T Skevington and M Bacina
FCA considers regulatory impacts of 'unstable coins'
On 6 March 2020, the UK's Financial Conduct Authority (FCA) published a speech given by Therese Chambers (Director of Retail and Regulatory Investigations, FCA) with the catchy title "Unstable coins: cryptoassets, financial regulation and preventing financial crime in the emerging market for digital assets".
The premise of the speech is that the approach to regulation of cryptoassets is necessarily different to other products or industries, as:
Cryptoassets are an attempt to rebuild the financial system from the ground-up, without the traditional financial institutional framework.
Often, this has led to commentary that Bitcoin and other digital currencies need to be specifically regulated. Chambers acknowledges this, saying:
When we initiated the implementation of the AML regime for cryptoassets, most colleagues and other key actors would ask how are you going to regulate Bitcoin or 'the blockchain'. The FCA does not regulate financial technologies, as we not in the business of picking winners, but financial activities.
While acknowledging the difficulty of regulating an industry that lacks traditional intermediaries, Chambers' notes that around 90% of economic activity in the digital currency market occurs on centralised custodial exchanges like Independent Reserve or BTC Markets, for whom the "well-worn logic which underpins financial crime regulation holds true".
Chambers' speech also reinforces a consistent theme internationally, that financial regulators love a good 'Regulatory Sandbox'. Unlike Australia's sandbox, which has seen limited use (which will hopefully change with upcoming amendments), Chambers' highlights the UK sandbox's success, claiming:
cryptoassets in regulated financial activities have been used in around 40% of tests and are the single most popular technology for testing.
Interestingly, Chambers' also refers to the important of international regulatory guidance in the cryptoasset space, emphasising in particular the contribution of US agencies (although this is understandable, given the speech was given in the US). Chambers specifically highlights the contribution of the SEC guidance on the Ethereum Decentralised Autonomous Organisation (DAO) published in 2017, or the CFTC's 2018 guidance on cryptoasset derivatives, or FinCen’s guidance published in 2019 on custodial and non-custodial cryptoasset business models.
The FCA has stepped up its engagement with the blockchain space in the last 18 months, releasing its consultation paper ‘CP19/3: Guidance on Cryptoassets’ in January 2019, followed by its more substantive policy statement PS19/22 in July 2019.