On 25 April 2023, the FCA published a speech by its Executive Director of Markets and Executive Director of International, Sarah Pritchard, at City Week 2023. The speech focuses on the regulation of digital assets in the UK.
In her speech, Ms Pritchard notes the rapid growth in digital assets in the UK. She warns that, as a result, cryptocurrency based crime hit an all-time high last year, with illicit addresses receiving 20.6 billion dollars over the course of 2022, up from 18 billion dollars in 2020. Furthermore, the number of reports to the FCA of cryptoasset scams have progressively increased over the years: in 2019 there were 1,619 reports, compared to 6,372 in 2021.
Ms Pritchard goes on to note that the current remit of the FCA over crypto is limited to making sure that crypto firms in the UK comply with anti-money laundering and counter-terrorism legislation, and only once the government legislates will the FCA have more powers to regulate crypto. Whilst the UK’s Money Laundering Regulations require UK-based cryptoasset exchanges and custodians to apply for registration with the FCA, this does not apply to overseas firms who may target UK based consumers. Nearly three quarters of the applications processed by the FCA were either refused or withdrew their application, but 41 crypto firms of all sizes have been registered.
Discussing the areas of change in crypto regulation, Ms Pritchard speaks about:
- The regulation of financial promotions relating to cryptoassets – This will come into the FCA’s remit once the government legislates and firms will have 4 months to implement the changes. Ms Pritchard advises firms to start preparing for this now, as the FCA expects crypto promotions to be treated on a par with other high-risk investments and failure to comply will be a criminal offence.
- Regulating stablecoins and the wider cryptoassets regime – The FCA has been working closely with the government on its proposals to regulate stablecoins that can be used for payments and on their consultation on the regulation of the wider cryptoassets regime. The FCA is also part of a Cryptoasset Taskforce which brings together HM Treasury, the Bank of England and the FCA, to assess the potential impact of cryptoassets and distributed ledger technology and what the policy response should be. However, Ms Pritchard stresses that consumers are highly unlikely to be covered by the Financial Services Compensation Scheme and the Financial Ombudsman Service if they buy crypto and it goes wrong.
- Global considerations – The government’s consultation proposes giving the FCA powers over those conducting activities related to crypto that do not have origins or a base in the UK, but do provide services to UK customers. In the future, HM Treasury may also decide to introduce equivalence regimes, where firms authorised abroad can provide services in the UK without needing a UK presence. This would require equivalent standards to be present in that country as well as suitable and effective cooperation mechanisms. Ms Pritchard goes on to praise the global collaboration shown by the IOSCO Fintech Task Force’s crypto and digital asset working group – the FCA is currently leading on one of the group’s key workstreams, on crypto and digital assets, while the US Securities and Exchange Commission is leading on a second, on DeFi products and services. Consultation reports on both streams are expected to be published later this year.
Finally, Ms Pritchard highlights that the FCA is committed to environmental, social and governance (ESG) considerations, and has set up workstreams to further understand what future crypto standards and requirements may mean when under the ESG lens. The FCA will reflect on how best to factor ESG considerations into the design of the future of cryptoasset regulatory regime.
The speech ends with a reminder of the various ways in which the FCA is inviting input from the industry to help it shape the future regulatory regime for cryptoassets. This includes joint sandboxes, policy sprints and consultations (such as the current asset management discussion paper DP23/2, which includes crypto-related proposals).