Tether (USDT) or USD Coin (USDC) to buy any goods and services in the UK.” Rather, the regulatory action on stablecoins at the moment is intended to “futureproof” something like Facebook’s Diem coin, or perhaps the way that USDC may be used within the Visa payments network.
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”What We’re Seeing Is a Really, Really High Bar for an Activity Regime for Cryptocurrency Businesses.”
In other words, there is quite a bit more regulatory clarity for crypto in the UK than ever before, ”and with that clarity has come institutional adoption, which is something that many in the industry have been calling out for.” After all, institutional adoption of crypto represents the industry “becoming more legitimized and the growth of crypto adoption.”
“So, what we’ve seen from the UK government is good, positive rhetoric that the UK is open for crypto businesses,” Ian said. The government has expressed that “fintech is an area where the UK is really looking to develop, to grow jobs, and improve economic benefits.”
“That’s all very well,” Ian continued. “However, on the ground, in actual reality, we have a ‘logjam’ with the Financial Conduct Authority (FCA) where what we’re seeing is a really, really high bar for an activity regime for cryptocurrency businesses.”
Of More Than 200 Applications for Authorization That Have Been Submitted to the FCA, Only Four Have Been Approved.
Indeed, in early 2020, the FCA set up a new “registration authorisation” for cryptocurrency companies. Under the rules of the authorization, cryptocurrency companies were required to apply for the right to continue their operations by January 9th, 2021. The deadline has since been extended to July of 2021.
Ian explained that at its core, the activity regime is intended to “ensure that crypto businesses have due process and policies in place to ensure that the customer’s they are dealing with are not laundering money or funding terrorism,” Ian said.
However, here is what is happening: of more than 200 applications for authorization that have been submitted to the FCA, only four have been approved. If the remaining 196 do not receive a decision by the July deadline, and there is no extension to the deadline, they could be forced to shut down their operations.
“It doesn’t make sense, because this was originally supposed to close after 12 months,” Ian said. “Because they hadn’t gotten through, the applications were given a temporary regime extension until July.”
“However, it’s been four months since the extension to July. So, you wonder what’s going on, why are companies not getting approved?”
What Is Causing the FCA’s Crypto “Logjam”?
“It’s almost a ‘catch 22’ in terms of the industry participants,” Ian explained. “The quality of some applicants aren’t perhaps to the standards required. This is understandable. It’s a new regime, and many participants haven’t operated within regulatory regimes previously.”
“If you can imagine two guys that are tech developers who have been building software solutions, and now all of a sudden they’re told, ‘you have to start KYCing your customers.’ They might say, ‘I don’t even know if I have any customers, I’m just writing code’,” Ian said.
“Secondly, the number of applications that the FCA received were far above the original forecast,” he continued. “We know that the FCA thought that they would receive 80 applications; they received almost three times that amount.”
There are a number of other factors that may be contributing to this ‘logjam’ at the FCA. For example, because of COVID-related complications, “there are a lot of resources that are being pulled out of these folks viewing these applications at the FCA onto other projects.”
“Also, there’s a lack of knowledge and understanding around some of the business models of new crypto businesses,” Ian explained.
However, “the final point, and this is what we hear from people at the regulator, is that there’s an extra level of fear around the risks attached to crypto.”
“All Applications Are Being Sent Back with So Many Questions from the Regulator”
Indeed, crypto-related crime is what “all policymakers, not just in the UK, but across the globe, are worried about,” Ian explained. Specifically, their concerns revolve around “cryptoassets, mainly Bitcoin, being used for illicit purposes, including funding terrorism and money laundering.”
While it has been proven that the amount of crypto that is used for these kinds of illicit purposes is very low, approximately 1%. Ian explained that senior politicians around the globe tend to inflate this number as high as 50%.
“There’s a perceived risk that the illicit use of crypto is higher than what it actually is,” Ian said. “So, we have this really high bar that’s set, much higher than what’s required of the FCA by the government, to put this regime in place.”
As a result, “all applications are being sent back with so many questions from the regulator. That’s why we have this logjam.”
“We All Have the Same Goals: To Promote Safe and Responsible Business in the UK.”
What exactly is CryptoUK doing to help fight against the logjam? The trade body published an open letter addressing the problem earlier this year. Beyond that, Ian said that: “it’s very difficult when you’re a new trade body with limited resources to advocate at perhaps the level we would like,” which is “to have relationships with senior politicians in Westminster, politicians that can raise our issues with senior leaders at the FCA.”
“That being said, we do what we can in discussions, and we provide information when we can, and we try and talk to people at the FCA and at Her Majesty’s Treasury (HMT),” he explained. “This year, we’re going to set up an All-Party Parliamentary Group (APPG) which will help us raise the issues surrounding crypto with senior government officials in both houses.”
Essentially, “it’s about collaboration,” Ian said. “I know that the folks at HMT and at Her Majesty’s Revenue and Customs (HMRC) are very proactive in speaking with the private sector community. I would urge the FCA to reach out a little bit more and work with us. We all have the same goals: to promote safe and responsible business in the UK.”
This is an excerpt that has been edited for clarity and length. To hear Finance Magnates’ full interview with Ian Taylor, visit us on Soundcloud or Youtube.