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UK CRYPTO ASSET REGULATORY UPDATE: NOVEMBER 2018
by Romal Almazo
On Tuesday 20 November, City & Financial hosted an event on the regulation of cryptocurrencies in London. In this blog, I will share the key messages imparted from the UK regulators at this event.
SPEAKERS
Christopher Woolard, Executive Director, Strategy and Competition, Financial Conduct Authority Martin Etheridge, Head of Division, Note Operations, Bank of England Gillian Dorner, Deputy Director, Financial Services Domestic Strategy, Her Majesty's Treasury.
SETTING THE SCENE
Crypto assets are still in a regulatory transition period. The UK regulation of crypto assets is now largely guided by a tri-party task force made up of:
1. Financial Conduct Authority (FCA) 2. Bank of England (the Prudential Regulation Authority) 3. Her Majesty’s Treasury.
Future regulations in crypto assets will largely be driven by this task force. They suggested referring to two papers for regulatory clarity: Crypto Asset Task Force, Final Report, October 2018 and Treasury Select Committee, Digital Currencies Inquiry, September 2018.
The Task Force meets every six months and is due to publish their next update in early 2019. The UK government meanwhile, is still highly supportive of technology innovation but regulators continue to emphasize the importance of customer protection and maintaining market integrity. The FCA are not currently concerned with any potential threats from crypto assets to financial stability. However, they will continue to monitor the crypto market size and any 'linkage' to systemically important banks (GSIBs). Market size and linkage are the two main determinants for regulatory heightened engagement.
UK REGULATORY CLARITY
The FCA now clearly classifies tokens into three main asset classes:
The FCA has confirmed that it does not consider cryptocurrencies to be commodities or currencies under MiFID II. They are clear that although cryptocurrencies are not themselves regulated in the UK, it regards the derivatives of cryptocurrencies to be captured under MiFID II and therefore likely regulated as financial instruments. Crypto derivative products include crypto futures, crypto contracts for difference (CFDs), crypto options and transferable securities. The Task Force was also explicit in its recent paper that they were looking at a potential prohibition of the sale of these crypto derivatives to retail consumers. They seem particularly concerned with crypto CFDs. With respect to the classification of tokens, the taskforce refers to a regulatory perimeter to determine whether a crypto asset behaves like a regulated financial instrument.
The UK government will issue a consultation in early 2019 to further explore whether and how exchange tokens and related firms such as exchanges and wallet providers could be regulated effectively.
Other considerations:
MY VIEW
Regulators are going to face a number of challenges. It is very difficult, if not impossible to regulate within a blockchain ecosystem. For example, if people start getting paid their salaries in crypto assets, as is happening in Japan right now, and as more retailers accept crypto as payment (adoption is growing) then eventually financial transactions will bypass the regulated financial system altogether. For the first time in history we are seeing a product/instrument such as a token, that could be construed as behaving like part-security, part-currency and part-commodity. Any regulatory classification will need to be an agreed global taxonomy or regulatory arbitrage will emerge – people will move their crypto assets to more favourable regulatory jurisdictions.
INSTITUTIONAL ADOPTION
The biggest issues facing institutions from adopting crypto are:
What institutions want is:
(source: TABB research Group).
This content is provided by an external author without editing by Finextra. It expresses the views and opinions of the author.
Ellison Anne Williams CEO at Enveil
30 October
Damien Dugauquier Co-Founder & CEO at iPiD
Kyrylo Reitor Chief Marketing Officer at International Fintech Business
Prashant Bhardwaj Innovation Manager at Crif
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