As the sun begins to set on 2022, Su Carpenter, Director of Operations, looks back on a very busy year for CryptoUK…
If we could use one word to sum up the year for the UK crypto industry it would be turbulent. Yet CryptoUK, as the self-regulatory trade association for the UK cryptoasset industry, has worked persistently and tenaciously to push policymakers for greater yet fairer regulation and consumer protection while also highlighting the many ways crypto continues to benefit our society as a whole.
The year got off to a positive start with the formal launch of the Crypto and Digital Assets All Party Parliamentary Group, chaired by Dr Lisa Cameron MP.
We organised a series of round table sessions to discuss some of the key issues facing our sector and helped to educate both Dr Cameron and officers of the APPG, along with other interested parties within Government, on the broader crypto industry, starting with the basics to provide a good foundational knowledge.
We also arranged meetings with members of the APPG Advisory Board and CryptoUK to spend time face to face with MPs and Lords discussing critical areas of concern. We also took APPG members to meet members of CryptoUK on a site visit to see first hand the way the sector operates and to help them understand the workings of crypto businesses in the UK.
Enhancing Financial Crime Regulation
Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 Statutory Instrument 2022 were made in a summer update. Over the prior 12 months since the public consultation was launched in 2021, bringing Virtual Asset Service Providers (VASPs) into the scope of the Travel Rule, CryptoUK and our members met with the Treasury’s Illicit Finance Emerging Markets Department on numerous occasions to discuss many of the contentious and technical issues. We were pleased to see a proportionate approach was adopted to non-hosted or private wallets for example. Whilst collecting personal identifiable information (PII) was not made mandatory, it was recommended that VASPs take a risk-based approach to this and decide how and when to implement it.
Encouraging government rhetoric, but DeFi concerns
We welcomed a speech made by John Glen, Economic Secretary the Minister of State (Economic Secretary) at the time, outlining plans for the UK to become a global hub for the cryptoasset industry including proposals for the regulation of stablecoins, development of an NFT (non-fungible token) issued by the Royal Mint and other measures including the introduction of a “financial market infrastructure sandbox” to help firms experiment and innovate.
We pointed out that crypto is too big to ignore and it’s not going away, that the opportunities for the UK in terms of crypto were vast and we welcomed the Government’s plans to be pro crypto innovation and its recognition of the opportunities and potential of the UK crypto sector. But we emphasised that we must also demonstrate this commitment through actions or the UK risked being left behind.
One of the commitments made was the establishment of a Crypto Asset Engagement Group to oversee this work and ensure a deeper understanding to influence and inform policy and regulation. However, this has not materialised. We continue to advocate for this group to be formed and lobby for updates and progress on this element of the promises made.
We also raised concerns about HMRC’s guidance on DeFi lending and staking which was published in February after extensive discussions – pointing out that it treats crypto assets as property for tax purposes which is inconsistent with the approach adopted by Government and other regulatory bodies in the UK.
We highlighted directly to the Treasury that this guidance was overly burdensome and that it would be difficult to achieve compliance, resulting in a public consultation suggesting a carve out.
Prime Minister Rishi Sunak said in April, while still chancellor, that “effective regulation” would help make Britain a global hub for cryptoasset technology and would encourage “the businesses of tomorrow to invest, innovate and scale up on UK shores”.
Ukraine: crypto shows true value
The Ukraine conflict proved to be the moment where cryptocurrency proved its true value to real people. Not as the quick-win instrument for the wealthy elite as many had previously dismissed it, but rather as an empowering force for good in a dangerously unstable world.
Indeed, those of us who have championed crypto as an inclusive transactional tool for ordinary people whilst mitigating risk through educating consumers have been vindicated. While the banking financial system had been under sustained attack by Russia, and while Ukraine took a number of measures in an effort to stabilise the banking sector and protect the country’s economy including suspending foreign cash withdrawals, limiting how much currency can be withdrawn, and banning cross-border forex transactions, life-saving money went directly to those in need.
More than £100 million was donated to the Ukrainian people via crypto, which led to President Volodymyr Zelenskyy signing a bill into law that made Bitcoin and Ethereum legal tender in the nation.
CryptoUK also supported, as secretariat for the APPG, a fundraising dinner at The Hurlingham Club in London to raise money for Ukrainian refugees, hosted by Dr Cameron, raising more than £175,000 for the cause via UNHCR, the UN Refugee Agency.
It turned out that crypto was a great way to stop sanctions evasion too, thanks to the publicly visible blockchain and a lack of liquidity for huge transactions. We called on all of our members and the wider crypto community to take all necessary steps to enforce economic sanctions against Russia through engagement with professional compliance teams, blockchain analytics companies, the National Crime Agency and government experts in illicit finance.
