In a bid to position itself as a global hub for Web3 technology and crypto innovation, the United Kingdom is being advised by a prominent conservative think tank to reconsider its regulatory approach. Policy Exchange, a respected institution in the UK, has released a report outlining ten proposals aimed at enhancing the country’s Web3 regulatory framework.
Among the key recommendations is the relaxation of Know Your Customer (KYC) requirements for cryptocurrency-related activities, as well as measures to protect individuals involved in decentralized autonomous organizations (DAOs). This move comes as Web3 firms consider relocating from the United States due to regulatory uncertainties.
One of the central recommendations put forth in the Policy Exchange report is the limitation of liabilities for individuals who hold tokens within a decentralized autonomous organization (DAO). The report points to a recent U.S. ruling that places legal responsibility on any American who owns or previously owned tokens in a DAO for any violations committed by that DAO. By contrast, the UK is urged to adopt a more lenient stance in this regard, potentially attracting Web3 firms and participants seeking a more favorable regulatory environment.
Rethinking UK KYC approaches
The report also suggests a fundamental shift in the approach to Know Your Customer (KYC) procedures by the principal UK financial regulator, the Financial Conduct Authority (FCA). Policy Exchange recommends that the FCA embraces “alternative and innovative techniques” for identity verification, including the use of digital identities and blockchain analytics tools. This proposed adjustment aims to strike a balance between regulatory compliance and fostering innovation within the crypto space.
In addition to KYC reforms, the report advises the UK to steer clear of imposing regulations that undermine self-hosted wallets and categorizing proof-of-stake services as financial activities. These recommendations reflect the think tank’s commitment to creating a regulatory environment that promotes the growth of Web3 technologies while ensuring security and investor protection.
To further entice crypto-related businesses and technologies, the report suggests that private stablecoin issuers be allowed to hold their stablecoin reserves at the Bank of England. This move could enhance confidence in stablecoins and position the UK as an attractive destination for stablecoin projects.
The Policy Exchange report also recommends the creation of a “tax wrapper” specifically designed for crypto exchanges. This initiative aims to provide clarity and transparency regarding tax obligations for crypto traders and businesses, addressing a longstanding concern within the industry.
In its effort to foster innovation in the Web3 space, the report proposes the creation of a new sandbox under the Department for Science, Innovation, and Technology. This sandbox would provide a controlled environment for startups and businesses to experiment with cutting-edge technologies and services, potentially driving further growth in the Web3 sector.
The recommendations made by Policy Exchange come at a time when the UK has been adopting a more rigorous approach to digital asset regulation. The government has been considering a ban on all cold calls promoting crypto investments, a measure aimed at protecting consumers from fraudulent schemes. Additionally, the Financial Conduct Authority (FCA) has issued warnings to local crypto businesses to ensure compliance with marketing rules or face potential consequences.
