What Can We Expect From the July 2024 Cryptocurrency Regulation: Our Predictions

The UK is set to introduce new cryptocurrency regulations by mid-2024, as announced by Economy Minister Bim Afolami. The contents of the regulation, which is said to target stablecoins too, are still missing the finer details. 

The regulations will likely cover stablecoins, crypto staking, exchanges and custody. Understanding these regulations is crucial for anyone involved in the crypto market, with the FCA currently having a clear pattern and strategy in their approach to crypto.

Background and Rationale 

The UK's Financial Services and Markets Act, passed in June 2023, sets the foundation for the upcoming cryptocurrency regulations. The government is looking to create a safer environment for investors and bring clarity to the cryptocurrency market. Ultimately, it’s claimed to be in the interest of bringing business to the UK. But, these regulations are mostly designed to prevent financial crimes such as money laundering and fraud.

The Financial Conduct Authority (FCA) oversees the broader crypto market, while the Bank of England (BoE) will oversee stablecoin providers that could impact the financial system. This comprehensive oversight aims to enhance the reliability of engaging with cryptocurrencies within the UK.

The Government aims to position the UK as a leader in the global digital finance space. By establishing clear and comprehensive regulations, the UK hopes to attract more crypto businesses and investors. 

The Conservative Party has been vocal about making the UK a global hub for crypto, but with an election anticipated in July 2024, the political landscape could affect the implementation of these regulations. The Labour Party, currently leading in the polls (June 2024), has been less vocal on crypto, which introduces some uncertainty about the continuity and specifics of the regulatory framework

At the Innovate Finance Global Summit, Afolami stated,

“We are now working intensively to finalise legislation to put our final recommendations for the regulatory regime in place.”

Key Features of the Regulation 

The upcoming UK cryptocurrency regulations are set to be introduced by July 2024. The regulatory updates are expected to focus on the regulation of stablecoins, crypto staking, exchange operations, and custody. Additionally, the Government is working on secondary legislation to further detail the regulatory framework for these digital assets.

Duncan Ash, strategy head at Coincover, remarked,

“While it remains to be seen exactly what new regulation may look like and how it will be enforced, it’s inevitable that the future of crypto lies within far more regulated and supervised parameters.”

Economy Secretary Afolami added,

“Once live, a range of crypto-asset activities, including operating exchanges and hosting customer assets, will come under regulation for the first time.”

So, while the specifics are not fully disclosed, key expected focus areas based on current announcements include

• Stablecoins: the new regulations will likely include specific provisions for stablecoins, ensuring these digital assets, which are pegged to traditional currencies, are stable and reliable. The Bank of England will oversee stablecoin providers that have a significant impact on the financial system​​​​.
• Crypto Staking and Custody: the legislation appears to bring crypto staking and custody services within the regulatory perimeter, ensuring these activities are conducted under stringent guidelines to protect investors and enhance market integrity​​​​. This likely refers to hot wallet services where the service provider holds the private keys to the customer's crypto assets.
• Exchange Operations: cryptocurrency exchanges will seemingly be subject to new regulatory requirements, presumably aimed at improving transparency and security in trading activities. This would be a part of the broader effort to prevent fraud and protect consumers​​​​.
• Broader Regulatory Framework: what we can say with absolute certainty is that the regulations will be part of a phased approach, allowing for future adjustments and expansions as the market evolves. This could include potential additional regulations for areas such as algorithmic stablecoins and other emerging crypto activities​​.

New Powers for Law Enforcement

In addition to the upcoming regulations, recent updates have empowered UK law enforcement agencies with new abilities to seize cryptocurrency used in criminal activities. These new rules, which came into effect in April 2024, allow law enforcement to confiscate crypto assets without needing to make an arrest first. Again, like the past and future changes, this brings crypto closer to within their control.

This change is part of a broader crime bill passed last year, aimed at enhancing the capabilities of law enforcement to tackle financial crimes involving cryptocurrencies. The National Crime Agency and other law enforcement bodies have already begun utilising these powers, seizing significant amounts of illicit crypto assets. These measures are expected to help fight against cybercrime and money laundering, thus reducing the degree to which the crypto market is exploited for illegal activities​

Our Predictions

While limited in the details of the regulatory update, below are some changes that we believe could happen in the near future—July or otherwise.

Licensing and Registration Requirements

We predict that the new regulations will mandate comprehensive licensing and registration requirements for all cryptocurrency businesses operating within the UK. This will likely include

Operational Licences for Exchanges: crypto exchanges may be required to obtain specific licences to operate legally, further ensuring they meet stringent operational and security standards.

Custodial Licences: firms offering custody services might need to secure additional licences to protect customers' assets, focusing on robust security measures and insurance coverage.

