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A UK public-private sector group has released a report claiming the country can be a hub for crypto innovation – with the right regulatory framework in place.
On 5 June, the All-Party Parliamentary Group (APPG) on Crypto and Digital Assets published a report entitled “Delivering on the Government’s vision for the UK to become a global hub for cryptocurrency and fintech innovation”. APPG is chaired by dr. Lisa Cameron – UK Member of Parliament from Scotland – and provides an informal forum for members of the public and private sectors to collaborate on key issues related to cryptoassets.
Although not a formal branch of parliament, the APPG offers an important channel for channeling key policy discussions that can influence parliamentary action. The APPG has a private sector advisory board – of which Elliptic is a member – and routinely solicits evidence from private sector participants to inform policy discussions on cryptoassets.
The newly released report is the result of an investigation into cryptoassets by APPG et al. Cameron led during 2022, and Elliptic was one of a number of participants who offered evidence in support of the investigation.
The report makes a clear and bold claim: it argues that it is in the UK’s interest to encourage innovation in the crypto space in order for the country to maintain its position as a leader in financial services.
However, it is argued that this can only be achieved if regulations ensure consumer protection in crypto markets and adequately address the risks arising from cryptocurrencies related to challenges such as financial crime and financial stability.
According to the report, a well-regulated crypto industry can offer the UK benefits such as new jobs, financial sector and economic growth, and greater financial inclusion.
To achieve these goals, the report offers dozens of recommendations for UK policymakers to consider. Among them are suggestions that law enforcement and regulatory agencies should work to increase information sharing with the crypto industry on financial crime typologies and risks to better enable the UK to ensure an end to cryptocurrency-related crime.
The APPG report comes after the government under Prime Minister Rishi Sunak expressed its intention for the country to serve as a global hub for crypto innovation.
The UK’s HM Treasury is currently consulting on the future regulatory regime for cryptocurrencies, and important changes to the UK’s Financial Services and Markets Act are moving through Parliament which would have important implications for consumer protection measures relating to cryptocurrencies and would set the framework for oversight of stablecoin arrangements. currency, among other things.
The APPG’s recommendations suggest that these policy efforts to bring cryptocurrencies under financial services regulation are on the right track.
However, not everyone in the UK agrees. As we recently noted, some members of parliament have argued that cryptocurrencies should be regulated as gambling given the risks to consumers.
While the government claims it has no intention of doing so and will persist in its efforts to use financial services regulation to oversee the crypto market, it is clear that there is still no political consensus among all policy makers in the UK. To this end, the views of the APPG could prove important in shaping the ongoing debate.
The APPG report also comes just days before the UK’s Financial Conduct Authority (FCA) published rules related to the financial promotion of cryptoassets, which will regulate how crypto firms can advertise their products and services to investors in the UK.
The crypto industry is eagerly awaiting the FCA’s rules on promotions as the scope of those rules could determine whether crypto firms find the UK an attractive place to do business. The rules – which will come into effect on October 8 this year – will require crypto businesses to:
- include personalized risk warnings in your communications with clients about losses they may face when investing in cryptocurrencies;
- do not offer incentives to consumers – such as refer-a-friend schemes and other rewards – that might encourage them to invest in high-risk crypto products that they would otherwise be disinclined to invest in;
- apply appropriateness tests to their promotions of crypto products and services to ensure that communications adequately convey the risks to investors.
To learn more about the financial promotion rules for cryptocurrencies set by the FCA, read this analysis by Elliptic’s Mark Aruglia, our EMEA Senior Policy and Regulation Advisor.
The ruling in the Ooki DAO case could set the stage for DeFi regulation
A court ruling from the US could prove critical in shaping how regulators there will approach oversight of the decentralized finance (DeFi) space.
On June 8, the United States District Court for the Northern District of California issued a ruling in a case between the US Commodity Futures Trading Commission (CFTC) and a decentralized autonomous organization (DAO) known as Ooki DAO. The case the CFTC brought against Ooki DAO last year, alleging that it violated US commodity trading laws when it offered cryptocurrency-based futures products through the bZx protocol.
The CFTC argued that Ooki DAO should have registered its services as a futures trader with the CFTC. In response, a number of law firms have filed briefs challenging the CFTC’s claims, arguing that DAOs—which are a collection of individuals who maintain an ownership stake in a project through cryptoassets issued on the blockchain—are not persons under the law because they are decentralized and diffusely set up.
The courts, those law firms argued, should reject the CFTC’s request on the grounds that its attempt to assert jurisdiction over activities conducted through a blockchain-based protocol was an overreach.
