On 6 September 2021, the FCA published a speech by its Chair, Charles Randell, entitled The risks of token regulation.
Key points in the speech include:
- The tide of regulation is turning all over the world, and online platforms should expect a future where regulation addresses the significant risks they pose in the same way as other businesses. Same risk, same regulation.
- The FCA has repeatedly warned about the risks of holding speculative tokens. These tokens are not regulated by the FCA. They are not covered by the Financial Services Compensation Scheme. If these tokens are purchased investors should be prepared to lose all of their money.
- The potential level of consumer harm that purely speculative tokens bring raises the question of whether the activity of creating and selling them should be brought within FCA regulation.
- A HM Treasury consultation on the UK approach to cryptoassets and stablecoins closed earlier this year, and the FCA is working closely with HM Treasury and Bank of England as part of the Cryptoassets Taskforce.
- The FCA has published a list of unregistered crypto exchanges that it suspects are operating in the UK, to help consumers avoid using them. Banks and other authorised firms should be very wary of transactions involving unregulated crypto exchanges wherever they are based, and should use the list of suspect UK businesses to identify customers and transactions which may be money laundering.
- Where digital tokens are used to constitute or represent investments that are already regulated by the FCA, like shares and bonds, the FCA will be willing to use its existing powers in the same way as for investments that are not tokenised. In 2019 the FCA set out guidance to clarify its approach to transferable securities of this kind.
- Where other activities the FCA regulates reference digital tokens, the FCA will pursue its consumer protection objective in limiting the harm. That’s why last year the FCA banned the sale of crypto-derivatives to retail consumers.
- The FCA does not currently have a general remit from Parliament to regulate the issue or promotion of speculative tokens.
- Because of the decentralised way that speculative tokens are created, any effective system of regulation will require a business seeking registration or authorisation with the FCA to bring itself firmly within its reach, with people and resources that the regulator could access in order to supervise and enforce its requirements. The FCA is not going to award registration or authorisation to businesses that will not explain basic issues, such as who is responsible for key functions or how they are organised.
- An effective system of regulation of digital tokens has to allow the more promising use cases for the innovative technology that underlies the tokens to flourish – especially the potential to make payments and financial infrastructures more efficient and accessible. It is essential to find the right balance between appropriate regulation to protect consumers and markets and encouraging useful new ideas in this space.
- It will take a great deal of careful thought to craft a regulatory regime which will be effective in the decentralised world of digital tokens. Legislators will need to consider 3 issues: how to make it harder for digital tokens to be used for financial crime; how to support useful innovation; and the extent to which consumers should be free to buy unregulated, purely speculative tokens and to take the responsibility for their decisions to do so.
- There are two cases where regulators should have the powers to take action to reduce the potential harm to consumers from purely speculative tokens. The first is crypto-asset promotions. A large proportion of people buying these speculative tokens seem to think they may be regulated already. The second is the risk of contagion of the regulated business of authorised firms by unregulated activities in digital tokens. As a first step, the Basel Committee is consulting on a proposal which would ensure that speculative digital tokens attract a full capital charge for banks. It is essential that the boards of FCA authorised firms can show how they have addressed the risks that unregulated activities in relation to digital tokens can pose to those firms: to both their conduct, and their prudential soundness.