UK Treasury Proposes Stricter Rules for Crypto Firms

• UK draft rules tighten AML/CTF oversight for crypto firms, raising competitiveness concerns.
• Stricter FCA oversight for crypto firms could deter investment or enhance credibility.
• Regulatory changes seek a balance between financial crime prevention and industry growth.

The UK Treasury has released draft proposals to strengthen its anti-money laundering (AML) and counter-terrorist financing (CTF) regulations. These updates aim to address evolving risks, especially in the crypto sector. With a focus on tightening oversight, the government intends to create a more risk-based and robust system. The changes are also designed to maintain industry practicality while improving compliance for various sectors.

A primary concern driving these proposals is the growing role of crypto assets in financial crime. The draft document noted that cryptocurrencies are being used in laundering schemes through service providers outside the UK. The UK’s large and open economy has exposed it to these risks. Law enforcement has identified a notable increase in the use of crypto in illicit financial activities, prompting stricter regulations.

Key Changes in Crypto Oversight

The suggested changes significantly impact cryptocurrency businesses, and new specifications for company ownership emerge. The UK’s Financial Conduct Authority (FCA) will increase the “fit and proper person” test for firm controllers. This new test would replace the existing beneficial ownership requirement to regulate complex ownership structures. The reforms are meant to bring about more scrutiny and transparency in crypto companies.

Additionally, the draft lowers the threshold for change-in-control notifications from 25% to 10% share. This aligns the rules with the Financial Services and Markets Act (FSMA). The reforms require any party purchasing 10% or higher share of a crypto business to inform the FCA. The move will likely increase control and reduce possible risks associated with sudden changes in ownership and control.

Impact on the UK’s Competitiveness

The proposed regulatory reforms cast doubt on the competitiveness of the UK in the international crypto market. Europe and Asia are competing to become the market leaders in the crypto field. Tougher regulations might force crypto companies to find friendlier jurisdictions elsewhere in the world.  The UK must balance credibility and competitiveness to avoid losing ground to other global financial hubs.

Crypto firms have raised concerns about the additional compliance weight. While the aim is to reduce financial crime, the complexity of compliance could deter investment. Institutional players might not be willing to venture into a market that has high requirements. The UK financial environment is at a crossroads: can it build stronger trust, or can it afford to drive innovation to more nimble jurisdictions?

Related: UK-based Firm Satsuma Technology Raises £163.6M via Convertible Notes 

Feedback and Next Steps

The UK Treasury is seeking public feedback on the draft proposals, with a deadline of September 30. After reviewing the feedback, the government plans to finalize the regulations for Parliamentary consideration in early 2026. This process will determine which regulatory environment will apply to crypto businesses in the future. The government is trying to balance between regulation and the promotion of innovation in the financial sector.

The government is committed to improving sectoral guidance and digital identity verification standards. By closing these loopholes, the UK aims to strengthen the financial system of the country.

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