UK and US governments move to control crypto

Martyn Warwick
By Martyn Warwick

Feb 3, 2023

  • “Incredibly volatile” crypto trading is “too dangerous” to be left unregulated, says deputy head of the Bank of England
  • Transfer of traditional banking, investment and other financial services regulation to crypto is likely on both sides of the Atlantic 
  • UK still hopes to become “a global crypto-asset hub”, but will protect investors
  • As crypto collapses, US agencies vie for the right to regulate and police what remains

With a tsunami of scandals deluging the global cryptocurrency/cryptoasset industry (and with more likely to come), the UK and US governments are moving, separately, to legislate and regulate what the current British administration calls a “turbulent industry”, and what an unknown number of poorer but wiser investors, at their politest, call a “bunch of bandits”.

Government estimates are that some 10% of British adults own one form of crypto asset or another. The total market capitalisation of cryptocurrencies has collapsed from more than US$3tn at its height in November 2021 to around $814bn today, and there are analysts who believe that the sector is now facing an extinction event rather than just a prolonged crypto winter.

It may not be immediately apocalyptic, but some cryptocurrency companies are already going out of business and something needs to be done now to get things on an even keel. Hence the proposed solution to rein in the manifold excesses of the runaway digital currency sector is to go back to the future and apply tried-and-tested regulations that have worked comparatively well (there have been exceptions!) in traditional banking, investment and other financial services for many years. The freebooting crypto days will soon be over as mainstream control is imposed with the application of the strictures and requirements of the UK's Financial Services and Markets Act 2000.

In a statement, the UK Treasury announced that extending the application of the act to “manage” crypto will, in due course, permit the sector to gain "confidence, credibility and regulatory clarity” in an environment where traditional and “emerging” financial services bear “the same risk [and] same regulatory outcome" under a “fair standards” regime.

As far as the individual or institutional investor is concerned, the UK government is proposing that the advertising and promotion of crypto be robustly regulated and policed to ensure it is “fair, clear and not misleading”. It will also outlaw “pumping and dumping”, the scandalous practice of artificially inflating the value of a crypto asset before selling it at a huge profit. It is also proposing to prohibit crypto companies from calling themselves “exchanges”. 

It was only last year that the now prime minister, Rishi Sunak, was extolling the virtues of the buccaneering sector and publicly declaring his intent to turn the UK into a “global crypto-asset hub”. Since then, the world has witnessed the collapse of the FTX exchange, an event that US prosecutors are labelling as “one of the biggest frauds in history”, and with public and institutional confidence in crypto ebbing fast, the economic secretary to the Treasury, Andrew Griffith, says that while the administration is still “steadfast in our commitment to grow the economy and enable technological change and innovation, and this includes crypto-asset technology… we must also protect consumers who are embracing this new technology – ensuring robust, transparent and fair standards.”

Among the proposals out for consultation until the end of April, are that crypto exchange companies would be civilly and criminally responsible for ensuring the safety of customers’ assets, mitigating fraud, and properly facilitating transactions.

As usual, politicians, in this case having been forced by the court of public opinion to take action against a sector that gives cowboys a bad name, is claiming kudos and flying a kite to claim that the proposed new regulatory environment will be “a world’s first” and will, in any event, certainly be on the statute book before the EU’s new crypto law that is expected to be enacted in 2024. So, yah! Boo! Sucks! How's that for a Brexit benefit?

Meanwhile, in the real wild west…

Over in the US, Congressional legislation of the crypto industry and crypto assets is pending, but whilst the House slowly deliberates, the Securities and Exchange Commission (SEC) is making a determined play to become the de facto lead regulator overall.

The SEC is a powerful and venerable independent agency of the US federal government that came into being following the economic and social devastation caused by the Wall Street Crash of 1929. Its main purpose is to enforce laws against market manipulation and it is claiming that it is the proper and most experienced agency to regulate crypto rather than the Commodity Futures Trading Commission (CFTC), the body originally favoured to take on the role. The CFTC is another independent agency of the US government: It was created in 1974 to regulate the US derivatives markets, which include futures, swaps, and certain kinds of options. 

The SEC has it that the great majority of crypto tokens are securities under the terms of a Supreme Court judgment handed down back in 1946 and, therefore, they are subject to the requirement to be registered and regulated. Gary Gensler, the current SEC chairman, who has often called the crypto sector “the wild west”, says the responsibility for regulating and policing crypto should be the remit of the Commission as “the investing public is buying or selling crypto security tokens because they’re expecting profits derived from the efforts of others in a common enterprise.”

As is the case in the UK, the SEC is looking to apply the statutes and regulations it has long applied to the traditional financial markets with equal force and fairness to crypto markets. Gensler says, “Investors deserve disclosure to help them sort between the investments that they think will flourish and those that they think will flounder… the law requires these protections.”

He expands his argument by claiming that as so many digital tokens are, in fact, securities, crypto intermediaries transacting in securities must register their functions with the SEC. He adds that what intermediaries actually do, regardless of whether they call themselves centralised or decentralised, is match orders in crypto security tokens of multiple buyers and sellers using established non-discretionary methods, and therefore fully meet the regulatory criteria for being securities exchanges. That’s why investors in crypto “will benefit from the application of exchange rulebooks that protect against fraud, manipulation…  and other misconduct,” he said.

While the jockeying for position continues apace, little is being said about what practical ideas either regulatory body claiming the right to oversee crypto has in mind. Meanwhile, US investors and markets wait for another crypto scandal to erupt and more money to be lost.

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