Regulatory Impact on a UK Crypto Exchange
In the United Kingdom, regulation for a UK crypto exchange can be seen as somewhat of a grey area compared to the European Union (EU) and the rest of the world.
Before diving into the state of play in the global regulatory realm, we look at why regulation is significant to a UK crypto exchange. Anti-regulation crypto enthusiasts often oppose any notion of regulation being introduced, believing it will hinder innovation and goes against the decentralised nature of cryptocurrency, specifically not being tied to any institution or government authority.
In the eyes of policymakers and many crypto business owners alike, these are the factors in which crypto may have implications on global financial stability:
Size, scale, and volatility of the burgeoning crypto market
The collective crypto market cap has reached highs of an estimated $2 trillion with high volatility. At the time of writing, the cryptocurrency market has shed $1 trillion in the last month! The crypto market is forecast to continue growing at a rapid rate sporadically.
Disruptive innovation effects of the industry
The distinctive nature of cryptos underlying blockchain technology conflicts with existing regulation for traditional methods of cross-border data flow, intellectual property rights, and capital controls. This introduces ambiguity as to how digital assets are treated for taxation purposes and various other policy concerns.
Correlation to existing financial markets
Earlier enthusiasts insisted that crypto can add valuable diversification benefits as a hedge to one's portfolio. So much so that the OG of crypto, Bitcoin, is still often dubbed "Digital Gold". Recent analysis suggests this is not the case, as there is a strong correlation between BTC and the S&P500 during the Covid-19 pandemic. Figure 1 below displays significant swings in volatility aligned with the trend of the US stock market.
Figure 1 (IMF, 2022)
For these reasons, policymakers worldwide see regulatory guardrails as imperative to achieving the common objectives of stabilising their monetary systems while championing innovation and economic growth.
Importance of regulation for a UK crypto exchange
Close to a year ago, Binance, the largest crypto exchange in the world in terms of daily trading volume, was banned by the UK regulator. This caused panic among British users who could not withdraw their fiat funds from the platform.
Crypto is volatile enough. UK crypto exchanges do not want to be banned like Binance. UK crypto exchanges crave stability, guardrails, and direction from regulators that can inform how to run their business sustainably. Therefore the Moni Talks team and I believe regulation is positive for a UK crypto exchange.
Regulation fosters stability in the market
For cryptocurrency to unleash its full potential, the industry will need to integrate into the mainstream financial system. This will unlock even more finance and use cases of blockchain technology among institutions and everyday retail investors alike.
Regulation will guide cryptocurrencies from looking like a gamble to more like an investment.
Encourages consumer protection and confidence
UK crypto exchanges do not have access to the same capital protection in the case of default as regulated stock exchanges in the legacy financial system. If, one day, investors can be assured that 80% of their funds are recoverable in the case of default, this will inspire wider adoption of cryptocurrencies. It will shift the mindset away from “only invest an amount in crypto you can afford to lose (5%-10% allocation of your portfolio)”.
Safer Crypto Industry
Although certain cryptocurrency coins like BTC are completely secure, immutable, and transparent, many certainly are not. There is widespread fraud, scams, rug pulls, and market manipulation, which gives the industry a bad name. Scammers took $14 billion worth of crypto last year, a record compared to the $7.8 billion taken by scammers in 2020, according to a report by blockchain data firm Chainalysis.
At Moni Talks , we are a customer-first company and support regulation to weed out bad actors in the industry.
Current regulatory landscape
Globally, central banks and policymakers are assessing impending regulatory responses to the rise of the crypto ecosystem. The traditional financial system becomes more interconnected with the rapidly growing decentralised finance (DeFi) industry each day. Concerns about how significant the overspill effects of this could be on the systemic stability of the monetary system have been keeping policymakers busy.
Countries from China to El Salvador have started evaluating and implementing different regulatory options. Most countries are broadly aligned in their objectives: to protect consumers, prevent illicit financing, protect the integrity of the market, and promote innovation.
Some jurisdictions, such as India, have proposed amending existing legislation. The EU and United Arab Emirates (UAE) propose setting up completely new regulators to deal with the industry comprehensively. The UK has adapted. The UK has transposed some of the related frameworks related to cryptocurrency regulation in the EU into its domestic law. Many jurisdictions' regulation is in limbo while still being developed before having the ability to be enforced. In Great Britain, all UK crypto exchanges are to be registered with the FCA.
Differing regulation presents arbitrage opportunities, lack of common standards and lingo. The Digital Currency Governance Consortium, composed of more than 80 organisations representing 33 countries, is tasked with facilitating a coordinated approach to regulation across the globe.
Key takeaways of UK crypto exchange regulation: • UK crypto exchanges are legal and have registration requirements with the Financial Control Authority (FCA) • The sale of crypto derivatives and Exchange Traded Notes (ETNs) are banned • Cryptocurrency is currently not considered legal tender • The HM Treasury plans to regulate some cryptocurrencies as part of a wider plan to make the UK a digital payment hub.
Turbulent regulatory timeline for a UK crypto exchange
The UK has transposed some of the related frameworks related to cryptocurrency regulation in the EU into its domestic law.
On 10 January 2020, the FCA announced that firms offering cryptocurrency services based in the UK are to be registered within one year.
Importantly, to be classified as a registered UK crypto exchange, a company must comply with Anti Money Laundering (AML) and Countering the Financing of Terrorism (CFT) reporting and customer protection obligations. This ignited a scramble of application submissions inundating the FCA processing resource.
On 6 October 2020, it was announced that the sale of cryptocurrency derivatives to retail consumers was banned by the FCA. This came into effect three months later in order to protect everyday investors from market volatility.
In December 2020, a ‘temporary registration regime’ was introduced due to the prolonged processing times of all registration from crypto businesses applying to adhere to the licensing requirements. On this register, a UK crypto exchange will be able to continue trading while awaiting determination of it’s application for registration with the FCA.
More than 80% of applications to the FCA have withdrawn or been rejected on the back of not meeting standards money laundering standards. Crypto has often been referred to as the Wild West and licensing requirements are clearly the new Sherrif in town.
Gemini’s head of UK, Blair Halliday, said, “The licensing regime is important as it provides customers the assurance that they’re dealing with a firm that has undergone rigorous scrutiny."
From 10 January 2022 onwards, UK crypto exchange firms, as well as recognised financial advisers and investment managers that market and provide services in the UK market, have to be registered by the FCA. As of 30 March 2022, 33 firms have been registered with the FCA, and only 12 firms remain on the temporary registration regime with notable names such as Revolut and Copper.
Author: Brendan Beeken
Moni Talks Founder and Chairman Brendan Beeken is an entrepreneur, commercial strategist, investor, and philanthropist. He writes on a wide range of subjects, including cryptocurrency, decentralised finance, blockchain, business advice, and professional wellbeing, for news and business websites, as well as Latest Moni and his personal site, brendanbeeken.com. Brendan draws from his own research and more than two decades of personal experience in business to offer a unique insight, perspective, and commentary on diverse subjects. He is passionate about making the cryptocurrency space more accessible and encouraging safer and more responsible trading and investing. Brendan's LinkTree is https://linktr.ee/brendanbeeken.