The UK’s Financial Conduct Authority (the FCA) held its first CryptoSprint in May 2022 involving over 100 participants from the crypto industry, financial services firms, academia and consumer groups. The aim – to increase the FCA’s understanding of the cryptoasset market and seek views from the industry on what appropriate regulation might look like. Why? The UK Government has announced that it will consult later this year on whether to regulate a wider range of cryptoassets. This comes in the background of an increasingly regulated space: certain cryptoasset businesses must register for AML purposes, and the Government has also confirmed that it will bring currently-unregulated cryptoassets within the scope of the financial promotion rules and bring stablecoins used for payments into the regulatory perimeter.
What was discussed?
Among other things, participants suggested:
- there should be a principles-based approach to regulation to accommodate the pace of technology and innovation, which should be technology neutral;
- given the many use cases for cryptoassets, an (ideally international) digital taxonomy should be created, such that rules can be applied appropriately;
- existing rules should be used where possible, rather than creating bespoke standards;
- regulation should be proportionate to balance encouraging innovation with protecting consumers and markets; and
- as an interim step before formal regulation, the creation of a self-regulatory organisation might provide greater clarity for firms.
The participants also considered a number of specific areas for regulation:
- Issuance and disclosure: While there was broad agreement that a disclosure regime is needed, there was not consensus as to: (i) the level of disclosure (plain language summary at the point of creation; objective information only; subjective information including risk warnings or volatility metrics); (ii) whether the exchange or the issuer should be responsible for providing the information; and (iii) whether a different standard of disclosure should apply to retail investors from institutional investors.
- Regulatory hooks: When determining where regulatory obligations should be placed, there were particular challenges around decentralisation – suggestions included focusing regulatory responsibility on centralised on and off ramps like exchanges or giving decentralised autonomous organisations a UK legal status. There was particular concern over regulatory arbitrage, with calls for cross-border regulation and a consistent global taxonomy.
- Custody: There was broad consensus that existing regulation should be used where possible, particularly the Client Assets Sourcebook (CASS). However, challenges were identified around: (i) wide range of business models, standards, and services among existing cryptoasset custodians; (ii) evidencing ownership of a cryptoasset in the case of a firm’s insolvency; (iii) the bearer nature of the private key, and the need for custodians to apply robust operational and governance controls to help prevent loss and misuse of private keys; and (iv) protecting UK consumers from harm when their assets are serviced by a custodian based in another jurisdiction.
What can we expect next?
With a host of regulatory change on the horizon for cryptoassets, we can expect to see the output from the Cryptosprint being fed into the UK Government’s proposals to regulate the broader cryptoasset industry. In particular, the FCA points to the imbalance of information between consumers and service providers, and challenges faced by consumers to fully understand the risks associated with investing in cryptoassets. Given the FCA’s concerns around consumers in particular, we anticipate that any regulatory proposals will have a strong consumer protection focus – for example, we may see cryptoassets being brought within the scope of the new Consumer Duty.