Crypto regulations in the United Kingdom: Are we there yet?

Following the Mt. Gox scandal in 2014, the Japanese government acted swiftly when it came to developing new regulations for the crypto industry.

Implementation of the new regulations obliged crypto exchanges to register with a competent local finance bureau and gave rise to supervision obligations by the Japanese Financial Services Agency, or FSA. According to the PSA, crypto businesses must keep accounting records of all cryptocurrency transactions and annual reports must be submitted to the FSA. While the MLRs appear to be slightly hazy on reporting rules for crypto businesses, the effect of the new amendments should, in theory, mean that firms engaging in crypto activities can now be defined as FCA-regulated entities.

A key finding from the FCA's 2020 crypto-asset consumer research is that crypto exchanges are key market participants in the space.

Security tokens are a class of crypto assets that may present with certain attributes, which means they provide certain rights and obligations comparable to those of financial instruments regulated by the Markets in Financial Instruments Directive, or MiFID. The current position in the U.K. is that if a crypto asset looks as if it has characteristics similar to a security, then it falls within the FCA's regulatory parameter.

Kraken subsidiary Crypto Facilities recently registered with the FCA to operate as a multilateral trading facility, claiming to be the first U.K.-based exchange to do so.

As a licensed MTF, Crypto Facilities is subject to significantly more regulations.

It has clearer reporting obligations to the FCA, which is a contrasting position to the ambiguous approach when it comes to those crypto exchanges that may not necessarily be offering crypto securities.

Binance is an FCA-registered exchange and is authorized to conduct a broad range of investment-related activities, but it doesn't have a license to operate as an MTF. Both Crypto Facilities and Binance are top exchanges with a U.K. presence, but one of the main differences between the two entities is that one has clearer reporting obligations while the other does not.

Earlier this year, new amendments to the regulatory landscape were introduced, with the new rules implemented to effectively govern crypto custody service providers, as well as businesses dealing in crypto derivatives.

The FCA's latest crypto consumer research found that most crypto exchange consumers in the U.K. tend to use non-U.K. based exchanges.