A Letter to His Majesty’s Treasury

Aztec’s response to HMT’s consultation for cryptoasset regulation

Answering HM Treasury’s Call

In February of this year, His Majesty’s Treasury (HMT) published a consultation and call for evidence titled “future financial services regulatory regime for cryptoassets”.

The consultation follows an April 2022 call for a new unified regulatory framework for cryptoassets in the UK.

The primary view expressed by the UK government is that “cryptoassets and the activities underpinning their use should follow the standards expected of other similar financial services activities.”

DeFi ≠ CeFi

We support the need for clear, affirmative, and proportionate regulation as a step toward jurisdictional clarity, and believe the UK’s stance that the prime objective should be on growth and innovation is the correct one.

Nevertheless, there are two nuanced distinctions within crypto that must be drawn:

  • Firstly, between centralized or intermediated financial entities and peer-to-peer decentralized financial protocols;
  • And secondly, between credibly neutral protocols and consumer-facing applications

The government’s core design principle equating “same risk, same outcome” threatens to throw centralized financial entities (CeFi), decentralized financial protocols (DeFi), and decentralized applications (dApps) into the same regulatory bucket.

Our Response

It’s our belief that the unique non-intermediated nature of DeFi is not only consumer protective but non-analogous to existing forms of financial services. Therefore, applying regulation derived from that applying to traditional financial services may both harm consumers and hinder industry innovation.

Consumers may be at risk of being misled into believing CeFi custodians are trustless, when in fact some of the biggest failures in the entire crypto-asset industry were in fact due to malfeasance on the part of CeFi entities and custodians.

In reality, there are vast differences in custody, trust, and permissioning between centralized financial services (CeFi) and decentralized protocols (DeFi), and as a result we recommend that HMT create a bespoke and progressive regulatory regime that is suited to DeFi’s unique benefit to the consumer.

We seek to clarify some of these nuances in our response to HMT’s consultation, with a specific focus on decentralized finance (DeFi), while underscoring the need for encryption to protect user privacy and security.

Read our full response here:

And read HMT’s full consultation here:


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