UK sets out plans to regulate crypto and protect consumers

Firms waiting for approval by the FCA were put on its “Temporary Registration Regime” (TRR), which enabled them to do business until April 1. Deviations from the peg in the secondary market create arbitrage incentives to bring the price back to par, so long as coinholders maintain confidence in the value and liquidity of the backing assets. A further disadvantage of this model is that the safeguarding banks may need to hold more high quality liquid assets than otherwise, in which case this model could have a more adverse impact on the provision of credit than other models. The ability to use the proceeds of a DeFi loan as collateral to raise additional DeFi loans means that users can significantly leverage their overall exposure. For example, the proceeds of a loan on one DeFi application can be pledged as collateral on another, allowing the user to ultimately borrow a multiple of their original cryptoasset holdings.

Large daily swings in value are common – Bitcoin prices have fallen by 10% or more in a single day around 25 separate times over the past five years, on one occasion falling 27% in a single day. This price volatility makes unbacked cryptoassets unsuitable to be widely used as money, for example as a means of exchange or a store of value. The price and value of an unbacked cryptoasset is driven by speculative investment decisions, rather than market fundamentals which can be objectively assessed. In contrast, even for high-risk traditional investments such as illiquid securities, advisors have experience and qualifications to conduct due diligence on the corporate issuer. Cryptoasset exchanges are currently required to be registered with the FCA for purposes of money laundering regulation.

The FPC also welcomes HM Treasury’s proposals to bring systemic stablecoins into the Bank’s regulatory remit. Some stablecoins intend to replace or substitute existing payment systems, and would transact in their own coin issuance rather than central or commercial bank money. Consistent with this intention, the FPC’s expectations outline that stablecoins used in systemic payment chains as money-like instruments should be regulated to standards equivalent to traditional payment chains. The expectations would also ensure that systemic stablecoins are regulated and supervised to deliver the same level of public confidence as commercial bank money. The Bank, alongside other UK and international regulatory authorities, is considering the optimal regulatory model for systemic stablecoins (Box C). Unlike unbacked cryptoassets, stablecoins claim to maintain a stable value against a fiat currency by holding a pool of backing assets, in a bid to make them more suitable for payment and settlement purposes.

  • If you live in the UK, dealing with an exchange that adheres to the country’s regulations makes perfect sense.
  • For example, according to UK regulations, selling your assets may attract an income tax.
  • These words should be carefully stored in a safe place because anyone who finds them will be able to access your cryptocurrency.
  • These devices resemble a USB drive, and modern hardware wallets have several features.
  • Seizure powers offer a means to preserve the value of assets pending the outcome of investigations or asset recovery proceedings.

General unsecured creditors are lower in priority on the list of creditors in a bankruptcy proceeding. Therefore, if there are not enough assets to liquidate and meet financial requirements for higher priority creditors, it is possible to lose your crypto assets if your custodial wallet company declares bankruptcy. There’s absolutely nothing to worry about if you trade cryptocurrencies legally in the UK. However, problems only begin when you use these assets for unlawful activities like money laundering.

Features of cryptocurrency control in the UK

If this is successful, exchange platforms will ensure that investors know the risk of investing in cryptocurrencies by passing a test before opening new accounts. All you need is a suitable crypto exchange that is regulated by the UK’s financial regulatory, the Financial Conduct Authority (FCA). Later, you can either store your asset in a cryptocurrency wallet or leave it in the exchange cryptocurrency regulation in the UK for future trading. The United Kingdom is set to create a broad regulatory framework detailing how cryptocurrency businesses can set up shop and operate in the country. Even though cryptocurrencies themselves like bitcoin are not regulated, some types of cryptoassets – such as security tokens, which fall within the FCA’s regulatory remit – may be, if the firm is registered with the FCA.

Features of cryptocurrency control in the UK

The Advertising Standards Authority (ASA) also comes in handy when it comes to safety, with the mandate to ban misleading promotions about the crypto market. This is one of the bitter truths you must understand before making an investment in crypto. Bitcoin ATMs were the most efficient way to buy cryptocurrency in the UK until the FCA banned them in early 2022.

As such, investing in cryptocurrency should only be considered by experienced investors who understand the regulation and who are comfortable with the fact that they may get less back than they put in. There is a risk that exposures to cryptoassets grow rapidly before internationally agreed standards are integrated into the UK regulatory framework. The FPC also welcomes the statement issued by the FCA reminding firms of key existing obligations when interacting with or exposed to cryptoassets and related services, given the risks they present to both market integrity and consumers. It is possible that some non-systemic stablecoin issuers will adopt this model, which is currently used by most e-money providers in the UK. But, as noted in the Bank’s Discussion Paper on new forms of digital money, there are some significant disadvantages with this model when applied to systemic stablecoins. A run on a systemic stablecoin would cause it to withdraw funds from the safeguarding bank, possibly prompting the latter to liquidate assets in order to fund the outflow.

Wallet safety is essential, as cryptocurrencies are high-value targets for hackers. Some safeguards include encrypting the wallet with a strong password, using two-factor authentication for exchanges, and storing any large amounts you have offline. You can make a cryptocurrency transaction on your computer or device by plugging in the hardware wallet.

People can buy and sell cryptocurrencies like Bitcoin, but they can also get hold of them through a process known as mining. Each transaction made is represented by a block which is added to the larger chain, hence the name blockchain, and all the transactions remain in the blockchain forever. Instead, every transaction ever made is recorded on a huge database known as a blockchain – think about it like a massive spreadsheet. The person shares their bank details with the shop and the shop then shares those details with the bank which checks its records to see whether the customer has enough money in their account to pay for the item. Once this is confirmed, the bank tells the shop the transaction is all good to go and updates its records. Nowadays, it’s common for people to use either cash, or what’s known as a debit card – which allows people to spend money they already have in their bank account – to make purchases.

Such regulations protect crypto exchanges by ensuring cryptocurrencies aren’t used for illegal transactions. Today, many crypto exchanges need new users’ details, including their email addresses and names, to store accurate records. According to the latest reports, the FCA could unleash a set of financial promotion rules to guide the crypto exchanges in the future.

These powers will apply to all assets but will be particularly useful in the context of cryptoassets. These amendments will enable law enforcement to more effectively investigate, seize, and recover the proceeds of crime within the cryptoasset ecosystem. This includes amendments to the Proceeds of Crime Act 2002 (POCA) to support the recovery of cryptoassets. Our robust approach to regulation mitigates the most significant risks, while harnessing the advantages of crypto technologies.

There is also a risk that cryptoassets become increasingly exploited to raise and move funds for terrorist activities in the future. Cryptoassets are now increasingly being used by criminals to move and launder the profits of various crimes including drugs, fraud, and money laundering. There is also an increased risk that cryptoassets are being exploited to raise and move funds for terrorist activities. Intervention is required to facilitate faster and more efficient processes for the seizure of cryptoassets, and to ensure that these assets can be recovered (that is, seizing and confiscating assets acquired by individuals as a result of crime).

Increased concerns about consumer protection or market integrity could lead to a loss of confidence in cryptoassets, which may in turn undermine financial stability by weakening broader trust and integrity in the financial system. Where crypto technology is performing an equivalent economic function to the traditional financial sector, the FPC considers that the function should be regulated to ensure an equivalent regulatory outcome. However, the use of decentralised technology – often across jurisdictional borders – means that there may not be a well-defined entity which could be subject to that regulation, so the way in which regulation is applied may need to be different. Decentralised exchanges facilitate transactions without the need for a centralised intermediary, by remunerating users for contributing cryptoassets into a liquidity pool where users can trade assets (see Box A, Aramonte et al (2021)).