The Financial Conduct Authority (FCA), Bank of England, and Prudential Regulation Authority (PRA) have released a raft of documents warning financial institutions of their responsibilities around cryptoassets and the direction of regulation in the space.
On the back of news that international securities regulator Iosco’s would launch a task force into DeFi, the three UK bodies released documents at the same time on Thursday the 24th of March, each containing reference to one another.
The Bank of England’s Financial Policy Committee (FPC) noted that while direct risks to the stability of the UK financial systems from cryptoassets and DeFi are currently limited, as they become more interconnected with the wider financial system they will present an increased risk to the stability of the UK financial system. The FPC stated that as cryptoassets and DeFi grow and develop, enhanced regulatory and law enforcement frameworks are needed at both a domestic and global level.
The FPC’s update welcomed a Dear CEO letter simultaneously issued by the PRA’s deputy governor, Sam Woods. Woods’ letter called for banks, insurances companies, and designated investment firms to consider their exposure to cryptoassets, citing both the need to comply with existing regulatory obligations and to expect changes to oversight.
“While the regulatory framework provides a structure to consider such risks, the methodologies and calibrations will likely need to be adjusted, in some cases substantially, to ensure that firms are appropriately and prudently considering and capitalising the risks,” read the letter.
The FCA’s notice reminded regulated firms of their existing obligations when they are interacting with or exposed to cryptoassets and related services. It underscored the importance of “being clear with customers” as there is a risk of consumer confusion where regulated firms provide services involving cryptoassets. The FCA expects firms to ensure that customers understand the extent of business that is regulated and to clearly distinguish any unregulated elements.
The notice also reinforced the need to comply with AML regulation and registration - pointing to the significant number of unregistered crypto firms operating in the UK which are currently under investigation. There are currently a handful of crypto firms on the FCA’s temporary crypto register, however, these firms must achieve full authorisation from the FCA by the 31st of March to join the permanent register.