Countries around the world find themselves at different stages of opening up or restricting crypto regulations. Recent moves towards a more effective crypto framework in the UK could see more support from traditional financial institutions.
New Framework Under Development for Handling Crypto Assets
As cryptocurrency markets around the world have continued to grow at a staggering pace, they’ve become impossible for banks and other traditional financial institutions to ignore. Many are developing their own blockchain solutions, while others are trying to determine how to integrate existing cryptocurrencies into their structure.
Among the organisations trying to facilitate this process is the Basel Committee on Banking Supervision (BCBS). The BCBS is an international committee of banking industry organisations from around the world, including the UK, the US, China, and Russia, and many others.
The BCBS is currently undertaking an extensive consultation and review of how banking institutions should handle crypto exposure, i.e., to what extent banks should hold and use cryptocurrencies. The majority of their efforts are geared towards gauging the potential risks that cryptocurrencies pose to established financial systems and how to mitigate them.
Different Types of Cryptocurrencies Require Vastly Different Approaches
During their assessment, the BCBS categorises crypto assets into two main groups. The first is called Group 1 and is considered the more stable the two. This group contains so-called “stablecoins,” cryptocurrencies that are backed by real-world assets, such as official currencies.
Having something to back their value makes these stablecoins less risky, and the BCBS advises that they can be used under existing guidelines with only minor revisions. As such, an extensive legal framework would not be necessary to accommodate these types of cryptocurrencies.
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Group 2, on the other hand, is believed to present a much more significant potential risk. This group contains Bitcoin and the majority of other cryptocurrencies. They’re defined as unbacked cryptocurrencies, having no other assets supporting their value. The value of these assets is controlled only by market forces and the scarcity inherent in their blockchains.
It is the opinion of the BCBS that these Group 2 crypto assets require a more extensive framework due to their increased volatility and risk. As banks seek to incorporate the use of cryptocurrencies, significant consideration will have to be taken on how to handle these types of cryptocurrencies.
UK Regulators Eager for New Framework Despite Some Pushback
Some within the UK believe that the frameworks being established by the BCBS might go too far, essentially making a true integration of cryptocurrencies impossible. Others welcome new regulations, believing that to be the final step necessary for banks to start capitalising on crypto.
A recent statement from Deputy Governor Sam Woods of the Bank of England suggests that the bank would support these types of international regulations if necessary. Woods believes that exposure to crypto within British banks will only begin to increase and that the potential risk unbacked cryptocurrencies carry with them requires addressing.
In general, frameworks from the BCBS can take years to prepare and years more to be implemented within the UK. The rapid growth of cryptocurrencies has shown the tendency for far outpacing any regulatory preparations in the past, and the Bank of England hopes to avoid that hazard in the future.
Among the most prominent changes that would come with such a framework will be capital rules for any bank holding crypto. Essentially, banks will be required to hold capital that could offset the complete loss of any crypto holdings. While this might seem like a prudent decision, these strict requirements would prove inhibitory for many smaller lenders who simply cannot afford this type of capital requirement.
While smaller organisations might struggle to cope with new requirements, the Bank of England seems to welcome these new regulations. With more effective oversight within the crypto space, banking establishments will feel more confident in expanding their use of cryptocurrencies in general, sparking growth within the sector. This sentiment is particularly echoed by Action Fraud in the UK, which has been dealing with complaints from victims that have been defrauded by get-rich-quick schemes like “Bitcoin Prime”. After doing some research we found out that this service is actually a “copied” scam which was exposed on ScamCryptoRobots.com.
Future of Crypto in the UK Far From Settled
While there have been many concrete movements towards establishing a real crypto framework in the UK, including significant action by the FCA beginning in June 2021, the government has yet to make a final decision. Developments within the crypto space are rapid and unexpected, and it’s not clear where the industry is headed quite yet.