Regulation
UK Makes Right Moves on Cryptocurrency Regulation, But Needs to Move Faster
The UK is moving in the right direction when it comes to cryptocurrency regulation, but the country needs to move faster, argues the author of this article.
The author of this article is Brett Hillis, a partner at the law firm Blacksmith Reedand a member of On-Chain, the firm’s cryptocurrency and digital asset group. The team has more than 100 lawyers working across the U.S., U.K., Europe, Asia and the Middle East.
How the cryptocurrency and digital asset space evolves continues to be important to the wealth management industry, and we are excited to share these insights. Usual editorial disclaimers apply. Please email the editor at tom.burroughes@wealthbriefing.comif you would like to get involved in the conversation. We welcome feedback from those on the front lines of this technology.
The UK government has made no secret of its ambition to transform the UK into a cryptocurrency hub. It is a laudable ambition, but the UK faces a crowded and internationally competitive market. There is much to attract to Britain for cryptocurrency and other digital asset activities, but the UK must recognize that, faced with competition from other jurisdictions, it cannot afford to sit idle.
It is worrying, however, that UK regulators at least do not appear to have reached this conclusion when it comes to retail investing.
Significantly, it has been five years since the Financial Conduct Authority last consulted on the sale of cryptocurrency-based investment products to retail clients, with the corresponding ban in place since January 2021. Since then, however, the global picture has changed dramatically. Recent developments of particular note include the US and Hong Kong granting regulatory approval for bitcoin exchange-traded funds (ETFs). In the European Economic Area, meanwhile, investors have been free to invest in physically backed bitcoin exchange-traded products (ETPs) since 2019.
But the FCA’s only move was to allow institutional investors to invest in bitcoin and ethereum ETPs. As a result, it is difficult to escape the conclusion that the UK’s position is much more conservative when it comes to the retail market for cryptocurrency-related products.
An obsolete position?
The FCA’s position is intended to protect retail investors, and this obviously remains of paramount importance. But the FCA’s position assumes that, unlike institutional investors, retail investors generally will not have the ability to accurately assess the risks and values of underlying cryptocurrencies, regardless of other regulatory protections put in place to protect them.
The FCA’s argument for banning retail investors from investing in ETPs is based on a number of assumptions that may have been correct in 2019. But cryptocurrency markets have matured significantly since then. Despite this, the FCA has not reassessed its position on whether the same challenges apply or whether a retail ban is the best way to address them.
For example, the arguments advanced five years ago that cryptocurrencies have no intrinsic value, are vulnerable to market manipulation and financial crime, and are highly volatile in price may not have the same force as they did then. And even if those points were as true today as they were then, it does not follow that a retail ban is the best response. Consequently, if the FCA were to undertake another consultation now, it is hard to imagine it would reach the same conclusion.
The FCA’s approach leaves UK regulation in a curious position. Cryptocurrencies do not fall entirely within the FCA’s regulatory remit. Most significantly, they fall outside the scope of the FCA’s product intervention powers, meaning that no cryptocurrencies have been banned by the FCA. In other words, it is not within the FCA’s powers to ban bitcoin or ethereum.
Anti-money laundering regulations have been extended to include cryptocurrency exchanges, brokers and custodians, which fall within the scope of the FCA’s regulatory powers, but the FCA’s role in this regard is to warn investors of the risks associated with cryptocurrencies as an investment product rather than to prevent access to them.
Consequently, as the FCA’s position has not changed, the ban on retail ETPs has left the UK to regulate cryptocurrencies and cryptocurrency ETPs differently, despite the fact that the products share a similar risk profile. In fact, the banned product is arguably the less risky of the two due to the custody and safeguarding arrangements.
And now?
Since 2021, the FCA has been given additional powers to regulate cryptocurrencies, with the financial promotion regime extended to cover cryptocurrencies. The FCA has set out detailed requirements around the promotion or sale of these products to retail consumers, which has perhaps unsurprisingly encouraged retail investors, and it is clear that the FCA intends to take a proactive approach to its enforcement responsibilities.
For example, on the first day after the introduction of a new cryptocurrency marketing regime, the FCA issued 146 warnings to firms, reminding them of their obligations to protect UK consumers from illegal promotions. In and of itself, this assertive approach to regulation should not necessarily be seen as a cause for concern. Rather, the tough approach to marketing can play an important role in helping to educate consumers about the risks. But educating consumers about the risks is one thing; denying them the opportunity to invest is another.
It is also out of step with the UK’s broader approach to crypto regulation as it has developed. This has not closed off the market, but has provided strong protections for retail investors. The FCA’s financial promotion regime for cryptocurrencies shows that retail investors can be allowed to purchase cryptocurrencies subject to a highly regulated customer journey. It seems incongruous that a similar approach is not being taken with fully regulated products referencing such cryptocurrencies.
Indeed, overall, the FCA’s regulation of cryptocurrencies and digital assets deserves credit both for the rules it has developed and its practical approach to their enforcement. The end result of this should be industry confidence.
But this confidence could be dented by the ongoing ban on retail investors, particularly in light of other jurisdictions reassessing their position. It is, of course, vital that retail clients are protected from exposure to undue risk, but this should be done in a way that does not create unnecessary barriers to investment. For all the positives of the UK regulatory regime, the FCA has also created such an unnecessary barrier to retail investment and the sooner this is addressed the better.