On 29 October 2018, the Cryptoassets Taskforce (the Taskforce), comprising of the FCA, HM Treasury and the Bank of England (BoE), published its final report on the UK’s policy and regulatory approach to cryptoassets (the Report). The Taskforce was launched by the Chancellor of the Exchequer in March 2018.
The Report provides an overview of cryptoassets and the underlying technology therein, assesses the associated risks and potential benefits of cryptoassets, and sets out the path forward with respect to regulation in the UK.
Chapter 2 of the Report provides an overview of the key concepts underpinning the cryptoassets market. The Taskforce considers there to be three broad types of cryptoassets:
- exchange tokens: ‘cryptocurrencies’ utilising distributed ledger technology (DLT) and not backed by a central body;
- security tokens: which amount to a ‘specified investment’ as set out in the Financial Services and Markets Act (2000) (Regulated Activities) Order; and
- utility tokens: which can be redeemed for access to a specific product / service typically provided using a DLT platform.
On pages 17-18 of the Report, the Taskforce provides a high-level table giving an overview of the current regulations in place for various current uses of cryptoassets. The regulations in place are notably limited, and in certain contexts are supplemented by FCA Handbook provisions.
Chapter 3 of the Report identifies the impacts of DLT. The Taskforce recognises that DLT has the potential to deliver significant benefits to financial services, as well as in a broad range of other sectors. Consequently, it is considered that the UK should exploit its position as an emerging leader in DLT to capitalise on these opportunities.
Whilst barriers to the adoption of DLT more widely are identified, the Taskforce considers that stringent regulation is not required. The Taskforce believes that the UK regulatory approach is well suited to support the development of DLT in financial services via its ‘technologically neutral’ approach to regulation.
Chapter 4 of the Report takes a more in-depth look at the impacts of cryptoassets, recognising that activity in the cryptoassets market is increasing year on year. The benefits of cryptoassets are presented in three areas:
- as a means of exchange: cryptoassets could allow for more efficient and cheaper transactions as a result of fewer intermediaries being involved (this is mainly due to the use of DLT);
- for investment use: cryptoassets have the potential to widen access to new and different types of investment opportunities – however the benefits of this are unproven on a large scale; and
- to support capital raising: initial coin offerings offer opportunities including supporting competition; improving efficiency; addressing financing gaps; and building a new customer base.
However, these benefits run alongside a number of risks, those of particular note are:
- risks of financial crime, including opportunities for cryptoassets to be used for illicit activity and cyber threats;
- risks to consumers, who may buy unsuitable products, face large losses, be exposed to fraudulent activity, struggle to access market services, and be exposed to the failings of service providers;
- risks to market integrity, which may lead to consumer losses or damage confidence in the market; and
- potential implications for financial stability, which may arise if the market grows and cryptoassets are more widely used.
In chapter 5 of the Report, the Taskforce sets out its conclusions which include:
- DLT has the potential to deliver significant benefits in both financial services and other sectors, and all three authorities will continue to support its development;
- HM Treasury, the FCA and the Bank of England will take action to mitigate the risks that cryptoassets pose to consumers and market integrity;
- exchange tokens present new challenges to traditional forms of financial regulation. There is a need to consider carefully how regulation could meaningfully and effectively address the risks posed by exchange tokens and what, if any, regulatory tools would be most appropriate; and
- the UK authorities will continue to: (i) warn consumers of the risks of investing in cryptoassets; and (ii) monitor potential implications for financial stability.
Table 5.A on page 48 presents the next steps to be taken by each UK authority respectively (including consultations, regulatory actions, etc.). Such steps include:
- FCA consultation on guidance for cryptoasset activities currently within the regulatory perimeter – by end of 2018;
- FCA consultation on a potential prohibition of the sale to retail consumers of derivatives referencing certain types of cryptoassets (for example, exchange tokens), including contracts for differences, options, futures and transferable securities – by end of 2018;
- HM Treasury consultation on potential changes to the regulatory perimeter to bring in cryptoassets that have comparable features to specified investments, and explore how exchange tokens might be regulated if necessary – in early 2019;
- HM Treasury to transpose the Fifth Anti-Money Laundering Directive and broaden the scope of the anti-money laundering / counter terrorism financing regulation further – consultation in the new year, with legislation in 2019;
- PRA to continue to assess the adequacy of the prudential framework, in conjunction with international counterparts; and
- HM Revenue and Customs to issue revised guidance on the tax treatment of cryptoassets – by early 2019.