Crypto inquiry launched
The Crypto and Digital Assets All Party Parliamentary Group launched an inquiry into the UK Crypto and Digital Assets sector, focusing on the UK’s current approach to regulation of crypto and digital assets and the Government’s plans to make the UK the global home of crypto investment, the role of UK regulators including the Bank of England, the FCA and the ASA in relation to crypto and digital assets, the potential of Central Bank Digital Currencies and potential risks in terms of Consumer Protection and Economic Crime.
It collected evidence from industry stakeholders, stablecoin issuers, financial crime practitioners, regulators and financial services organisations. The Inquiry aims to publish a report on the findings early in 2023 which will feed into the final stages of the Treasury Select Committee Inquiry, running concurrently, and help to shape the future direction of the sector
Consistent outreach despite political turmoil
Britain fell into a political vacuum from the summer onwards, with multiple changes of leader and ministerial resignations – but CryptoUK maintained a consistent and focused approach, and continued to make inroads within Parliament regardless of who was occupying 10 Downing Street.
We attended both the Conservative and Labour conferences and continued our outreach to politicians, ensuring our message in support of the UK crypto industry was heard by the right people throughout the year. We met with MP Andrew Griffith, Economic Secretary to the Treasury, on several occasions and also spoke to his counterpart in the shadow cabinet, Tulip Siddiq MP, offering to support their upcoming manifesto for Financial Services and Technology.
We made specific outreach to Labour, including discussions about financial inclusion and open banking. Jeff Smith MP, Shadow Minister (Digital, Culture, Media and Sport) said that although more regulation of crypto was required, “Labour is not advocating a ban on the ownership of cryptocurrencies. We recognise the opportunities they can create for our economy when done right.”
We continue to encourage dialogue with the opposition parties to ensure that there is Westminster-wide coverage of the issues and concerns of the sector, along with an education programme to enable fair and balanced debate about crypto.
Banks ban crypto transfers
Towards the end of the year we sent a letter to the Treasury, the Financial Conduct Authority (FCA) and the Payments Systems Regulator (PSR) drawing their attention to a concerning development in the industry where a number of UK banks have introduced blanket bans on transactions from their customers’ accounts to crypto exchanges.
We pointed out that while this may be coming in response to a PSR consultation that proposed making UK retail banks liable for compensating customers for losses related to fraud or scams, these restrictions are anti-competitive, disproportionate and discriminatory.
Crypto winter and FTX
It was a very tough year for the digital assets industry already thanks to the crypto winter which began in May with the collapse of TerraUSD and then LUNA, combined with the economic shocks of rising interest rates, rocketing inflation and recessions which helped cause a loss of approximately $1 trillion in crypto value. However, the link between a global economic downturn and the crypto winter does at least indicate a correlation between fiat economies and the crypto and digital assets market.
We had spent much of 2022 pushing for greater regulation of the crypto industry and greater consumer protection, yet sadly it took the FTX exchange going bankrupt for many within the government to start understanding the potential implications of a lack of a clear set of guidelines and policies for the crypto sector.
While we have been advocating more regulation, our members have also been building tools to help prevent unethical behaviour – using smart contract technology to specifically identify “rug-pulls” and prevent them in real time, for example.
The Treasury is now planning new regulations enabling the FCA to oversee crypto more broadly, including monitoring how companies operate and advertise their products, restrictions on selling into the UK market from overseas and rules about how crypto companies can be wound down.
Whilst we welcome clarity in light of a regulatory future, we will also continue our work to educate and inform the regulatory bodies in the UK to ensure that any regulation is fit for purpose for the diverse businesses we see across the industry and does not stifle innovation and development.
The year ahead
Despite recent turmoil, the UK crypto industry is broad, diverse and mature. We believe that the only real way to bring about change and implement a better way of working in the industry is through Government intervention and regulatory controls.
Yet there is still some way to go, despite the progress we have seen. Access to bank accounts, a clearer taxation framework, negating the fallout from the FTX issues and building a robust regulatory landscape that nurtures innovation and growth whilst protecting consumers are important aims for the next year.
We will build upon the work of the APPG in 2023 to better educate and inform policymakers and consumers, to provide opportunities for our members to contribute towards discussions that help to shape policy and the direction of travel.
We are determined to make sure that we work together as a community to build an environment where businesses can grow, develop, innovate and drive for positive change so that they become a showcase for best practice models. If we can achieve all of this, the UK can become a truly aspirational market for crypto businesses.