A Brief History of Crypto Regulation in the UK

The regulatory landscape for cryptocurrencies in the United Kingdom has been an interesting one. Regulators have had to quickly understand the complicated technology underpinning crypto, and respond to its rapid evolution and use cases. This article aims to provide a chronological timeline of key regulations and their impact on the crypto market in the UK.

‍

2008: the Birth of Bitcoin

Crypto history begins with the inception of Bitcoin in 2008. An anonymous entity (even to this day) known as Satoshi Nakamoto marked the beginning of the crypto era as he introduced Bitcoin. Although not specific to the UK, the global phenomenon of the whitepaper “A Peer-to-Peer Electronic Cash System”, which has been cited over 29,000 times already, set the stage for the adoption and regulation of cryptocurrencies worldwide.

‍

2013: Early Recognition

In 2013, the UK government began to show interest in the potential of cryptocurrencies and blockchain technology. While there were no formal regulations at this time, the government's acknowledgement served as an early indicator of the UK's openness to these emerging technologies. 

‍

Various government departments started to explore the benefits and risks associated with cryptocurrencies. This year marked the beginning of a dialogue between regulators, financial institutions, and crypto enthusiasts.

‍

2016: FCA's Initial Involvement

By 2016, the UK’s Financial Conduct Authority (FCA), which is one of the most reputable financial regulators in the world, had started to take a more active role in the crypto space. The regulatory body issued preliminary warnings about the risks associated with unregulated digital currencies, and in 2017 spoke out about crypto CFDs. 

‍

These warnings were primarily aimed at retail consumers and highlighted the volatility, lack of consumer protection, and potential for financial loss in the crypto market—all things you expect the FCA to say. Although the FCA had not yet established a formal regulatory framework for cryptocurrencies, its involvement marked a significant step towards greater oversight. 

‍

The FCA's early warnings set the stage for more comprehensive regulations that would come into play in the following years. And, its warning was somewhat of a premonition, as derivatives were to become fully outlawed a few years later in 2021.

‍

2018: Cryptoassets Taskforce

In 2018, the UK took a significant step towards formalising its approach to crypto regulation by establishing the Cryptoassets Taskforce. Comprising the FCA, HM Treasury, and the Bank of England, the taskforce was tasked with evaluating the UK's policy and regulatory approach to cryptoassets and blockchain technology. 

‍

The group released a comprehensive report that categorised crypto assets and outlined the associated risks and potential benefits. This report served as a foundational document for future regulations and provided clear guidelines for how the UK would approach crypto regulation. The taskforce's work was a huge milestone in shaping the UK's current regulatory landscape that exists today, and it showed that a coordinated effort was necessary.

‍

2020: Implementation of AML

In January 2020, the UK implemented the European Union's Fifth Anti-Money Laundering Directive (5AMLD), even as Brexit negotiations were underway. This was a pivotal moment for crypto regulation in the UK. The directive required crypto exchanges and wallet providers to register with the FCA and adhere to Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations. 

‍

This move aimed to curb the potential misuse of cryptocurrencies for illegal activities and brought the UK in line with international AML standards. The introduction of 5AMLD marked a shift towards formal regulation, requiring crypto businesses to maintain records and conduct due diligence, thereby increasing transparency and accountability in the sector.

‍

2021: Ban on Crypto Derivatives

In January 2021, the FCA implemented a ban on the sale of crypto derivatives and exchange-traded notes to retail consumers. This was quite a big decision (in part because it remains legal in the US, among many other places). The move aimed to protect retail investors from the high risks and volatility associated with these financial products. Crypto has always been risky, but leveraged positions in crypto are extremely risky.

‍

The FCA cited the lack of reliable valuation, market abuse, and financial crime as some of the reasons behind the ban. This regulatory action had a significant impact on the crypto market in the UK, as it led to the exit of several firms offering these products. The ban didn’t just serve as a caution to retail investors that crypto is risky, but it showed that the FCA were prepared to get very hands-on with the crypto world.

‍

2022: Economic Crime and Corporate Transparency Bill

Introduced in 2022, the UK government introduced the Economic Crime and Corporate Transparency Bill, a comprehensive legislative effort to strengthen the country's economic crime framework, including cryptoasset regulations. 

‍

The bill aims to enhance anti-money laundering measures and consumer protection in the crypto space. It also brings attention to the role of cryptoassets in illicit activities, such as money laundering, fraud, and tax evasion—all things that are married with “anonymous” transactions. While the bill covers a broad range of economic crimes, its corporate transparency provisions are particularly relevant for cryptoasset firms.

‍

2023: Updated FCA Oversight

In September 2023, the FCA unveiled stringent marketing rules for cryptoasset firms, effective from 8 October 2023. These rules ban incentives like 'refer a friend' bonuses and mandate that all marketing be 'clear, fair, and not misleading', complete with prominent risk warnings. If you're looking for support with this, check out this page.

‍

The FCA is also considering giving firms until 8 January 2024 to implement specific features requiring technical development, such as a 24-hour cooling-off period. Non-compliance could lead to criminal offences, including unlimited fines and up to 2 years imprisonment. These regulations apply globally and aim to bolster consumer protection against the high risks associated with cryptoassets.

‍

The FCA's approach aligns with its regulations for other high-risk investments (for example the disclosures needed on CFDs) and shows its commitment to working with the industry for effective rule implementation.

‍

Conclusion

The UK has come a long way in a short amount of time in shaping its regulatory framework for cryptocurrencies. From early recognition to the implementation of stringent AML regulations and consumer protection measures, the UK is striving to balance innovation with managing risk. As the crypto landscape continues to evolve, so too will the regulations that govern it. For help with staying compliant in a fast-paced regulatory environment, get in touch with us at Englebert.

‍