Cryptoassets: squaring the circle

Proposals included bringing stabletokens within the regulatory perimeter, considering further normalisation of cryptoassets and associated innovation (e.g. distributed ledger technology and blockchain) and pencilling in further consultation on these matters later in the year. This followed 2021’s call for input on stabletokens. It was also proposed that the Royal Mint issue a non-fungible token (NFT) as a marker of the UK’s intent to lead the way.

This follows a growing interest in cryptoasset investments on the part of investors, for whom exposure has become more common, in spite of the much-publicised risks and price volatility.

These risks have also triggered a distinct difference of opinion between HMT and the FCA. On the one hand, where HMT’s stance could be described as ‘bullish’, the FCA, emphasising its consumer protection remit, has consistently highlighted the risks to investors. Statements regularly draw attention to the possibility of investors losing their money. This has become especially palpable amid the so-called ‘crypto winter’ in which prices have fallen significantly.

In April, the FCA issued a particularly direct statement on cryptoasset risks. In it, the regulator noted that such investments, including NFTs, are outwith the regulatory perimeter, and are not protected by the Financial Services Compensation Scheme. Effectively, the FCA was saying ‘buyer beware’.

This difference of ethos between UK policymakers and regulators will ultimately need to be resolved.

The key challenge is clearly how to square the circle of boosting the UK’s position as a hub for cryptoassets while also maintaining high standards of governance and investor protection. Key risks for depositaries include monitoring to avoid breaches, volatile prices and resulting challenges regarding valuation.

There is also a difference between how this matter is being addressed in the UK and in the EU, where the proposed Markets in Cryptoassets regulation (MiCA) represents a sizeable effort to harmonise regulation across jurisdictions (implementation is expected 2023-24).

What next?

We know that there will be further consultation on this later in the year, including on the regulatory perimeter.

The world is changing and demand is growing. This means it is important for everyone that regulators and policymakers try to form a more consistent position.