Specific Rules for Stablecoins

Stablecoins, given their unique nature and potential impact on financial stability, we expect to face:

• Collateralisation Requirements: regulations may stipulate that stablecoins be fully backed by reserves, with regular audits to verify collateral levels. Thus, stablecoins cannot be claimed to be as such without being fully backed.
• Operational Transparency: issuers of stablecoins might be required to maintain high levels of transparency regarding their reserves and operational practices.

Increasing Anti-money Laundering (AML) and Know Your Customer (KYC) Protocols

Building on existing AML and KYC protocols, the new regulations could

• Require Real-time Monitoring: cryptocurrency exchanges and service providers might need to implement real-time transaction monitoring systems to detect (and thus report) suspicious activities more quickly.
• Enforce Customer Due Diligence: firms could be required to conduct even more due diligence on all customers, possibly screening for high-risk individuals/entities more generally.

Poland’s New Cryptocurrency Regulations 

Poland is set to implement new cryptocurrency regulations based on the European Union’s Markets in Crypto-Assets (MiCA) framework. The Polish Financial Supervision Authority (KNF) will have significant new powers, including the ability to block cryptocurrency accounts for up to six months if suspected of criminal activity. This measure aims to prevent fraud and enhance market integrity.

It’s often worth looking to neighbouring regulatory bodies because these are the testing fields that FCA are getting their information from. With such an infant industry, it’s these small changes overseas (and subsequent effects) that the FCA is using to base some of its strategies on.

Under the new laws, the KNF can initially block accounts for 96 hours without external approval. With the prosecutor's consent, this period can extend up to six months. This power has raised concerns among investors about potential misuse, but ultimately, the lack of clear criteria for blocking accounts. This is akin to people’s deposits being suspended on (fiat) money transfer platforms due to AML triggers.

Sure enough, enhanced AML (anti-money laundering) and KYC (Know Your Customer) protocols are the thrust of these changes.

Unsurprisingly, the KNF will also have the authority to impose financial penalties on companies that fail to comply with the regulations. This regulatory framework aligns with MiCA’s goals but includes specific provisions tailored to the Polish market.

The changes reflect Poland’s effort to align with broader European standards while addressing local market needs. We are also seeing efforts between the UK and EU to remain in tandem.

Impact on the UK Cryptocurrency Market  

The introduction of new cryptocurrency regulations in the UK by mid-2024 will undoubtedly have a significant impact on the domestic market. These regulations aim to bring greater clarity and security, but of course, intention and outcome aren’t always perfectly aligned. 

Market Stability and Investor Confidence

One of the primary impacts of these regulations will be the enhancement of market stability and investor confidence. By introducing comprehensive licensing and registration requirements for cryptocurrency exchanges and custodial services, the UK Government aims to ensure that only compliant and secure entities operate within the market. 

This move is expected to eliminate fraudulent and non-compliant operators, as well as increase the compliance burden on smaller entities—rightly or wrongly. This is expected to reduce some of the unique risks associated with cryptocurrency ownership, and thus enhance investor confidence among the mainstream.

Should real-time monitoring and more thorough customer due diligence be brought in, this may further boost the reputation for crypto - helping it shift away from the stigma of being used for illicit activities.

Enhanced Regulatory Oversight

The FCA and the BoE will be playing a bigger role. This dual oversight could help maintain a more orderly market which reduces systemic risks. With respect to stablecoins, making them fundamentally sound and stable has profound impacts on blockchain projects that are focused on technology and use-case over equity gains. 

We may see customers who otherwise are sceptical about the volatility of crypto, begin to use more services that utilise stablecoins. However, given the common criticism that many stablecoins are not sufficiently capable of retaining stability due to insufficient collateralisation, we may see many projects immediately fail to comply—and potentially relocate their effort overseas.

It is also becoming difficult for crypto projects to foresee regulatory changes. While there may be little sympathy afforded to stablecoins that may or may not get stung by not having sufficient collateral, for most projects, simply knowing what the upcoming changes will be is not too much to ask. Although there is always a phasing-in period, having many changes each year is creating instability among projects that need certainty.

Conclusion 

The upcoming July 2024 UK cryptocurrency regulations will shape the future of the market. These new rules will most likely, as per recent updates, aim to protect investors and the market integrity but at the cost of increasing the burden of compliance on crypto projects. 

The specific challenges that will face crypto projects are yet to be seen, as the specifics of the law changes are yet to be fully disclosed. However, we expect them to hit exchanges and stablecoins by further reaffirming the regulatory partnership of the FCA and BoE.

If your crypto asset project is facing regulatory uncertainty, please get in touch with a member of the Englebert team. At Englebert, we can approve promotions for unauthorised parties, train members of your team how to remain compliant and help you with due diligence with our partner, CrypTegridy.