UK regulators are weighing up a range of a measures to rein in potential risks posed by ‘cryptoassets’.
Christopher Woolard, Financial Conduct Authority (FCA) executive director of strategy and competition, told a UK symposium that government agencies were mulling new control settings in the wake of a report on the cryptoasset sector.
Woolard said the UK Treasury, FCA and the Bank of England cryptoasset taskforce report published at the end of October “concluded that there are three major harms” linked to the sector.
“The first harm is to consumers, who may buy unsuitable products, face large losses, be exposed to fraudulent activity, struggle to access market services, or be exposed to the failings of service providers, such as exchanges,” he said in the speech. “Then there’s potential harm to market integrity. Opaque practices and misconduct could damage confidence in wider market functioning.
“And of course, we cannot overlook the risk of financial crime, where cryptoassets have been used as part of illicit activity such as money laundering and fraud.”
The joint government regulatory taskforce lumped cryptoassets into three categories: ‘exchange tokens’ such as bitcoin; ‘security tokens’ used in ‘initial coin offerings’ and the like; and, ‘utility tokens’ that can be “redeemed for access to a specific product or service” via a blockchain service.
“We’re concerned that retail consumers are being sold complex, volatile and often leveraged derivatives products based on exchange tokens with underlying market integrity issues,” Woolard said. “Given this, the FCA will also consult on a prohibition of the sale to retail consumers of derivatives referencing certain types of cryptoassets (for example, exchange tokens), including contracts-for-difference, options, futures and transferable securities.”
He said the UK financial regulator would also consult by the end of this year on “perimeter guidance” to determine which cryptoassets fall inside the current regime.
“Treasury is to then consult on whether the regulatory perimeter requires an extension to capture cryptoassets that have comparable features to specified investments, but currently fall outside the perimeter,” Woolard said.
Furthermore, the Treasury planned to “consult and legislate” on extending the UK anti-money laundering rules to cover the cryptoasset market.
“Finally, the Taskforce has also concluded that exchange tokens present new challenges to traditional forms of financial regulation,” Woolard said. “The Treasury, therefore, plan to complete further analysis on whether regulation could meaningfully and effectively address the risks posed by exchange tokens and what, if any, regulatory tools would be most appropriate.”
He said the consultation would begin early next year “on whether and how exchange tokens, as well as related actors such as exchanges and wallet providers, could be regulated effectively”.
“However, we also recognise the limits of domestic action on this global, cross-border issue,” Woolard said. “We will, therefore, also seek to work collaboratively with international counterparts, including standard-setters and other national jurisdictions.”
About half of the current batch of firms playing in the FCA’s ‘Regulatory Sandbox’ were using some form of distributed ledger technology (also known as blockchain) or cryptoasset to build their products.
“Given that both UK firms and consumers are likely to experiment with current and future generations of cryptoassets, it’s vital we head off risks,” Woolard said.
Last year the Financial Markets Authority (FMA) concluded that most cryptoassets would likely fall under its purview.
An FMA guide issued at the time says: “As this sector develops, we will continue to monitor and consider what additional regulatory support and requirements may be appropriate for the offer of these products and services.”