The UK Treasury has outlined new rules in a consultation paper that could see increased responsibility placed on crypto firms when it comes to their requirements for authorization and disclosure documents.
As per the announcement, the proposed regime would be based on the existing Financial Services and Markets Act 2000 which governs traditional trading venues.
This means that UK regulators would need to authorize crypto exchanges before they can set up shop in Great Britain.
"The UK government’s priority should be to underline why cryptoasset firms should be inside the perimeter," Kraken's UK managing director Blair Halliday told Decrypt. "Right now, there is little preventing firms based outside the perimeter from providing products and services to the UK market, exposing UK customers and institutions to additional risk."
Applications would need to include the firm's business plans, outline its operations, and provide “a description of controls and risk management processes,” per the Treasury.
Crypto custodians, or entities that hold crypto to protect them from loss or theft, would also be impacted by the new rules.
Still, the Treasury has made explicit that adjustments “due to the limitations of retrofitting an existing regime to a new asset class” can be made.
Adapting to crypto’s ‘unique features’
The Treasury’s announcement also acknowledged that the proposed rules may need to be modified to accommodate the “unique features” of cryptocurrencies.
This may mean putting in place new provisions where appropriate, such as safeguards for crypto-specific technologies like private keys.
The new proposals also suggested measures to prevent market abuse and insider trading. Trading venues could be expected to identify offenders and establish information-sharing arrangements with other platforms to develop a system by which such users are blacklisted.
The proposals also suggested more expansive rules for lending platforms, including introducing adequate risk warnings for consumers lending to these platforms, and clear contractual requirements including how firms can protect users amid insolvencies.
"Importantly, the status quo has led to investors signing up to platforms that have much less, if any, track record when it comes to investor protection," Halliday said. "As we’ve seen over the past few months, tens of thousands of clients have lost significant amounts of money, with very little hope of any substantive recuperation."
In addition, the consultation also touched on the environmental impact of proof-of-work (PoW) cryptocurrencies such as Bitcoin, saying that the current British ESG reporting requirements could be applied, acknowledging these may be harder to implement due to the decentralized nature of crypto.
Today’s consultation will close on April 30, 2023, and the Treasury will then consider feedback before setting out its response.