It was inevitable that crypto would come under increased scrutiny from global regulators after the FTX scandal, and the Treasury has now laid down a series of proposals designed to protect consumers and preserve financial stability.
The proposed regulations are not a silver bullet that will guarantee absolutely no consumer harm stems from the crypto industry, but they do provide a more robust regulatory framework that is several steps closer to that applied to more mainstream financial activities.
Laith Khalaf, head of investment analysis at AJ Bell, comments on the government’s announced plans to regulate crypto: “It’s notable that the government is not by any means shutting the door to crypto, and is keen to encourage technological innovation, but within prescribed regulatory boundaries. This makes sense, as there is no telling where crypto technologies may lead, even though the jury is out on the value of the main products so far created by the industry, namely cryptocurrencies and NFTs. Nonetheless, the underlying technology may yet deliver products and services with a less contentious utility, which is why the Bank of England is considering launching its own cryptocurrency, often dubbed Britcoin.
“Practiced curmudgeons might question whether the vast amount of capital and technological expertise that has been directed at producing such creations such as Bitcoin, PooCoin, and some digital Trump trading cards might have been better directed at addressing more pressing matters, such as the shift to clean energy, global healthcare challenges or financial inclusion. But then, one could level the same criticism at the first growth Chateaux of the Medoc, who hawk their fermented grape juice for many thousands of pounds a bottle. Perhaps the difference is that those who buy fine wines, classic cars, or rare stamps do so mainly as a speculative hobby, whereas buying cryptocurrency is seen by some consumers exclusively as an investment activity to deliver returns, if not riches. Crypto is also becoming more widespread, with around 10% of the UK population having bought cryptocurrency, according to YouGov, so there is a heightened risk that consumers will buy in without fully understanding the risks.
“The widening pool of crypto holders makes consumer regulation more of a priority for the government. In the short term it will increase costs for crypto businesses, but taking a longer term view, greater regulation should be positive for the industry by reducing the likelihood of blow-ups like FTX damaging confidence in the sector, and it may even encourage greater institutional interest in crypto. That’s not to say there aren’t other risks to the cryptosphere which could impair demand, as the long term adoption of cryptocurrencies by businesses, consumers and investors is still highly uncertain. Most importantly, greater regulation isn’t going to make a dent in the price risk assumed by crypto holders, and the golden rule of buying cryptocurrency remains to only do so with money you are willing to lose in its entirety.”