Potential opportunities from regulation 126. The Committee heard that increasing the regulatory oversight of crypto-assets may help the ma...
Potential opportunities from regulation 126. The Committee heard that increasing the regulatory oversight of crypto-assets may help the market to develop. Obi Nwosu, Chief Executive Officer of Coinfloor told the Committee that: The lack of regulation is one of the things preventing [crypto-assets] getting to a mature stage. […] We know for a fact that there is a huge demand for the provision of much higher levels of liquidity to the market to stabilise the price. The only reason they are not entering the market is because the players are not regulated and there is not appropriate regulation in place. If there were regulation in place in a jurisdiction such as the UK, with such a strong financial and technology base, we would see a massive influx of inward investment and businesses not only migrating to this space but also expanding to this space.170 127. Mr Nwosu noted that if more regulation was to be applied to crypto-assets, it could encourage insurance companies to collaborate with crypto-asset exchanges to provide mechanisms for compensation in the event of a hack.171 128. Iqbal Gandham, Chair of Crypto UK and Managing Director of eToro, told the Committee that regulation could have wider benefits for the competitiveness of the UK financial services industry: Hundreds of thousands of [consumers] are buying [crypto-assets] from exchanges, such as the ones that have been hacked abroad. If you speak to these exchanges, they would be more than happy to be regulated and operate out of the UK. Currently they are going to jurisdictions such as Switzerland, Gibraltar, Malta, et cetera. They would be happy to be regulated.172 129. Crypto-assets have been embedded in certain pockets of society and industry, and it is highly likely that they are here to stay. The UK Government and financial services regulators appear to be deciding whether they will allow the current “wild west” situation to continue, or whether they are going to introduce regulation. The current ambiguity surrounding the Government’s and the regulators’ positions is clearly not sustainable.
130. The Committee is aware of the establishment of self-regulating bodies in the crypto-asset industry such as Crypto UK, which set out codes of conduct and best practice for the industry. However, as these standards are wholly voluntary, there are inevitably firms ignoring them. When industry is self-regulating, there is no authority to hold industry to account. Throughout the inquiry, the Committee has heard of the crypto-asset industry distributing misleading advertisements and laxing on their selfimposed ‘know your customer’ rules. Self-regulation within the crypto-asset industry is clearly insufficient. The introduction of formal regulation would make standards compulsory and relevant regulators can hold industry to account. 131. Given the scale and variety of consumer detriment, the potential role of cryptoassets in money laundering and the inadequacy of self-regulation, the Committee strongly believes that regulation should be introduced. At a minimum, regulation should address consumer protection and anti-money laundering. 132. In deciding the regulatory approach, the UK Government and regulators should evaluate the risks of crypto-assets, and assess whether their growth in the UK should be encouraged. 133. If the Government decides that growth is to be encouraged, the Committee believes that the introduction of regulation could lead to positive outcomes for the cryptoasset market. The implementation of crypto-asset regulation in the UK may enable the market place to move to a more mature business model that improves consumer outcomes and enables it to grow sustainably. The entry of institutional investors into the market would increase liquidity, which in itself could reduce some of the inherent risks that exist at present. 134. If the UK develops an appropriate and proportionate regulatory environment for crypto-assets and if future innovations in crypto-assets proved themselves as beneficial to society and industry, the UK could be well placed to become a global centre for this activity, providing that the crypto-asset market adhered to high standards and was not associated with criminality.
Introduction of regulation in the UK 135. There are two ways in which regulation of crypto-assets can be introduced in the UK: incorporating crypto-asset activity into the existing regulation or designing a new framework of regulation specifically for crypto-assets. 136. The FCA has previously explained to the Committee that under the existing framework of regulation, “certain types of financial services activity require a licence or ‘permission’ before they can be carried on.”173 The FCA noted that “the definition of these activities, and the ‘specified investments’ to which the activity relates […] are described at a high-level in the Financial Services and Markets Act 2000 (FSMA), and in more detail in the Financial Services and Markets Act 2000 (Regulated Activities) Order (the RAO).”174 The firms conducting these regulated activities must be authorised by the relevant regulator. For example, retail banks are authorised, regulated and supervised because deposit-taking is specified as a regulated activity in the RAO. Once an activity is specified in the RAO, the relevant regulators, such as the Bank of England or the FCA, then create the regulatory system for that activity. Thus, to regulate crypto-assets under the existing framework, crypto-asset activities must be specified as a regulated activity in the RAO. 137. Introducing regulation by adding a new regulated activity to the RAO has been done before. For example, peer-to-peer (P2P) lending was not regulated initially but was subsequently added to the RAO and became a regulated activity. “Operating an electronic system in relation to lending”, i.e. operating a loan-based crowdfunding platform (also known as a peer-to-peer lending platform) was added to the RAO as a new regulated activity under Article 36H, effective from April 2014.175 This brought P2P lending within the FCA’s regulatory remit, enabling the FCA to consult on its regulatory approach for P2P lending and subsequently introduce rules and regulations.176 The regulatory requirements the FCA introduced for P2P lending platforms included: • Minimum prudential requirements that firms must meet in order to ensure their ongoing viability; • Rules that firms must follow when holding client money, to minimise the risk of loss due to fraud, misuse, poor-record keeping and to provide for the return of client money in the event of a firm failure; and • Rules on the resolution of disputes.177
138. In its written evidence to the Committee, Crypto UK argued that incorporating crypto-asset activity into the existing RAO was the “simplest” option for imposing regulation on crypto-assets.178 139. David Raw, Deputy Director of Banking and Credit at HM Treasury, indicated that HM Treasury has not yet decided on how to incorporate crypto-assets into the current regulatory framework, but is considering expanding the RAO as a method: It could be that the right answer […] is to amend the Regulated Activities Order and put in place a regime that looks similar to the regime we have for peertopeer, where there are restrictions in relation to the sale to consumers and protections in place in terms of the amount of capital that exchanges need to hold or the way in which things are marketed to consumers. I am not sure that means treating them like banks, but that could be a model we end up following.
140. The alternative option to introducing regulation of crypto-assets through the RAO is to set up a new framework of regulation for crypto-assets that is separate to existing financial services regulation, the FSMA and the RAO. Crypto UK noted that this separate framework “can be tailored to meet the exact requirements of industry and […] perhaps provides the most flexibility.”180 However making the necessary alterations to all the existing legislation would take considerably more time. 141. The Committee considers that introducing the regulation of crypto-assets and associated activities by extending the Regulated Activities Order would be the quickest method of providing the FCA with the necessary legal powers to execute its duties of protecting consumers and maintaining market integrity. Designing a new framework of regulation would inevitably take much longer and given the growing risks surrounding crypto-assets and subsequent consumer detriment, the introduction of regulation should be treated as a matter of urgency. 142. The Committee recommends that the Government consider what “activity” related to crypto-assets should be specified in the RAO and the ramifications of this introduction. As discussed earlier, this should include at a minimum the issuance of ICOs and the provision of crypto exchange services.
No comments