UK Cryptocurrency Regulations Indicate Significant Change: Will They Fulfill Their Promise?
Rewritten Content:
Title: The UK's New Crypto Regulations: A Path to Crypto Hub or Misstep?
The UK, my wife's homeland and a place I frequent often, has recently unveiled its draft Statutory Instrument for cryptocurrency regulation. Ambitious as it may sound, the proposed rules could potentially propel the UK to a global "crypto hub." But will these intentions translate into reality?
The path ahead is challenging, and the success of these regulations is far from guaranteed. The crypto sector in the UK has long clamored for clearer, fairer regulations, and these new proposals have been dubbed a positive step by some. However, with the rules still pending parliamentary approval and industry feedback, much work remains to be done.
Gemini's Head of UK Legal, Azariah Nukajam, notes that the proposals present an opportunity for the industry to weigh in and help shape the final rules. Nukajam believes that the foundation has been laid, but the house still needs to be built.
The draft SI spans a wide range of topics, from stablecoins and staking to exchange registration and operational resilience. Its aim is to align cryptocurrency oversight with traditional finance standards, but steering this tightrope without stifling innovation or excluding smaller players will be no easy feat.
One of the key differences between the UK's framework and those of the EU and US lies in its explicit regulation of staking and deliberate exclusion of decentralized finance for the time being. Nukajam sees this as a strategic advantage for the UK, given the ambiguity in other regions regarding these areas.
In this piece, we delve into what these new proposals mean for crypto exchanges, startups, and everyday users in the UK. Naturally, we spoke with Nukajam, covering a wide array of topics, from the UK's position in the global regulatory race to the FCA's handling of the anticipated deluge of applications.
Q: Does the UK have a genuine shot at becoming a global crypto hub with these new regulations, or are there reasons to be skeptical about the impact these rules will have?
A: The proposed regulations have the potential to create a stimulating environment for crypto assets, but their effectiveness depends on their implementation and the speed of execution. The Draft SI sets the stage for seamless integration of crypto activities into the broader financial regulatory framework, providing much-needed clarity and assurance for the sector. However, the rules are in a draft state, subject to further parliamentary scrutiny and industry feedback.
Q: Critics have suggested that the UK is still playing catch-up in the global race for regulatory leadership. How confident are you that the UK can catch up and even overtake competitors like the EU and US? If the rollout isn't swift and clear, are there risks of London lagging behind other cities like Singapore, Dubai, or New York?
A: A delay in implementation could compromise the UK's competitiveness. Faster-moving jurisdictions, such as Dubai, Singapore, and Switzerland, may gain an advantage if the UK's implementation is delayed or overly complicated. However, the UK's distinct regulatory framework, particularly its regulation of staking and exclusion of decentralized finance from its scope at present, sets it apart and provides its unique advantages.
Q: The UK government has indicated it will work closely with the US on crypto regulation, with experts noting that the UK's rules "align... with the U.S., rather than the EU." Considering the state of bilateral relations between London and Washington, how do you foresee this cooperation playing out?
A: Both the UK and US share similarities in their regulatory approaches, such as a focus on consumer protection through increased transparency and conduct standards. Both governments have also made it clear that they plan to regulate stablecoins, whichconstitute a significant portion of the cryptocurrency market. UK-US cooperation on crypto regulation is a positive step, but there is cause for caution, as the pace of regulatory deployment in both jurisdictions might create challenges if there is a delay or a potential reprioritization of the crypto agenda.
Q: Under the new regime, nearly all crypto firms conducting vital activities in the UK will need to become authorized, regulated entities. The FCA has yet to detail the application process and requirements. What can we expect this process to look like, and how arduous will it be for a crypto company to become authorized, considering factors like preparing business plans, compliance manuals, meeting fit-and-proper tests, possibly holding regulatory capital, etc.?
A: We anticipate the process to be similar to that required for firms seeking UK MiFID licenses. While the specifics remain to be revealed, there are parallels between the UK's regulatory framework under MiFID and the proposed crypto regime. Firms will need to meet stringent requirements for governance, capital adequacy, and to submit a regulatory business plan.
