Potential opportunities from regulation
126. The Committee heard that increasing the regulatory oversight of crypto-assets may
help the market to develop. Obi Nwosu, Chief Executive Officer of Coinfloor told the
Committee that:
The lack of regulation is one of the things preventing [crypto-assets] getting
to a mature stage. […] We know for a fact that there is a huge demand for
the provision of much higher levels of liquidity to the market to stabilise
the price. The only reason they are not entering the market is because the
players are not regulated and there is not appropriate regulation in place. If
there were regulation in place in a jurisdiction such as the UK, with such
a strong financial and technology base, we would see a massive influx of
inward investment and businesses not only migrating to this space but also
expanding to this space.170
127. Mr Nwosu noted that if more regulation was to be applied to crypto-assets, it could
encourage insurance companies to collaborate with crypto-asset exchanges to provide
mechanisms for compensation in the event of a hack.171
128. Iqbal Gandham, Chair of Crypto UK and Managing Director of eToro, told the
Committee that regulation could have wider benefits for the competitiveness of the UK
financial services industry:
Hundreds of thousands of [consumers] are buying [crypto-assets] from
exchanges, such as the ones that have been hacked abroad. If you speak to
these exchanges, they would be more than happy to be regulated and operate
out of the UK. Currently they are going to jurisdictions such as Switzerland,
Gibraltar, Malta, et cetera. They would be happy to be regulated.172
129. Crypto-assets have been embedded in certain pockets of society and industry, and
it is highly likely that they are here to stay. The UK Government and financial services
regulators appear to be deciding whether they will allow the current “wild west”
situation to continue, or whether they are going to introduce regulation. The current
ambiguity surrounding the Government’s and the regulators’ positions is clearly not
sustainable.
130. The Committee is aware of the establishment of self-regulating bodies in the
crypto-asset industry such as Crypto UK, which set out codes of conduct and best
practice for the industry. However, as these standards are wholly voluntary, there are
inevitably firms ignoring them. When industry is self-regulating, there is no authority
to hold industry to account. Throughout the inquiry, the Committee has heard of the
crypto-asset industry distributing misleading advertisements and laxing on their selfimposed ‘know your customer’ rules. Self-regulation within the crypto-asset industry
is clearly insufficient. The introduction of formal regulation would make standards
compulsory and relevant regulators can hold industry to account.
131. Given the scale and variety of consumer detriment, the potential role of cryptoassets in money laundering and the inadequacy of self-regulation, the Committee
strongly believes that regulation should be introduced. At a minimum, regulation
should address consumer protection and anti-money laundering.
132. In deciding the regulatory approach, the UK Government and regulators should
evaluate the risks of crypto-assets, and assess whether their growth in the UK should
be encouraged.
133. If the Government decides that growth is to be encouraged, the Committee believes
that the introduction of regulation could lead to positive outcomes for the cryptoasset market. The implementation of crypto-asset regulation in the UK may enable
the market place to move to a more mature business model that improves consumer
outcomes and enables it to grow sustainably. The entry of institutional investors into
the market would increase liquidity, which in itself could reduce some of the inherent
risks that exist at present.
134. If the UK develops an appropriate and proportionate regulatory environment for
crypto-assets and if future innovations in crypto-assets proved themselves as beneficial
to society and industry, the UK could be well placed to become a global centre for this
activity, providing that the crypto-asset market adhered to high standards and was not
associated with criminality.
Introduction of regulation in the UK
135. There are two ways in which regulation of crypto-assets can be introduced in the
UK: incorporating crypto-asset activity into the existing regulation or designing a new
framework of regulation specifically for crypto-assets.
136. The FCA has previously explained to the Committee that under the existing
framework of regulation, “certain types of financial services activity require a licence or
‘permission’ before they can be carried on.”173 The FCA noted that “the definition of these
activities, and the ‘specified investments’ to which the activity relates […] are described at
a high-level in the Financial Services and Markets Act 2000 (FSMA), and in more detail
in the Financial Services and Markets Act 2000 (Regulated Activities) Order (the RAO).”174
The firms conducting these regulated activities must be authorised by the relevant
regulator. For example, retail banks are authorised, regulated and supervised because
deposit-taking is specified as a regulated activity in the RAO. Once an activity is specified
in the RAO, the relevant regulators, such as the Bank of England or the FCA, then create
the regulatory system for that activity. Thus, to regulate crypto-assets under the existing
framework, crypto-asset activities must be specified as a regulated activity in the RAO.
137. Introducing regulation by adding a new regulated activity to the RAO has been
done before. For example, peer-to-peer (P2P) lending was not regulated initially but was
subsequently added to the RAO and became a regulated activity. “Operating an electronic
system in relation to lending”, i.e. operating a loan-based crowdfunding platform (also
known as a peer-to-peer lending platform) was added to the RAO as a new regulated
activity under Article 36H, effective from April 2014.175 This brought P2P lending within
the FCA’s regulatory remit, enabling the FCA to consult on its regulatory approach for P2P
lending and subsequently introduce rules and regulations.176 The regulatory requirements
the FCA introduced for P2P lending platforms included:
• Minimum prudential requirements that firms must meet in order to ensure
their ongoing viability;
• Rules that firms must follow when holding client money, to minimise the risk of
loss due to fraud, misuse, poor-record keeping and to provide for the return of
client money in the event of a firm failure; and
• Rules on the resolution of disputes.177
138. In its written evidence to the Committee, Crypto UK argued that incorporating
crypto-asset activity into the existing RAO was the “simplest” option for imposing
regulation on crypto-assets.178
139. David Raw, Deputy Director of Banking and Credit at HM Treasury, indicated that
HM Treasury has not yet decided on how to incorporate crypto-assets into the current
regulatory framework, but is considering expanding the RAO as a method:
It could be that the right answer […] is to amend the Regulated Activities
Order and put in place a regime that looks similar to the regime we have for
peertopeer, where there are restrictions in relation to the sale to consumers
and protections in place in terms of the amount of capital that exchanges
need to hold or the way in which things are marketed to consumers. I am
not sure that means treating them like banks, but that could be a model we
end up following.
140. The alternative option to introducing regulation of crypto-assets through the RAO
is to set up a new framework of regulation for crypto-assets that is separate to existing
financial services regulation, the FSMA and the RAO. Crypto UK noted that this separate
framework “can be tailored to meet the exact requirements of industry and […] perhaps
provides the most flexibility.”180 However making the necessary alterations to all the
existing legislation would take considerably more time.
141. The Committee considers that introducing the regulation of crypto-assets and
associated activities by extending the Regulated Activities Order would be the quickest
method of providing the FCA with the necessary legal powers to execute its duties of
protecting consumers and maintaining market integrity. Designing a new framework
of regulation would inevitably take much longer and given the growing risks
surrounding crypto-assets and subsequent consumer detriment, the introduction of
regulation should be treated as a matter of urgency.
142. The Committee recommends that the Government consider what “activity”
related to crypto-assets should be specified in the RAO and the ramifications of this
introduction. As discussed earlier, this should include at a minimum the issuance of
ICOs and the provision of crypto exchange services.