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7.31 Rather Enabling Environment
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The market for cryptocurrencies has operated in the UK since 2008, but without any regulation.
State authorities now monitor the market for cryptocurrencies, study it, but refrain from regulatory initiatives. For one, the Bank of England has been following the cryptocurrency market for the last few years to clarify the financial stability implications of crypto-assets. No regulatory moves have been initiated by the Bank of England since that time, as it believes that the cryptocurrency market is still insignificant and cannot affect the financial system. According to estimates of the Bank of England, even when cryptocurrencies peaked in January 2018, their market capitalization was USD 800 billion, which is still a tiny percentage, less than 0.3%, in relation to the size of the securities markets.
In 2017, when consumers and companies showed increased interest in the market for cryptocurrencies, and ICOs were made to attract investors' money beyond the regulated field, the state regulators were forced to intervene to protect consumers. The main responsible body is the Financial Conduct Authority (FCA). The FCA was the first one to react to the appearance of ICOs, releasing on September 1, 2017 a Consumer warning about the risks of Initial Coin Offerings. In that document, the FCA pointed out that ICOs are very high-risk, speculative investments that are not regulated in any way.
Despite the absence of state regulation of crypto-business, since 2014, crypto companies have been given the opportunity to work within the legal field. Therefore, to develop the optimal and adequate regulation for innovative FinTech technologies, the FCA introduced "regulatory sandboxes", which envisaged the provision of an individual regulatory treatment for companies where they could test innovative products, services, business models and delivery mechanisms in the real market, with real consumers.
HM Treasury in 2018 announced plans to regulate trade in cryptocurrencies in the context of the disclosure of the identity of cryptocurrency holders.
Rather Enabling Political Environment
The authorities in United Kingdom have a cautious approach to cryptocurrencies. The main regulator in United Kingdom – the Bank of England - does not see the need for regulation of cryptocurrencies, because according to its estimates the market is too small and does not pose a threat to the financial system of the UK. Other authorities believe that you first need to monitor the cryptocurrency business before you begin to regulate it.
Therefore, since 2014, the FCA has been watching the operation of crypto businesses within its "sandboxes", and sees in them not only risks, but also opportunities for the development of the financial system and the convenience of consumers.
The regulators often point out the threats that cryptocurrencies carry, but it is very positive about blockchain technology.
Neutral Legal Environment
Regulatory Convergence At the moment, there is no comprehensive legal regulation of cryptocurrencies in the UK. Legal relationships related to cryptocurrencies are regulated by various branches of law and various state bodies within their competence. Nevertheless, despite the absence of special regulation in the UK, there is a unity of views and approaches to regulation among government bodies. The main regulators – the Bank of England, the Treasury, the Financial Conduct Authority (FCA) – are constantly interacting with each other in developing approaches to regulating the crypto industry.
Definiteness of Legal Regulation Despite the absence of special legal regulation of cryptocurrencies, some legal relationships with the use of cryptocurrencies are subject to regulation applied to similar legal relations. In this case, regulation is clearly defined, and regulators promote its uniform application. Even for unregulated legal relationships, it is possible to work in the legal field within the framework of "sandboxes".
Cryptocurrencies are not a legal tender in the UK, because they do not fall under the definition of the Coinage Act of 1971. In 2014, the UK's authorities applied the AML law to crypto exchanges and electronic wallet operators, obliging them to comply with the requirements for customer identification. Depending on the nature of tokens issued ICOs may be subject to FCA regulation.
Stability of Legal Regulation The rules for the existence of the crypto sector can be viewed as relatively stable: basically, they have not changed since 2014. But at the same time, there are reasons to believe that in the near future, state authorities can take some steps with regard to the regulation of cryptocurrencies. The Cryptoassets Taskforce (which includes representatives of the Bank of England, the Treasury, including the Financial Conduct Authority) is working on the understanding of the principles by which regulation should be implemented and its possible scope, rather than the regulation of cryptocurrency itself.
Adequacy of Legal Regulation Regulation of the crypto currency in the UK seems relatively adequate. While realizing the innovative nature of the blockchain technology that underlies cryptocurrencies, and the inability to use existing legal norms, the regulator allowed businesses to develop freely according to their laws in "regulatory sandboxes."
Situation with the Rule of Law The UK has high scores in the Rule of Law Index and is ranked 11th out of 113 countries. The conditions of the legal regulation of blockchain and cryptocurrencies are neutral, and since the values of the sub-criterion of the rule of law are high (0.81), the amount of the difference between weighted (multiplied by Rule of Law Index score) and unweighted assessments are not significant.
Enabling Infrastructure Environment
There is a highly developed E-Government infrastructure, telecommunications infrastructure and online services in the UK. The UK ranks 4th among 193 countries in the UN Global E-Government Development Index.
The UK also has relatively high business environment development indicators ranking 7th in the world.