Crypto industry players respond to UK Treasury's proposed regulatory framework

The United Kingdom's HM Treasury released a consultation paper and call for evidence on a proposed crypto asset regulatory framework in February. The deadline for comments on the paper was on May 1, and a variety of cryptocurrency industry players responded, including blockchain provider Polygon Labs, venture capitalists Andreessen Horowitz (a16z), the Association for Financial Markets in Europe (AFME), and the Digital Pound Foundation (DPF). Although these voices were diverse, some common issues were raised.

The Treasury's call for "same risk, same regulatory outcome" was well received, but there was no uniform understanding of what that meant, aside from its basis in the Financial Services and Markets Act of 2000. A16z pointed out weaknesses in the United States Securities and Exchange Commission's dependence on the Howey test as the firm assessed the U.K. proposal. A16z wrote, "It is encouraging that the Treasury's interpretation of this principle recognises that it does not mean it will be appropriate to apply exactly the same form of regulation in all cases to achieve the same regulatory outcome."

This tied into the proposal's emphasis on regulating activities, rather than assets themselves. The differences between centralized finance (CeFi) and decentralized finance (DeFi) were central to this discussion. Polygon wrote, "The source of risk in DeFi systems is significantly different than that in centralized systems, like CeFi or the traditional financial system. To this end, it may be more accurate to update: 'same risk, same regulatory outcome' to 'different source of risk, same regulatory outcome.'"

The proposed framework treated fiat-backed stablecoins and algorithmic stablecoins differently, classifying algorithmic stablecoins as an "unbacked crypto asset." Polygon favored the activity-based regulatory approach in this case.

The AFME noted the importance of a global taxonomy of crypto assets for effective international regulation and the "same activities" approach to exclude blockchain-based representations of value such as loyalty and rewards programs.

The AFME also identified the territorial scope of the proposed crypto regulations, which are written to apply to companies that provide services to U.K. nationals. That is a broader scope than regulations concerning traditional assets have, it noted.

The DPF perceived possible deviations from the "same risk, same regulatory outcome" principle in the handling of several forms of crypto assets, and it commented on them in detail. The classification of stablecoins was one of the points it thought needed clarification in this regard.

The U.K. government will respond to the collected responses it received to its paper and engage in further consultations on specific rules as its next step, if they are "taken forward."