Established crypto firms, particularly larger players, will likely be familiar with the process and the FCA's expectations, having already been regulated beyond crypto assets. Smaller players, however, may require additional support from regulators and legal advisors to avoid application delays or rejections.
Q: Do you believe the UK regulators (the FCA in particular) will be equipped to handle an influx of applications from crypto firms eager (or forced) to come into the regulated fold?
A: The FCA has made a substantial effort to allocate additional resources to its Authorisations Department and streamline applications processes through enhancements to the FCA Connect portal. The FCA has set clear expectations regarding the standards expected at the authorization gateway. As such, we expect the FCA to provide extra support to applicants through measures such as authorization information sessions, and over time, publish guidance and feedback on good and poor applications, as it did for registered firms under the Money Laundering Regulations.
Q: With roughly 12% of British adults having owned crypto at some point, how will everyday users be affected once these new regulations are enforced? Will they notice improvements, for example, more trust in exchanges, clearer information, fewer fly-by-night operators, or will they face inconveniences like limited choices due to certain overseas platforms leaving the UK market?
A: Regulations are a significant positive step for the UK industry, and we have already witnessed the benefits of higher compliance standards in the form of Consumer Duty. As part of this effort, we have dedicated resources to defining and segmenting our target markets and building our products and services around our customers, rather than the other way around.
These rules are instrumental in building trust in the sector so that consumers know they are dealing with a regulated firm. They also provide a layer of protection against risks like breaches of consumer protection laws, unfulfilled promises, misleading practices, and the lack of recourse when things go wrong.
While some firms may choose to leave the UK market due to the stringent regulations, it is unlikely that this will limit consumer choice, as over 50 firms are already registered under the UK Money Laundering Regulations (MLRs) to offer a range of cryptoasset services.
Q: With the potential for increased regulation, some in the crypto community worry that the regulations will favor established exchanges and large fintech firms, marginalizing smaller startups and community-driven projects. Do you think the UK's new rules risk cementing the dominance of existing crypto incumbents?
A: The regulatory maturity brought about by these new rules is likely to foster grassroots talent within the industry and attract transferable skills from TradFi. This should create opportunities for players of all sizes. Under the Conservative Sunak government, the National Quantum Strategy was established to invest in and develop quantum technologies over the next 10 years. This appears to be supported by the Starmer's Labour government, with an additional £121m injected in April 2025.
Q: To implement traditional financial controls in the crypto world, we must tackle challenges like market surveillance, operational resilience, and preventing market manipulation. What are the key hurdles in these areas?
A: Implementing traditional financial controls in the crypto world presents several key challenges, particularly in areas like market surveillance, operational resilience, and preventing market manipulation. Here are some of the main obstacles:
- Lack of Regulatory Clarity and Consistency
- Operational Resilience and Risk Management
- Market Surveillance
- Anonymity and Lack of KYC
- 24/7 Global Market
- Technological and Infrastructure Challenges
Addressing these challenges will require a collaborative effort from regulatory bodies, financial institutions, and technology providers to develop and implement effective controls that balance the unique aspects of crypto with the need for financial stability and security.
- The draft Statutory Instrument for crypto regulation in the UK could position the country as a global "crypto hub," but its success is uncertain.
- The proposals have been favorably received by some in the industry, with Gemini's Head of UK Legal, Azariah Nukajam, encouraging participation in shaping the final rules.
- The SI encompasses various topics, including stablecoins, staking, exchange registration, and operational resilience, aiming to align crypto oversight with traditional finance standards.
- One distinguishing feature of the UK's framework is its explicit regulation of staking and deliberate exclusion of decentralized finance for the time being, offering a strategic advantage.
- In this regulatory environment, cryptocurrency exchanges, startups, and individual users in the UK will have to navigate new authorization and compliance requirements.
- As the UK government works closely with the US on crypto regulation, cooperation and alignment are expected between the two jurisdictions, although challenges in pace and prioritization could arise.
