Will UK Regulatory Approach Trump the US in Enabling Cryptocurrency Innovation?

The Financial Conduct Authority (FCA) has recently published a note stating they are aware of a growing number of UK firms issuing cryptocurrencies or digital assets associated with initial coin offerings. These vehicles are currently not directly regulated but the FCA, and other policy types, have been monitoring this sector of Fintech for quite some time.

Previously, the FCA issued advisories regarding the risk intrinsic to ICOs – including cryptocurrency CFDs or “contracts for differences.” The FCA published a discussion paper on distributed ledger technology (DLT) or Blockchain in April 2017.

The FCA states:

“Cryptocurrency derivatives are … capable of being financial instruments under the Markets in Financial Instruments Directive II (MIFID II), although we do not consider cryptocurrencies to be currencies or commodities for regulatory purposes under MiFID II. Firms conducting regulated activities in cryptocurrency derivatives must, therefore, comply with all applicable rules in the FCA’s Handbook and any relevant provisions in directly applicable European Union regulations.”

The UK regulator says that firms dealing in cryptocurrencies, or providing services regarding regulated activities for ICOs, may require authorization. The FCA bulleted out several specific instances that require proper authorization:

  • cryptocurrency futures – a derivative contract in which each party agrees to exchange cryptocurrency at a future date and at a price agreed by both parties
  • cryptocurrency contracts for differences (CFDs) – a cash-settled derivative contract in which the parties to the contract seek to secure a profit or avoid a loss by agreeing to exchange the difference in price between the value of the cryptocurrency CFD contract at its outset and at its termination
  • cryptocurrency options – a contract which grants the beneficiary the right to acquire or dispose of cryptocurrencies

The FCA advises potential issuers to seek “expert advice” if they are uncertain but also adds that it is the firms responsibility to ensure they have the the appropriate authority to pursue regulated activities. If not, an enforcement action is a possibility.

Recently, the FCA published its annual Business Plan. The document explains the regulators priorities over the following year. One of the items on the agenda is a review of cryptocurrencies as part of the Treasury, Bank of England and FCA Taskforce established to study digital assets. Expectations are for this document to be published as soon as Q2.

The Plan explains that digital currencies that are a method of payment or exchange are not part of their regulatory “perimeter.” But some cryptocurrencies clearly fall within their regulatory portfolio:

“…some models of use or packaging cryptocurrencies bring them within our perimeter, making the landscape complex. Last year, we issued consumer warnings on cryptocurrency Contracts for Difference and the risks of Initial Coin Offerings (ICOs). We will work with the Bank of England and the Treasury as part of a taskforce to develop thinking and publish a Discussion Paper later this year outlining our policy thinking on cryptocurrencies.”

Nigel Green, founder and CEO of deVere Group – a financial services firm, believes the FCA review will be “one of the most impactful and far-reaching regulatory reviews in modern.”

Green says that due to the prominence of the FCA when it comes to financial innovation, the report will “help shape and define the thinking and policies of regulators globally, the majority of which in the major economies are now also carefully looking at the crypto space.” The FCA has so far avoided the fate of the US which is going through a period of rule making by enforcement action as the SEC cracks down on unregistered crypto securities.

“cryptocurrencies are here to stay; they simply can no longer be ignored,” commented Green. “Therefore, the FCA’s proactive approach towards the crypto market must be welcomed as it will help protect investors and tackle illicit activity and unscrupulous firms. I expect the regulator to issue warnings and this caution should also be championed as these digital assets remain highly speculative and the market relatively new. The FCA cryptocurrency review will fundamentally shape this market that now, thanks to its exponential growth, needs a robust regulatory framework.”

The FCA has been recognized globally for its light touch regulatory approach when it comes to online capital formation or crowdfunding. Their rules have been studied in most developed markets around the world. To extrapolate this a bit further, it is not outside the realm of possibility that the FCA approaches ICOs in a similar fashion. Currently, the UK is in “all hands” mode as they manage Brexit repercussions and the potential impact to the British economy. They are keenly aware of the need to maintain their status as a leading global financial center and top international Fintech hub. Already, the French are positioning themselves to become a safe harbor of sorts for ICOs.  This has not gone unnoticed. The forthcoming review on crypto by the UK government will be keenly watched by digital asset aficionados globally.

See the UK FCA Business Plan embedded below.

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