The FCA Takes First Steps Towards Regulating the UK Crypto Market

20 February 2019

The UK financial watchdog has published a new consultation paper designed to help regulate cryptocurrencies.

The Financial Conduct Authority (FCA) has started the process of establishing which cryptoassets it’ll be responsible for regulating in its new consultation paper.

Despite cryptocurrency being deemed as a “small but growing marketing”, the UK government still believes it poses substantial risks to consumers.

In recent months, cryptoassets like Bitcoin have been under scrutiny, with organisations and governments like the pan-European regulator ESMA calling for an EU-wide regulatory approach.

The FCA’s new consultation paper has been produced in response to the government’s Cryptoasset Taskforce’s October report, which set out the UK’s policy and regulatory approach to cryptoassets and Distributed Ledger Technology (DLT).

What does FCA’s consultation paper include?

Inside the report, it includes:

  • an assessment of the potential benefits of cryptoassets
  • an insight into any risks and issues the industry could bring
  • a plan for regulation in the UK
  • details on what activities and scenarios should be assessed for regulation.

Those who wish to comment on the consultation paper have until Friday 5th April 2019 to do so.

In response to the paper, the FCA stated: “Cryptoassets pose a range of substantial risks to consumers, which stem from consumers purchasing unsuitable products without having access to adequate information.”

“This can include fraudulent activity, as well as the immaturity or failings of the market infrastructure and services.”

The FCA concluded by adding that there’s “limited evidence of the current generation of cryptoassets delivering benefits”, however, “benefits may arise in the future”; especially with regards to the DLT.

The consultation paper’s focus on specifying which cryptoassets are considered as “Special Investments”, “Financial Instruments” or fall under the Payment Services Regulation or the E-Money Regulations should give crypto companies a clearer idea of regulatory perimeters.

As a result, the FCA believes that crypto companies will be able to act with more confidence, improve market integrity and encourage healthy and effective competition for the good of consumers.

Furthermore, the consultation paper also highlighted that the Treasury will be publishing their own consultation paper in the early months of 2019, exploring “legislative change to potentially broaden the FCA’s regulatory remit to bring in further types of cryptoassets”.

Reaction to the consultation paper

Creating a clear regulatory framework is “absolutely essential to the UK maintaining its position as one of the most attractive destinations for cryptoasset innovation.

A partner at law firm Kingsley Napley, Jill Lorimer, says such regulation “will give investors much-needed comfort and help to attract more interest in the sector. In effect, regulation will help crypto come of age.”

“The UK is already ahead of other jurisdictions in the number of crypto operators and users it has spawned.”

“Greater rules to govern this area of business will help to further legitimise and grow the industry at a time which must be very welcome to the UK financial services sector.”

What are your thoughts on the FCA’s new consultation paper? Does this position the UK as a leading nation to conduct crypto-business in? Let us know your thoughts.

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