Digital Assets – Key Regulatory Frameworks in the UK

The tech boom has come to feel more like a tech epoch, as the breakneck pace of new developments and innovations continues to accelerate. Scientific achievements and breakthrough inventions piggyback off one another, while a relatively young digital industry continues to expand near-limitlessly. 

The UK has been something of a nexus for this new digital industry, with an astounding volume of digital start-up funding centring on what could be the global digital capital. One unignorable corner of this foundational industrial revolution is that of the blockchain, and of a new sub-industry in digital assets. But what is this new industry, and how is it regulated?

Digital Assets, Explained

Digital assets describe a new form of commodity, enabled by and traded via blockchain exchanges. The blockchain, of course, is a peer-to-peer system that enables the generation and transaction of unique digital materials transparently and immutably. Blockchain is decentralised, meaning there is no central arbiter to wield control over a transaction or series of transactions; since data is held and shared amongst a network, data inherent to transactions cannot be altered on an individual basis. 

This allows for a wide variety of use cases, from file-sharing with complete transparency to the generation and transaction of unique datasets with rarity and value attached. It is the latter use case that enabled the generation of cryptocurrencies – arguably the first truly valuable digital asset. Today, the term encompasses cryptocurrencies, NFTs and digital ‘real estate’ in prototypical new internets like the Metaverse.

Role of the Financial Conduct Authority 

Decentralised blockchain networks allow for relatively free-flowing trade between clients, without a centralised system or body to make executive decisions on the network. For early cryptocurrency adopters, this was a core benefit, as transactions were wrested from the control of centralised institutions in the form of banks or lenders.

However, decentralised networks are not entirely exempt from the legal frameworks of nation states in which they might operate. The Financial Conduct Authority is the UK’s core financial regulatory body, and is taking an active role in investigating routes to properly regulate UK-based DeFi (Decentralised Finance) interaction via the ‘Future financial services regulatory regime for cryptoassets’.

Regulatory Requirements for UK-Based Crypto Businesses 

While formal regulatory requirements for engaging in the purchase, sale, borrowing or lending of assets within blockchain networks are some way from being ratified, there are nonetheless some key legal concerns and considerations surrounding interaction with DeFi networks. For example, businesses that utilise cryptocurrency architecture to create ‘security tokens’ as part of their initial offerings must register with the FCA. 

More generally speaking, businesses that engage with cryptocurrency need to ensure compliance with money laundering regulations and the Financial Services and Markets Act 2000. This is to say nothing of the ramifications of trading value across country borders without taking international law or foreign national frameworks into account.