In the wake of the Autumn Budget delivered by Chancellor of the Exchequer Philipp Hammond today, the Financial Conduct Authority (FCA), Bank of England, and HM Treasury has published their final report on the topic of regulating cryptoassets and distributed ledger technology (DLT/blockchain).
The Cryptoasset Taskforce was launched in March of 2018. The goal was to assess the emerging digital asset sector along with the potential of DLT. Fostering an economy driven by innovation remains a strategic objective for UK policymakers. The authors state in the opening of the report:
“The government has set out an ambition for the UK to be the world’s most innovative economy, and to maintain its position as one of the leading financial centres globally. The UK is well placed to achieve this, as host to a very mature and diverse domestic financial sector. This is a function of, but also relies on, the UK maintaining its international reputation as a safe and transparent place to do business in financial services; ensuring high regulatory standards in financial markets; protecting consumers; and allowing innovators in the financial sector that play by the rules to thrive, so that the benefits of new technologies can be fully realised. The Taskforce has developed a response to cryptoassets and DLT that is consistent with these objectives.”
The Taskforce has concluded that while DLT is at an early stage of development, it has the potential to deliver “significant benefits in financial services and other sectors in the future.” The three constituent members of the Taskforce are committed to supporting its development.
Simultaneously, while voicing their combined support, the Taskforce acknowledges affiliated risks.
These risks largely have to do with cryptoasset related activity along the lines of initial coin offerings (ICOs), rampant fraud, and the potential for market manipulation. The Taskforce says that “strong action should be taken” to effectively manage the crypto market risk. This regulatory response expects to engage with international entities in recognition of the global nature of digital asset offerings.
So what does the Taskforce propose?
The FCA, Bank of England, and HM Treasury, have jointly committed to:
- The UK maintaining its international reputation as a safe and transparent place to do business in financial services
- Ensuring high regulatory standards in financial markets
- Protecting consumers
- Guarding against threats to financial stability that could emerge in the future
- Allowing those innovators in the financial sector that play by the rules to thrive so that the benefits of new technologies can be fully realised
The Taskforce said that while illicit activity in crypto remains subdued the risks are increasing. Illegal activity will not be tolerated and authorities are ready to act.
Additionally, stringent anti-money laundering (AML) and counter-terrorist financing (CTF) compliance will be enforced. The UK authorities may also require crypto firms that operated outside the UK to adhere to their standards. The Taskforce is very aware that the crypto market is evolving quite rapidly.
As concerns for consumer protection remain elevated, the FCA may prohibit the sale to retail consumers the following digital assets: all derivatives referencing exchange tokens such as Bitcoin, CFDs [contract for difference], futures, options, and transferable securities. This would not cover cryptoassets that qualify as securities, also frequently referenced as security tokens. The FCA will consult on exact rules with a document forthcoming in early 2019 that will outline their approach.
The Taskforce states:
“Before listing any securities with cryptoassets as the underlying asset, the FCA will need to be satisfied that granting the listing would not be detrimental to investors’ interests. To date, the FCA has not approved the listing of any exchange-traded products with exchange tokens as the underlying asset.”
The group is sensitive to the structuring of offerings, such as ICOs, which may be designed to avoid regulation.
“Activities related to such cryptoassets should be regulated in order to protect investors, eliminate fraudulent activity and ensure market integrity.“
As for DLT / Blockchain, there are no regulatory barriers for adoption. The Taskforce considers the tech immature but opportunities exist that may benefit financial services. In fact, the FCA has already engaged with multiple DLT projects as part of its pioneering Fintech Sandbox. Simultaneously, the UK government has already committed tens of millions of pounds for research and development of DLT.
The members of the Taskforce will be engaging directly with crypto industry participants to better craft rules that do not undermine innovation while ensuring sufficient consumer protection.
“Today’s Cryptoassets Taskforce Report identified the opportunity for future action to address potential risks often associated with cryptoassets. We welcome the conclusion that cryptoassets and distributed ledger technology has the potential to deliver significant benefits in both financial services and other sectors, as well as the intention of UK authorities to work together with industry to develop a comprehensive regulatory framework.”
The Taskforce approach is in contrast to a Parliament Committee that has been critical of the FCA and digital assets in general. There is a concern that Members of Parliament may be inclined to crush the emerging crypto sector with excessive rule-making, without considering the benefits of crypto innovation for both consumers and businesses. A report from earlier today voiced the concern that excessive rule making would risk the UK’s global Fintech prominence.
The Taskforce report provides a solid overview of the crypto marketplace along with an outline of the regulatory approach. The UK remains well positioned to benefit from DLT/crypto if the government can balance the various stakeholder desires.