UK Cryptocurrency Exchanges Adapt to Enhanced Regulatory Standards

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The cryptocurrency landscape in the UK is undergoing significant changes as it aligns with the Financial Services and Markets Act. This major development, marking a significant shift in regulatory approach, aims to apply strict standards similar to those in traditional financial services to businesses dealing with cryptocurrencies and stablecoins.

Cryptocurrency exchanges such as Coinbase, Crypto.com and Gemini are already initiated measures in response to these new regulations. They have introduced risk assessments and financial tests for UK consumers which include a statement of their investor profile and an associated questionnaire. These steps are critical to complying with requirements that require crypto companies to inform users of the risks associated with trading cryptocurrencies and advertise their services responsibly. It should be noted that failure to implement these measures will prevent users from trading their crypto accounts.

The wider framework for these regulatory changes has been set by the UK Government, with the intention of balancing innovation with financial stability and clear regulatory standards. New specific regulated activities will be created for crypto-assets, parallel to those of traditional financial markets. Therefore, local crypto firms whose core business revolves around cryptoassets will need full authorization and oversight from Financial Conduct Authority (FCA). Traditional financial firms will also have the option to expand their authorizations to include crypto-asset activities.

In addition to directly affecting businesses operating in the UK, these regulations extend their reach to offshore businesses providing services to UK customers. These businesses will need permission in the UK, although exceptions such as ‘callbacks’ are being considered. This new regulatory environment covers a range of activities, including trading, custody and lending, each with specific requirements. For example, trading venues should offer fair access policies, transparent fee schedules and effective conflict of interest management. Crypto asset brokerage will be regulated similarly to investment broker rules, with an emphasis on consumer protection and detection of market abuse.

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HM Treasury is also exploring the regulation of decentralized finance (DeFi) and is seeking to understand how regulatory outcomes achieved in traditional finance can be applied to DeFi. This includes looking at cryptoasset investment advice and portfolio management, as well as how these services align with current regulatory practices.

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