July 7, 2022
While the headlines coming out of London this week may have been related to politics, scandal, and upheaval at 10 Downing Street, financial regulators have been hard at work the last few months providing consultations, reports, responses, and guidance or issues related to cryptocurrency. On Thursday, Ari Redbord sat down to talk discuss UK crypto regulation James Gillespie, Policy Advisor, Sanctions & Illicit Finance at HM Treasury and Ian Taylor, Executive Director at CryptoUK.
What does the Prime Minister’s resignation mean for crypto policy?
As Ian Taylor explained, ultimately, government will remain government. While Boris Johnson’s resignation will undoubtedly indicate a period of instability in UK politics, particularly around who the new minsters responsible for spearheading crypto regulation will be, this development does not cancel out the work that has been done thus far in fleshing out crypto policies. Over the past few years, an immense amount of groundwork has been laid around what the finalised iterations of crypto policy will look like in the UK- this is due to remain on track, particularly due to the level of international expectations around these policies such as the Travel Rule.
The Travel Rule and Unhosted Wallets
On June 15, HM Treasury issued a final response to consultation on Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 Statutory Instrument 2022. The response sets out findings and decisions that the UK has taken as a result of months of feedback. Going forwards, changes will be implemented through the ML/TF Regulations 2022 Statutory Instrument.
For crypto-businesses, the key takeaways revolve around the UK’s new approach to the Travel Rule. According to the response, "instead of requiring the collection of beneficiary and originator information for all unhosted wallet transfers, crypto businesses will only be expected to collect this information for transactions identified as posing an elevated risk of illicit finance."The response continues to explain Treasury’s reasoning, explaining that "the government does not agree that unhosted wallet transactions should automatically be viewed as higher risk; many persons who hold cryptoassets for legitimate purposes use unhosted wallets due to their customisability and potential security advantages (e.g. cold wallet storage), and there is not good evidence that unhosted wallets present a disproportionate risk of being used in illicit finance.
Nevertheless, the government is conscious that completely exempting unhosted wallets from the Travel Rule could create an incentive for criminals to use them to evade controls."
The response provides crypto-businesses a 12-month grace period until September 2023, and addresses data privacy concerns around information transfer.
This is an ocean apart from the U.S. Treasury’s take on unhosted wallets in December 2021 (check out TRM Insights to explore the differences between this approach and the US Treasury’s take on the matter).
Fundamentally, James Gillespie explained that the public and private sectors are in agreement that unhosted wallets are an important part of the UK financial system, and while they have the potential to be high risk, the UK government has acknowledged the need to introduce controls and verification processes without fully cracking down. This approach is generally agreed to take the shape of data collection on a case by case basis, whereby information is requested only in situations where certain risk factors, such as geographical origin of transfers, are flagged as high risk."
According to Coindesk, HM Treasury, “in consultation with other regulatory bodies including the Bank of England (BoE), the Payment Systems Regulator (PSR) and the Financial Conduct Authority (FCA), will introduce legislation on a regulatory system for Stablecoins before the August summer break, said Deputy BoE Governor Jon Cunliffe on Wednesday.”In an April 2022 consultation response on Stablecoins, HM Treasury outlined three key regulatory provisions:
• The government proposes to require issuers of Stablecoins pegged to fiat currencies (specifically, issuers of ‘payment cryptoassets’) to seek authorization from the FCA;
• The government would also require custodial wallet providers to seek authorization from the FCA;
• The government would enable the Bank of England (as lead prudential regulator) and the FCA to directly supervise certain Stablecoin payment systems if they are deemed to pose systemic risks.
In May, in the wake of the collapse of stablecoin TerraUSD, UK financial regulators followed up the April response with a consultation on managing systemic risk.
The consultation, for which a response is due on August 2, intends to “ensure [that] appropriate and proportionate tools are in place to mitigate the financial stability issues that may materialise should a firm that has reached systemic scale fail,” by giving the Bank of England the power to appoint administrators to oversee insolvency arrangements with failed Stablecoin issuers.
As part of this process, administrators would determine how to prioritize paying back customers.
"We've heard a lot from the government regarding Stablecoin ” said Ian Taylor “and we will see policy come through and new regulation, treating Stablecoin issuers like e-money institutions.” He added that the UK crypto community is in agreement that not treating Stablecoin issuers like banks is indeed the right approach as this would stifle innovation.
The U.K.’s plan - what's next?
According to a comprehensive plan to make the U.K. a global cryptocurrency hub issued in April 2022, we are going to see:
• Stablecoins brought within regulation, paving the way for their use as a recognised form of payment in the UK
• The introduction of a ‘financial market infrastructure sandbox’ to enable firms to experiment and innovate
• The establishment of a Cryptoasset Engagement Group to work more closely with the industry
• An exploration of ways to enhance the competitiveness of the UK tax system to encourage further development of the cryptoasset market
• Work with the Royal Mint to create a Non-Fungible Token (NFT) in summer 2022 as an emblem of the forward-looking approach the UK is determined to take.
As discussed in this episode of TRM Talks, it is critical for the UK to ensure that its approach remains joined up and doesn't fall victim to the tradeoff between growth of the crypto ecosystem and stability. With that being said, keep an eye out for potential updates in this space in the upcoming Chancellor's speech in mid-July.
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