The court, however, ruled in favor of the CFTC, finding that Ooki DAO violated US commodity laws by offering futures products without prior registration with the CFTC. The court also found that Ooki DAO should have established customer controls and other anti-money laundering and countering the financing of terrorism (AML/CFT) controls.
As a result of the court order, Ooki DAO was prohibited from offering further services in the US and was ordered to pay civil penalties totaling more than $640,000.
The Ooki DAO case could be an important precedent as regulators in the US seek jurisdiction over the DeFi space.
Many in the crypto industry have argued that DAOs and other components of the DeFi space should not – and cannot – be subject to regulation given that they do not contain the traditional intermediaries that are typically the target of regulation.
By ruling that Ooki DAO’s unregistered delivery of services via a blockchain-based protocol violates the law, the court in this case could offer US regulators a basis for asserting jurisdiction over other DeFi arrangements.
Australia discourages banks from de-risking cryptocurrencies and other high-risk activities
Australian regulators have issued guidelines that could help crypto firms access much-needed banking services. Australia’s Transaction Reporting and Analysis Center – the country’s anti-money laundering and countering the financing of terrorism regulator – released guidance on June 6 on how financial institutions can serve higher-risk customers.
In releasing the guidelines, AUSTRAC emphasized that de-risking – or de-banking – entire sectors of activity not only affects legitimate activity, but also reduces the visibility of financial crime by pushing certain activities further away from the regulated sector. The guidelines are intended to help financial institutions understand how they can service higher-risk clients without resorting to wholesale risk reduction.
The guidance specifically notes that financial institutions should take steps to apply a risk-based approach when dealing with digital currency exchange (DCE) services, which AUSTRAC regulates for AML/CFT purposes. The guidance suggests that banks should not categorically deny services to DCEs, but rather should consider a range of factors to assess the risks of any relationship they establish with a DCE, including:
- the types of cryptoassets that DCE exchanges;
- the expected scope of DCE’s business;
- the quality of the DCE’s AML/CFT controls, including how it uses blockchain analytics; and
- confirmation that the DCE is registered with AUSTRAC.
The crypto industry has long struggled with access to banking services globally, and guidance like this from AUSTRAC is welcome news for crypto exchanges and other service providers. However, what will be its final effect in practice remains to be seen.
A day after AUSTRAC released its guidelines, the Commonwealth Bank of Australia (CBA) announced its intention to limit payments to cryptoasset exchanges it deems to be high risk.
Circle gets license for Singapore
For the second time in a week, a crypto firm has received a full license from regulators in Singapore. On June 7, US-based stablecoin issuer Circle announced that it has received a Major Payment Institution (MPI) license from the Monetary Authority of Singapore (MAS).
The license will allow Circle to offer customers in Singapore a full range of products using its USDC stablecoin. In its statement, Circle emphasized that receiving the MPI license from MAS underscores its “reputation as a responsible digital financial technology company […].
This milestone marks a huge step forward for the future of regulated, transparent and trusted digital dollar currencies in Singapore and the wider Asia region.”
This is the second time in the past week that a crypto firm has received an MPI from MAS. On June 1, crypto exchange giant Crypto.com announced that it had also received MPI from MAS.
To learn more about crypto regulation in Singapore, read Elliptic’s Singapore country guide.
Philippines delays crypto regulation update
Regulators in the Philippines will hold off on publishing crypto regulations for now in an effort to get things right. According to news reports on June 7, the chairman of the Philippine Securities and Exchange Commission (SEC) said that the country may release updated rules on the regulation of the crypto market before the end of 2023 – but did not commit to that time frame.
The Philippines already has an AML/CFT regulatory framework administered by the country’s central bank. However, like other jurisdictions, the country wants to expand the regulatory scope around cryptocurrencies to include rules on consumer protection, market conduct and other measures. According to the SEC, it wants to continue to take time to get those regulations right, rather than rushing them through.
To learn more about the crypto regulatory framework in the Philippines, read Elliptic’s guide to the Philippines.
EU officially publishes updates to MiCA and travel rules
On June 9, the European Union published its Markets in Crypto Assets (MiCA) Regulation in the Official Journal of the European Union – a key step in making the EU’s landmark crypto rules a reality.
After passing through the European Parliament this spring, MiCA’s publication in the Official Journal puts it on track so that its stablecoin provisions will come into force on June 30, 2024, while its provisions for cryptoasset service providers (CASP ) take effect from January 2025.
In addition to the MiCA, the Official Gazette also published amendments to the EU regulations on the transfer of funds, which will require CASPs to comply with the Travel Rule.
You can read more about Elliptic’s analysis of MiCA here, here and here.
Compliance with Financial Services Regulations
