Cryptoasset regulation: clarity or conundrum?
06 June 2019
The growing popularity of cryptoassets poses a conundrum for regulators. Some have acted quickly with bans or bespoke regimes, while others are taking a more evidence-based approach and plan to reach a more considered view on the appropriate regulatory stance. But with cryptoasset products and associated activities increasingly crossing the boundaries into mainstream financial services, regulators around the world are under pressure to provide clarity over the application of existing regulation to this market. In the UK, authorities have attempted to do this but, how helpful have their efforts been?
First, it is worth briefly recapping on why regulators care about cryptoassets and what the interventions in the UK have been so far. HM Treasury (HMT) first reviewed cryptoassets in 2014 and subsequently launched the UK Cryptoasset Taskforce, comprising HMT, the FCA and the BoE. After recognising that cryptoassets could potentially pose a number of risks in relation to consumer protection, financial crime, market integrity and financial stability, the Taskforce produced a taxonomy for cryptoassets, to lay the foundations for further policy work. The taxonomy, which categorises cryptoassets into exchange, security and utility tokens, provided the basis for the FCA’s proposed new guidance in January 2019. This sought to provide additional clarity on when cryptoassets are likely to fall within the FCA’s regulatory perimeter and to which existing regulation might apply.
The general sense among firms is that, in practice, the guidance is particularly effective in helping them to determine whether a cryptoasset is likely to constitute an equity share. But a number of concerns and questions remain. Some firms still believe it will be difficult to determine whether more complex cryptoasset structures might be classified as a debt instrument or UCITS product, and that further detail in the guidance could be helpful.
There has also been debate across industry over whether further clarity could be provided on the treatment of stable coins, which are tokens pegged to a currency/real-world asset to provide a less volatile digital asset. A number of firms suggest that these do not fit neatly into the existing cryptoasset taxonomy, while others believe they are a hybrid security and should be treated as such. Either way, the FCA should address this before the guidance is finalised.
Wherever the FCA ends up on its guidance, it will not be the last of the regulatory activity impacting the UK market. A further area in need of clarity is the appropriate approach to take for cryptoassets that do not currently fall within the FCA’s regulatory perimeter. HMT is due shortly to consult on a potential expansion of the FCA’s perimeter which could bring these cryptoassets under FCA rules, but what do firms do in the meantime? A number of firms have argued that the use of voluntary FCA-endorsed industry codes for such token classes would help to build trust and confidence in these markets, preserving the reputation and competitiveness of the UK cryptoasset market as a whole. While a voluntary code is likely to be beneficial, and could be adopted formally by the FCA should HMT expand the perimeter, securing FCA endorsement seems unlikely given its typical stance on unregulated markets. For the moment, it may remain unclear.
In addition, the FCA is considering a ban on the sale of cryptoasset derivatives to retail investors, while international regulatory bodies such as IOSCO, ESMA and the EBA are taking forward their active cryptoassets agenda, exploring the appropriate regulatory approach in this area at a more fundamental level.
For now though, the initial clarity we have from the FCA represents an important first step in the journey of cryptoasset regulation in the UK, and should provide firms with the confidence to think strategically about their offering in this area. Opportunities to develop new products, services or even entire business models are waiting to be exploited.