Why is UK worried?
Bitcoin was created in 2009. Since then, cryptocurrency as a medium of exchange and investment has skyrocketed. In 2021, the annual volume of investor crypto trades reached $14 trillion.
The UK like other countries has a centralized monetary system. Its central bank, the Bank of England, issues the pound (£) as its national currency or legal tender. The central bank controls the supply (circulation) of pounds and by doing so can modulate natural economic fluctuations.
Cryptocurrency is a decentralized system. Anybody can create (mine) crypto if they have a powerful computer, required software, and a source of an enormous amount of electric energy.
The UK government, as well as other governments, are concerned about losing control of their monetary policies and their implementation. They are also concerned about crypto advertising which dominated the Super Bowl advertising in 2022 where a 30-second spot cost $7 million. Also, because of the secrecy and privacy of crypto investment, it is increasingly used to hide ill-begotten gains from criminal activity.
UK Government Response
The UK government’s, as well as other governments’, response to crypto challenges has been relatively timid. They have struggled to understand the complex and rapidly changing digital asset technology and practices.
The UK along with other countries are seriously considering having their central banks mine and issue their own state crypto. The UK crypto might be called “Britcoin.” Doing so would effectively fight fire with fire. Such state cryptos would be subject to the central bank monetary policy.
While considering new protections for consumers, the regulators recognize the reasons why crypto trading is popular. The task of balancing the benefits of crypto as a more efficient payment system and their obligation to protect consumers and implement monetary policy is a challenging one.
Today there is no meaningful regulation of the crypto world.
Under existing law, crypto exchanges must register with the Financial Conduct Authority (FCA). The FCA regulations require crypto exchanges to comply with customer protection and reporting obligations of the Anti-Money Laundering and Countering the Financing of Terrorism act. That’s pretty much the extent of government action.
In April 2022 the UK financial services minister announced the government plans to submit legislative proposals for new crypto rules and regulations. Their focus will be on the regulation of stablecoins which are tokens backed by tangible assets like gold and central bank-issued money. They are convertible into the underlying asset (e.g. British pounds).
Stable coins are designed to give the market more stability and avoid the volatility of other digital assets. Also, they will be regulated along with the British pound.
The new legislation would also have features to encourage innovation for digital assets and assist the UK financial services sector to innovate and compete. These measures will continue to operate within the scope of consumer protections.
Regulators also continue to consider measures to regulate crypto derivatives which are currently unregulated. The FCA currently bans the retail sale of crypto derivatives because of the unreliability of valuation for retail consumers. However, the FCA is considering ways to facilitate derivative trading while protecting consumers.
Summary
Crypto markets are volatile. Trading prices have fallen almost 50% in the first quarter of 2022. The technology is complex. Many investors don’t understand as much as they should and are targeted by the explosion of crypto advertising. The UK government is trying to deal with the multiple challenges to its obligation to protect consumers and the economy.
Guest Contributor