Partner Nicola McKinney analyses digital asset regulation and the Treasury’s consultation on the financial services regulatory regime for crypto assets.
Nicola’s article was published in The Times, 16 February 2023, and can be read here.
The UK government has finally announced its first substantial crypto regulation plans. Last week, the Treasury published an 82-page consultation on the ‘Future financial services regulatory regime for cryptoassets’. Despite widely-drawn potential reforms, actual regulation will be slow – responses followed by legislative drafting will take several years.
UK regulation has been painfully slow and behind the international curve. Political pressure to make progress increased following the dramatic demise of FTX, the world’s second largest cryptocurrency exchange which filed for bankruptcy last November with $9 billion in liabilities.
The FTX debacle is reported to have impacted around 80,000 UK-based investors. Unprotected by current UK regulation, these investors do not benefit from the Financial Services Compensation Scheme (FSCS) which applies to fiat currency assets, protecting up to £85,000 of an individual’s savings or investments.
A warning issued to potential investors published on the Financial Conduct Authority (FCA) website last September plainly did nothing to prevent their losses. The absence of protective mechanisms left affected UK investors with limited scope for recovery.
The Treasury consultation document highlights that despite the need for urgency, the UK governmental response and that of its regulatory agencies will struggle to make up historic delays in implementing regulation when cryptoassets were emerging.
The digital asset sector is constantly innovating, with new forms of asset – from non-fungible tokens to stablecoin – regularly emerging. Without a swifter regulatory response, there is a real danger that the UK will perennially be playing ‘catch up’. There is also a notable lack of focus on a coherent international approach; crypto’s decentralised nature and lack of jurisdictional boundaries inevitably gives rise to the significant question of cross-border enforcement.
The former chancellor Phillip Hammond recently said that in order to compete with countries that are already implementing crypto regulation, the UK must move faster in creating a regulatory framework for the oversight of digital assets. Hammond suggested that, post-Brexit, the UK should be leading in this area, but instead had allowed itself to slip behind. Regrettably, the proposed legislation may do little to close the gap.
Despite the ambition of the consultation document, it provides scant evidence of UK regulators anticipating developments in the rapidly evolving crypto market; by focusing too heavily on the issues of today, they may fail to account for those of tomorrow. In essence, it is largely reactive, rather than proactive. It also does not offer protections for direct, unsolicited UK investment into foreign exchanges like FTX, highlighting a fundamental lack of understanding of how many consumers engage with crypto assets.
To quickly develop effective regulation of cryptoassets, UK regulators will need to foster talent and incorporate knowledge of the crypto industry within their own ranks, while maintaining contact and continuous dialogue with key industry players.
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