The Financial Conduct Authority (FCA) has unveiled a roadmap outlining key dates for the development of its ‘crypto regime’, as it aims to introduce a clear regulatory framework for the UK’s crypto industry.
As of August 2024, around 12 per cent of UK adults own some sort of crypto asset – equivalent to around seven million people – while around 93 per cent have at least heard of them, according to new FCA research revealed on Tuesday.
Despite the fact that investing in crypto remains unregulated and high-risk, consumers appear to increasingly consider cryptoassets as part of ‘a wider investment portfolio’, leading to 26 per cent dipping into their long-term savings to purchase them.
While the FCA still warns that consumers who invest in cryptoassets ‘should be prepared’ to lose all of their money, due to the continuing volatility and lack of regulation surrounding the industry, consumers appear undeterred. In fact, the FCA noted a rise in the average value of crypto held by people from £1,595 to £1,842.
“Our research results highlight the need for clear regulation that supports a safe, competitive, and sustainable crypto sector in the UK,” explained Matthew Long, director of payments and digital assets at the FCA, in response to the findings. “We want to develop a sector that embraces innovation and is underpinned by market integrity and consumer trust.”
Industry collaboration
It seems the industry wants the same, as Bivu Das, UK general manager at crypto exchange Kraken expresses support of the new roadmap: “The recent announcements by the government laid out a forward-thinking vision to enable cryptoassets to thrive in the UK long term.
“By providing legislative clarity to both stablecoins and staking, the UK has greenlit the asset class for investment opportunities and widespread adoption. We look forward to working with the government, our regulators and industry partners to unlock the full potential of crypto so that everyone can benefit from this technology’s growth.”
Joey Garcia, director and head of public affairs, policy, regulatory affairs at Xapo Bank, the Bitcoin-enabled bank integrating traditional finance with crypto, shares similar views.
Garcia explains: “With $17billion in ETF inflows and surging institutional interest, crypto’s rapid ascent is reshaping the political landscape, driving candidates to heed calls for reform. Our view is that the right, balanced regulatory frameworks are critical to creating a secure ecosystem that can lead to wider mainstream adoption.
“We hope that the FCA will continue to collaborate with enterprises in the digital asset space. The regulator must work toward establishing policies and regulations that will benefit consumers and institutional investors while creating solid and secure environments.
Can the FCA move fast enough?
Cassie Craddock, managing director, UK and Europe, at Ripple, the global digital asset infrastructure provider, adds: “Establishing a competitive and forward-thinking regulatory framework is essential to unlocking international investment and fostering innovation in such a rapidly growing industry.
“For example, stablecoins currently represent a $190billion market opportunity, and real-world asset tokenisation is set to play a transformative role in the future of financial services, with institutional players increasingly leaning into DeFi.”
However, Craddock also stresses that “time is of the essence”. While the FCA says that its full crypto regime governing cryptoassets will go live in the UK by 2026, it cannot afford to rest on its laurels.
“If the UK is to secure a meaningful share of this market and maintain its standing as a leading international financial centre, it must act swiftly and decisively to finalise and implement regulatory proposals,” she concludes.
Striking a balance
Although the FCA’s goals are clear, and many industry participants’ views are aligned on crypto regulation, scepticism remains among others, some of whom believe the rules could stifle market growth, innovation and competition in the crypto industry.
“The final proposals must strike the right balance between consumer protection and giving firms enough breathing room to innovate,” says Anthony Yeung, global head of strategic development at digital asset protection provider CoinCover. “Effective regulation targets specific areas – such as anti-money laundering protocols, capital reserve requirements and third-party risk assessments of crypto companies – without applying blanket restrictions that stifle growth.
“However, we can’t rely on regulation alone to drive sector maturity and crypto firms must also take responsibility. Interestingly, the FCA’s report suggests that an increasingly sizeable percentage of users think their funds are protected even though the FCA has repeatedly warned of the opposite.
“Proactively investing in fraud prevention, compliance and security will not only help crypto firms meet likely forthcoming regulations, but also enable them to send a strong signal to customers that their funds are indeed safe and secure. Alongside smart regulatory frameworks, this will be key for crypto to secure its future as a credible alternative to traditional finance.”
Positive steps forward
It’s all well and good stressing the importance of maintaining a balance between protection and innovation, but how can the FCA actually achieve this in practice? Louise Abbott, crypto partner at London-based Keystone Law, makes some recommendations.
“Risk-based approach to the introduction and implementation of regulation is the right approach. The government will need to ensure a number of things, including:
- Implementing a risk-based regulatory framework that differentiates between high-risk and low-risk activities – allows for more stringent oversight of higher-risk entities while providing a lighter touch for lower-risk businesses.
- Continuously assess and adapt regulations based on the evolving risk landscape and market developments, ensuring they remain relevant and effective without stifling innovation.
- Continue to consult with industry – engage with the crypto businesses, and ensure the regulations are workable. The UK wants to have a strong crypto offering, so we do not want large crypto businesses leaving London. We have seen this with phase 1, and we certainly do not want to erode this further.
- Create a regulatory sandbox that allows innovative crypto projects to test their products in a controlled environment without immediate regulatory burdens. This encourages experimentation while ensuring consumer protection.
- Clear communication and guidance, so businesses aren’t caught out. That is not, or ought not to be, the purpose of these regulations. They need to work.”
The clock is ticking
The FCA must walk a fine line to ensure it does not stifle innovation by over-regulating the market, however, bringing in new infrastructure takes time. For example, the Markets in Crypto Assets (MiCA) regulation was first introduced in 2020, and it is only going into full effect four years later. This begs the question, will one year be enough time for final judgements to be made?
Jon Light, head of OTC trading platforms (FX, CFD and Crypto) at Devexperts, the software solutions and services provider, is optimistic, saying: “Although crypto markets are fairly new, one year should be enough time to understand what measures need to be put in place, if the process is done correctly.
“We need to remember that the FCA has a wealth of experience in regulating new assets, meaning they can adapt previous frameworks to fit the specifics of new markets.”
Alexandr Sharilov, CEO of CoinDataFlow, the crypto markets analytics firm, also saw the potential benefits of the roadmap, but he also noted the risks due to the timeframe.
“The coming year promises to be ambitious, given the constant renewal of the crypto market, with new coins being minted almost daily. Investors are currently concerned about stablecoins, rates, and credit, and each of these areas is fraught with uncertainty and risk, but also opportunity.
“That’s why prioritising stablecoins and custody systems will be key, as these two components form the basis for wider adoption and integration into traditional finance.”
Has everything been accounted for?
The FCA roadmap looks to ensure that all major aspects of the crypto space are broken down and consulted upon, but with such a booming sector, there is a lot to cover. Highlighting the importance of constant communication throughout the consultation process, Sharilov added: “I would like to add that the success of the roadmap depends entirely on the willingness to constantly modify it and consult with people in the industry.
“It will not work perfectly the first time, but if regulators work closely with fintech innovators, they can achieve a system that is reliable and adapted to the future of cryptocurrency.”
However, according to Matthew O’Connor, co-founder, Legion, a platform for MiCA-compliant public token sales, the roadmap is missing something. He says: While the roadmap sufficiently covers trading platforms and order handling intermediation for secondary trading, the roadmap is currently missing guidance on public token offerings or ICOs (Initial Coin Offerings).
“This absence is especially noticeable given MiCA lays out explicit rules for appropriately conducting and marketing public cryptoasset offerings. In the absence of clear guidance, the FCA risks driving new innovation, capital formation, and project launches out of the UK.”
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