Venues set to bear the brunt of monitoring crypto market abuses under proposed UK regulatory regime

The UK Government is proposing a new regime in which venues will be charged with greater responsibility in monitoring market abuse and play a key role in regulating the cryptocurrency landscape.

The proposal follows the EU’s passing into law of the Markets in Crypto-Assets Regulation (MICA), with ESMA publishing its first consultation package last month, inviting feedback from stakeholders by 20 September.

The UK Government recognises that currently exchanges and intermediaries are already highly focused on surveillance, however, there remains considerable failings in terms of monitoring and preventing market abuse, explained Acuiti.

When venues report firms or individuals for suspected market abuse under the current rules, this does not prevent said entities from relocating and continuing in the same activity.

The new framework being proposed is set to make venues responsible for detecting, deterring and disrupting market abuse incidents for all participants on their market – regardless of where the individual or firm is based.

According to Acuiti’s analysis “Know Your Client (KYC) and Suspicious Transaction and Order Reports (STOR) requirements will be taken from the existing rules, but blacklisting and information sharing between venues could play key roles in the new regime. Sharing information is key to solving problems in traditional markets and is an area in which UK regulators should innovate in crypto markets.” 

Data privacy – and related technology – is key, with venues expected to take the lead in developing solutions.

In addition, the report highlighted that the new framework also proposes principles set out by the UK’s Financial Conduct Authority (FCA), which venues listing crypto assets will be responsible for overseeing. One key aspect relates to these venues shouldering the responsibility of the issuer in cases where none exist – as is the case for Bitcoin.

Additionally, in a bid to avoid coins or tokens being listed without due diligence, “security offerings would be subject to the Public Offers and Admission to Trading Regime while public offers of crypto assets that do not meet the definition of a token would be subject to the new Designated Activities Regime,” essentially making the venue that lists liable.

The UK Government’s regulatory framework is set to be based in large part on existing legislation. Will Mitting, founder of Acuiti, explained: “Where possible, regulations for institutional investors should be closely aligned with existing rules. There are, however, certain areas in which crypto assets are distinct. The regulation of crypto assets in the UK therefore needs to reflect these differences while allowing the market to evolve as efficiently and securely as possible.”

Recognising the areas which are unique to crypto assets is especially prudent given the collapse of FTX in November 2022, which triggered $6 billion of withdrawals in three days and forced Bitcoin to a two-year low.

The surge of client withdrawals followed news that the US Securities and Exchanges Commission had been investigating the firm’s handling of client funds and crypto-lending practices, with FTX founder Sam Bankman-Fried losing around 94% of his estimated $15 billion fortune.

Read more: Wild West in action: FTX’s fall from grace

Mitting also explained the opportunity regulatory framework development represents, increasing the economic competitiveness of the market, as well as fostering innovation and job creation. He further highlighted the need to protect investor interests and working towards a transparent, secure market.

Acuiti asserted that the UK Government should embrace blockchain technology and leverage its benefits when innovating crypto regulation, with the policing of market abuse by venues just one new process which could potentially be developed in the crypto space and subsequently be adopted in traditional markets.

The ‘Competitive Advantage: Charting the Path Ahead for UK Crypto assets Regulation’ paper is based on a roundtable from May this year which included insights from key firms in the UK crypto assets market and regulators.