UK's New Crypto Regulations: A Threat to Foreign Firms?

• Deliberations on UK Crypto Regulations
• Implications for Foreign Crypto Firms
• Call for Regulatory Exceptions
• What is the Overseas Persons Exclusions (OPE)?
• Government Response to Industry Requests
• Stringent Regulations for Crypto
• Anticipated Consequences of the New Regulation
• Phased Supervision of Crypto
• International Crypto Groups and the UK Market

Deliberations on UK Crypto Regulations

Key players in the crypto industry have appealed to the UK government to think about extending regulatory exclusions typically granted to traditional finance (TradFi) institutions based abroad, to crypto firms. However, the UK government has indicated that they have no plans to do so.

Implications for Foreign Crypto Firms

According to legal opinions, stringent regulatory requirements could discourage foreign crypto firms from conducting business in the UK, thereby impeding its aspirations to become a global digital asset hub. The government's proposed crypto regulations are intended to apply to all firms, with no exceptions. Lawyers warn that this could potentially push international firms out of the market.

Call for Regulatory Exceptions

Industry stakeholders are urging the UK government - which has expressed its ambition to establish the UK as a global crypto hub - to provide some regulatory exceptions for foreign crypto companies wishing to operate in the country. They are specifically advocating for the expansion of overseas persons exclusions (OPE) to include crypto.

What is the Overseas Persons Exclusions (OPE)?

The OPE allows certain traditional financial institutions, such as multilateral trading facilities that exchange financial instruments, to operate without requiring authorization. The OPE can be utilised when a regulated activity is performed with or through an authorized or exempt person.

Government Response to Industry Requests

These industry appeals were presented during a government consultation on crypto regulation. Nonetheless, the government has firmly stated that it does not intend to extend the OPE to crypto. This decision could potentially discourage international firms from establishing operations in the UK.

Stringent Regulations for Crypto

The government has opted not to broaden the OPE to crypto because it believes the context for crypto asset markets differs from that of traditional financial products, which are currently covered by the OPE. It maintains that firms dealing with UK retail consumers should be required to obtain authorization, irrespective of their location.

Anticipated Consequences of the New Regulation

However, it has been pointed out that the government's approach effectively blocks the use of the OPE for crypto for any person abroad, even if they are exclusively conducting institutional business. While it is suggested that the government may have a different solution in mind, such as deference or equivalence, no detailed information on this has been provided so far.

Phased Supervision of Crypto

UK regulators plan to oversee crypto in phases, beginning with legislation for stablecoin early next year, followed by policies for the broader crypto sector. Previous legislation that treats crypto as a regulated activity under the Financial Services and Markets Act 2023 has already been enacted.

International Crypto Groups and the UK Market

The government expects international crypto trading firms to establish a UK branch for authorization to operate in the country. However, companies may deem it not worth the hassle of setting up a branch, hiring staff, and so on.

Edited by Jonathan Stoker