UK watchdogs propose regulatory framework for cryptoassets

The UK Government's Cryptoasset Taskforce, comprised of the Bank of England, the Financial Conduct Authority and the Treasury was set up last March to consider the policy and regulatory implications of distributed ledger technology and the booming market for cryptocurrencies.

While earlier reports on DLT were generally positive, the FCA has adopted a more bearish tone on cryptoassets in its final report, stating: "The FCA has made clear that in its view cryptoassets have no intrinsic value and investors should therefore be prepared to lose all the value they have put in.

"Whilst the Taskforce appreciates that cryptoassets have the potential to bring benefits to markets, firms and consumers, there remains considerable risks that HMT, the Bank of England and the FCA will take action to mitigate."

The final report sets out a range of proposals to bring the free-wheeling world of cryptocurrency activity under the regulatory bonnet. The Taskforce has committed to a number of actions, including consulting on:

• Perimeter guidance by the end of 2018 to clarify which cryptoassets fall within the existing regulatory perimeter, and those cryptoassets that may fall outside;
• Whether the regulatory perimeter requires extension to capture cryptoassets that have comparable features to specified investments, but currently fall outside the perimeter;
• A separate consultation by Q1 2019 on a potential prohibition of the sale to retail consumers of derivatives (including contracts for differences, options, and futures) referencing certain types of cryptoassets;
• Given the complexity and new challenges presented to traditional forms of financial regulation, more time is needed to consider how regulation can meaningfully address the risks posed by exchange tokens, such as Bitcoin. The 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; and
• Implementing one of the most comprehensive responses globally to the use of cryptoassets for illicit activities by applying and going further than the fifth EU Anti-Money Laundering Directive.

The proposal are likely to dampen the uptake of Initial Coin Offerings in the short-term while investors await the regulatory shakedown.

The ban on retail uptake of crypto derivatives is also eye-catching and described by Lorraine Johnston, regulatory counsel at law firm Ashurst "like using a sledgehammer to crack a nut. Retail CFD providers are already subject to Esma's product intervention powers. Banning crypto derivatives will merely force customers to unregulated exchanges, where they have no regulatory protections whatsoever".

Nonetheless, the imminent arrival of some regulatory clarity in the cryptoasset space was welcomed trade association CryptoUK: “We are pleased that today’s report announces a Treasury consultation on bringing cryptoassets within the regulatory perimeter of the FCA. We have consistently argued that this is the simplest and most effective way to introduce regulation. In taking forward these plans, it is important that new rules are proportionate and do not excess put up excessive barriers, including for retail investors."