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Cryptocurrencies will be regulated in a similar way to other financial products under legislation coming into force in 2027.
The Treasury is drawing up rules that will require crypto companies to meet a set of standards overseen by the Financial Conduct Authority (FCA).
Ministers have sought to overhaul the crypto market, which has ballooned in popularity as a way of investing money and making payments.
Cryptocurrencies have not been subject to the same regulation as traditional financial products such as stocks and shares, which means that in many cases consumers do not enjoy the same level of protection.
The government said the new rules would make the crypto industry more transparent, boost consumer confidence and make it easier to detect suspicious activity, impose sanctions and hold companies accountable.
Rachel Reeves, the chancellor, said: “Bringing crypto into the regulatory perimeter is a crucial step in securing the UK’s position as a world-leading financial centre in the digital age.
“By giving firms clear rules of the road, we are providing the certainty they need to invest, innovate and create high-skilled jobs here in the UK, while giving millions strong consumer protections, and locking dodgy actors out of the UK market.”
Crypto companies, which can include crypto exchanges and digital wallets, must register with the FCA if they provide services that fall within the scope of the UK’s money-laundering regulations.
The changes mooted by the Treasury will bring companies that provide crypto services into the remit of the FCA and mean the services are regulated in the same way as other financial products, including by being subject to transparency standards.
Lucy Rigby, the minister for the City of London, said: “We want the UK to be at the top of the list for crypto assets firms looking to grow and these new rules will give firms the clarity and consistency they need to plan for the long term.”
The cryptocurrency market has suffered from turbulence amid growing investor fears about a potential artificial intelligence bubble.
Banking industry data in October showed that the amount of money lost to investment scams by UK consumers had surged by 55% in a year, with fake cryptocurrency thought to top the list.
A Chinese woman living in the UK was convicted in September over a multibillion-pound bitcoin fraud.
Zhimin Qian, also known as Yadi Zhang, orchestrated a fraud in China between 2014 and 2017 that left 128,000 people out of pocket. The 45-year-old stored the proceeds in bitcoin but UK authorities made a breakthrough in the case when they raided a Hampstead mansion in 2018 and seized devices from Qian holding 61,000 bitcoins, worth more than £5bn at current prices.
The Metropolitan police believe it is the largest single cryptocurrency seizure in the world. Qian pleaded guilty at Southwark crown court on Monday to acquiring and possessing cryptocurrency that was criminal property.
Ministers are also drawing up plans to ban political donations made with cryptocurrency, amid concerns that it is difficult to determine their origin and ownership.
Nigel Farage’s Reform UK, which became the country’s first party to accept contributions in digital currency this year, is believed to have received its first registrable donations in cryptocurrency this autumn. It has set up a crypto portal to receive contributions, saying it is subject to “enhanced” checks.
Reform this month received £9m from Christopher Harborne, a cryptocurrency investor and businessman based in Thailand – the largest donation made by a living person to a British political party.