OPINION: How UK’s Regulatory Framework Can Be A Blueprint For India’s Crypto Regulations

Jurisdiction-specific rules which only apply to service providers and users of a region make the process of regulation cumbersome and difficult to abide by.

The UK has positioned itself as an emerging Crypto hub right from the start. Recognizing the technological prowess and potential of Crypto, the country has designed a framework solely for its financial services which will make its adoption risk-free and bolster its innovation simultaneously. 

While advocating for a globally aligned policy framework for Crypto assets, the UK is slowly building up its pronounced presence in domestic regulations with a complete overhaul of existing laws. It is dedicated to fixing all that is and could possibly go wrong in the foreseeable future. Most experts are terming this as the Dodd Frank moment of the industry. It is on a path of redemption, course correction, and gaining back the integrity which the technology promised in 2008. 

The UK has been quite forthcoming in their wish to make Crypto mainstream, amidst wider scepticism, changing market sentiments, and mixed reactions from global leaders. With its strategic ties and geographical advantage with the US, EU, and Asian markets, it already has an existing robust network in the traditional financial system. 

UK’s HMRC rolled out a detailed guideline on treating each type of Crypto asset and how each of those categories will be taxed, in 2019. It also ensured that users and stakeholders were aware of the steps to comply with the regulations. 

Keeping up with its efforts to have a consistent set of guidelines for the Crypto community, the government dived deep into specific areas of Crypto taxation and aimed to support the industry in its growing stage in 2021. 

The Latest Developments: Hits And Misses

The current framework lays a lot of emphasis on curbing bad practices in the market. One of the key highlights of the latest regulatory framework is the prerequisite of Crypto asset issuers to disclose all documents that will enable users to make informed decisions. Starting from underlying technology which needs to be clearly stated, to governance, token distribution, and other relevant information that could affect the investors’ interest, digital asset issuers should work towards building greater transparency and will also be liable to all statements that they make related to the projects. It is a strong step towards ensuring that Crypto project developers live up to their claims and do not create rug-pull situations which have negatively impacted the industry before.

Besides this, platforms which offer VDA trading are also required to support the trust-building mechanism of the industry by providing adequate disclosure for traders. They are also responsible for preventing manipulation of prices, listing incorrect prices to affect user sentiment, etc. in cooperation with regulatory bodies. The government had already laid out clear frameworks in 2022 where Crypto service providers would need to register with the Financial Conduct Authority (FCA) to abide by AML laws and prevent illicit transactions. The framework also advocates for Crypto assets to be treated the same as securities in financial services. 

However, the framework clearly states its dissatisfaction towards algorithmic stablecoins. Given the uncertainty that users are still facing following the TerraUSD crash, the Treasury is not ready to bring algo stablecoins under regulatory ambit. The lawmakers also do not favor the way the prices of algo stablecoins rely on trading activities. In their view, bringing them within the same category as other stablecoins would actually increase the market risk. While the framework has been slightly more positive about Crypto backed stablecoins, because of its non-ability to fulfil the existing liquidity criteria of the UK market, it will fall under the same category as Bitcoin or in other words, be treated as an unbacked asset. This adds to the larger global scepticism towards non-fiat backed stablecoins. 

Companies may be required to have a UK presence to provide services to UK consumers. This may prove to be a challenge for consumers who want to get their hands on overseas Crypto services. This might also present challenges for global service providers not registered in the UK, or meeting regulatory standards at the UK level, as they may face stricter regulations and scanning from time to time, causing a negative sentiment in the market.  

Lastly, the approach to regulate DeFi on the same lines as centralized financial entities operating in the system might be detrimental to the purpose of decentralization that Crypto aims to achieve. 

Will This Colour India’s Approach? 

India has clearly expressed its intentions of working on a globally aligned framework which is uniform for all stakeholders across the world. The UK’s stance on non-fiat backed stablecoins might have an impact on how India will treat those assets. Its existing stance around non fiat stablecoins has not been encouraging. Now with the Treasury framework being a potential point of reference, the country might work on sidelining algorithmic and Crypto backed stablecoins. 

The role of Indian banks, which will be prominent in CBDC issuance, also remains to be seen with a demand for Crypto services from traditional financial institutions increasing in the country. However, the appetite for traditional financial institutions to cater to the demands of their consumer base might have them looking for ways to support stablecoins which are not pegged to fiat but meet the liquidity criteria of global banking systems with sufficient reserves in any form, and are subject to regular audits.

Consumer protection wise, if India decides to take cues from the UK to build a protectionist framework catering to Indian consumers and service providers, that would also lead to a lot of ambiguity where domestic laws will be applicable to global entities. Often this would mean organizations choosing to set up shop in countries which are friendly towards new entities and do not levy heavy duties for operations. This might also translate into additional tariffs for users who want to interact with businesses abroad.  India’s own country-specific framework might be a challenge for its Crypto users to interact with global service providers with taxes and other hindrances in the picture.

Jurisdiction-specific rules which only apply to service providers and users of a region make the process of regulation cumbersome and difficult to abide by. It is also a painstaking process for regulators to draw synergies between the rules of different regions. 

The current development however indicates that the UK government recognizes the importance of the Crypto industry and the need for user protection which can be achieved by a clear and conducive regulatory framework. This is a ray of hope for all that is to come for the Crypto industry in the coming months. 

(The author is the Vice President of crypto investment platform WazirX)

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