Taming the crypto wild west: the US and UK strengthen regulation

The United States and Europe have gone full steam ahead to tame the crypto wild west, whilst the United Kingdom has some catching up to do. There has been so much uncertainty in the global crypto world, now is the time for adequate regulatory lines to be drawn to contain the ever-expansive crypto activity as it becomes a mainstream investment opportunity.

With recent crypto crashes and crypto fraud on the rise, the need for safeguards and risk controls is greater than ever.

HM Treasury’s proposal for a blueprint for successful crypto regulation

The UK has been depicted as one of the leading global financial centres. As such, in 2022, the UK outlined its plan to become a global crypto hub and a world leader in FinTech, with a well-developed regulatory infrastructure, the promise of consumer protection, innovation and technological advancement by harnessing new financial technologies such as crypto.

On 1 February 2023, the UK’s HM Treasury released its plans to regulate crypto, which focuses on the future UK regulatory framework for cryptoassets in financial services. The consultation and call for evidence are important steps forward in the regulation of crypto for the country.

It recognises that the crypto market poses complex risks and requires effective regulation if it is to properly reap its benefits whilst maintaining financial stability.

The proposal known as ‘Future financial services regulatory regime for cryptoassets’ is a hefty 82-page document that seeks to a establish clear, proportionate regulatory framework, that covers centralised crypto exchanges as well as CeFi and DeFi lending products.

Key takeaways from the UK Government’s crypto proposal

• Crypto will be brought under mainstream regulation and help the UK become a digital asset hub. The rules for crypto trading platforms will be strengthened and there will a robust “world-first regime for crypto lending.”

• Consumer protection and economic growth will be achieved through robust regulatory frameworks.

• An acknowledgement that the industry is prone to high levels of volatility and recent failures including FTX and BlockFi have “exposed the structural vulnerability of some business models in the sector.”

• The Government states that a “robust approach” will mitigate the most significant risks and still harness “the advantages of crypto technologies.” Through regulating a broad suite of cryptoassets, consistent with the traditional finance approach, the UK hopes to provide confidence to consumers and businesses.  

• A crypto market abuse regime will be built to ensure consumer protection, and operational resilience and improve market integrity.

• The rules for financial intermediaries and custodians will be bolstered to securely facilitate transactions and safely store consumer assets.

• For high standards, crypto trading platforms will be responsible for defining content requirements for admission and disclosure documents.

Economic Secretary to the Treasury, Andrew Griffith said: “We remain steadfast in our commitment to grow the economy and enable technological change and innovation – and this includes cryptoasset technology. But we must also protect consumers who are embracing this new technology – ensuring robust, transparent, and fair standards.”

The consultation will close on 30 April 2023, after this date, the Government will consider feedback and work to set out its consultation response.

The US tackles cryptocurrency

The US has approached crypto with cautious optimism. It recognises the potential benefits of digital currencies but also wants to prevent illicit activities such as money laundering and fraud.

Currently, there are no federal-level crypto regulations, but the US does continue to progress in developing federal laws. Crypto regulations are fragmented as various states follow different legislation and there aren’t consistent definitions. For example, the Financial Crimes Enforcement Network (FinCEN) considers crypto exchanges as money transmitters as crypto tokens are “other value that substitutes for currency.” Whereas the Internal Revenue Service (IRS) defines crypto as “a digital representation of value that functions as a medium exchange, a unit of account, and/or a store of value.”

In the United States, cryptocurrency exchanges are legal and subject to regulations under the Bank Secrecy Act (BSA). This means that cryptocurrency exchanges need to register with FinCEN and have an Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) program implemented as well as maintain relevant records for regulators as and when needed.

Despite the progress, the crypto industry is far from being adequately regulated. With Senator Sherrod Brown urging Janet Yellen, United States Secretary of the Treasury, to develop legislation to regulate cryptocurrencies after the FTX collapse.

FINRA launches review of retail crypto communications by broker-dealers

In November 2022, the Financial Industry Regulatory Authority (FINRA) launched a review of retail communications regarding cryptocurrency asset products and services by broker-dealers and their affiliates. This covers all retail communications on crypto assets made to 25 or more investors from 1 July 2023 to 30 September 2023, including electronic interactions such as written communications, videos, social media posts, mobile apps, and websites.

Following the crypto crashes of 2022, the review is a step forward in increased regulatory scrutiny of cryptocurrency. As such, broker-dealers are required to provide FINRA with all communications within the time frame and other related materials such as supervisory procedures and contracts with affiliates.

The SEC announces its 2023 priorities including crypto

On 7 February 2023, the US Securities and Exchange Commission (SEC) proposed its plans for 2023, covering topics such as ESG, information security, operational resilience and emerging technologies and cryptoassets.

In summary, the Division will oversee evaluations of broker-dealers and Registered Investment Advisors (RIAs) that are using emerging financial technologies or employing new practices, including technological and online solutions to meet compliance and marketing demands and to service investor accounts.

The examinations will focus on the offer, sale, recommendations of, or advice regarding crypto trading and explore whether the firm adhered to standards of care when providing advice and whether it regularly reviewed and updated its risk management procedures.

“In a time of growing markets, evolving technologies, and new forms of risk, our Division of Examinations continues to protect investors,” said SEC Chair Gary Gensler. “In executing against the 2023 priorities, the Division will help ensure compliance with the federal securities laws and rules.”

The SEC’s priorities “reflect the changing landscape and associated risks in the securities market,” and are aimed at “protecting retail investors” as well as identifying “emerging risks to investors and markets.”

CUBE comment

Regulators need to consider carefully when new crypto-specific rules are required versus expanding the scope and clarifying where existing rules are appropriate. However, the pace of action needs to increase to avoid consumer harm in the meantime. The recent development in global crypto regulations, the increasing enforcement activity, and the pace at which regulators are hiring crypto-experienced experts confirm that more regulation and oversight are coming, and mass adoption will soon be required.

Abiding by crypto regulations is mandatory. The US is cracking down on crypto wrongdoings through enforcement actions such as Nexo for the unregistered offering of crypto assets, CoinDeal for fraud and Genesis and Gemini for the unregistered sale of crypto assets. This suggests that regulators are clamping down on bad actors, misleading promotion, and poor corporate governance.

Stay ahead of the crypto regulations by implementing a regulatory change management solution. CUBE’s Automated Regulatory Intelligence (ARI) products can identify emerging crypto regulations and map these to your firm’s processes in near real-time. For confident compliance, crypto exchanges would benefit from automating the end-to-end regulatory journey to mitigate compliance gaps, build reputation and trust and avoid being hit with penalties.

Keep ahead of emerging crypto regulations by speaking to CUBE.