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Out-Law News 2 min. read

Increase in UK regulation of cryptoassets anticipated

Businesses active in the UK’s cryptoassets market can expect to see an increase in regulation in the months and years ahead, an expert has said.

David Hamilton, who specialises in financial services regulation at Pinsent Masons, the law firm behind Out-Law, said the details contained in the Financial Conduct Authority’s business plan for 2021-22, allied to comments made by the FCA’s chief executive, Nikhil Rathi, represent a concerted push by the regulator to educate consumers about the risks associated with cryptoassets. They also point to future reform, he said.

According to FCA estimates, as many as 2.3 million UK consumers now hold cryptoassets, confirming their growing popularity among the public. However, the regulator said that while cryptoassets have “captured the interest”, they represent a “high risk” investment and that their “potential use … in financial crime and their highly volatile nature bring significant risks to consumers and market integrity”.

Hamilton said: “Crypto businesses have been subject to more stringent anti-money laundering obligations under the Money Laundering Regulations 2017 since January 2020, including a requirement to register with the FCA. The regulator has publicly stated that the registration process has seen a substantial number of applications either refused or withdrawn over concerns about firms’ financial crime systems and controls. Non-registered firms are currently listed in a rogue’s gallery on the FCA’s website as a warning to consumers looking to deal with them.”

The FCA has previously classified cryptoassets into three categories: e-money tokens, which fall subject to regulation under the Electronic Money Regulations; security tokens, which are cryptoassets with the characteristics of specified investments and so are effectively regulated investments in digital form; and unregulated tokens, namely utility tokens used to access a service or exchange tokens, such as bitcoin, that can be used for payment. These unregulated tokens represent the bulk of cryptoasset activity in the UK. Despite this, the FCA said in its business plan that it would “seek to reduce harm” outside of its regulatory perimeter.

The FCA said: “While we don’t give investment advice, we do warn consumers where types of products, like cryptocurrencies, are high risk. We maintain a list of cryptoasset businesses that aren’t registered with us, so everyone can see they aren’t complying with anti-money laundering regulations. We will continue to actively seek out intelligence where we suspect misconduct. As we improve our technology and capabilities, we will be able to identify and make better, faster judgements about harm. Where we can’t act, we will share with our partners so they can act.”

“We speak out when we see the need for legislative change. We welcome the proposal to include investment fraud in the Online Safety Bill. But this should apply to online advertisements as well – the biggest source of consumer fraud – not just user-generated content. Including online advertisements would support the recent change, which means online platforms have to comply with elements of the financial promotion rules,” it said.

In an accompanying speech published at the launch of the FCA’s business plan, FCA chief executive Nikhil Rathi said there is evidence that “more people see investment as entertainment – behaving less rationally and more emotionally, egged on by anonymous and unaccountable social media influencers”. He admitted that the regulator is “not used to engaging with” consumers in this category, who are typically aged between 18 and 30, and said that new digital technologies pose fresh challenges for regulators, policymakers and society as a whole to grapple with.

Hamilton said: “Many cryptoassets are currently unregulated, meaning the FCA is often limited in what it can do to protect consumers. However, the regulator is clearly undeterred and committed to highlighting issues that it sees arising outside of its regulatory perimeter. The references in its business plan to the government’s recent consultations on bringing cryptoassets within the financial promotions regime and to the UK’s broader regulatory approach to cryptoassets and stablecoins more generally show that there is already appetite for bringing more crypto-related activities within the FCA’s perimeter.”

Andrew Sackey, also of Pinsent Masons, said: “The overall trajectory appears to be a more interventionist approach by the FCA in the short term, with greater regulation and broadening of the FCA’s perimeter in the medium to long term.”

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