In the UK, cryptoasset related activities are rightly being increasingly regulated for anti-money laundering (“AML”) and financial crime reporting purposes. However, except where cryptoassets crossover into certain other regulated areas, there is currently no specific wider regulatory framework. As such it has been recognised that they may not be subject to the same consumer protections or safeguards as other financial services. This comes at a time of increased public awareness, but decreased public understanding of this complex area. 

In the March 2020 budget, and partly to address this protection gap, HM Treasury outlined two consultation measures. Firstly, on bringing cryptoassets within finance promotions regime, and secondarily on introducing a broader regulatory regime. However, will this be enough, or is it time for the UK to accelerate the focus on a more bespoke crypto-regulation regime?

Increased reporting and AML regulations

A recent Financial Conduct Authority’s (“FCA”) March 2021 Policy Statement summaries proposals to increase the number of firms that need to submit a REP-CRIM return (a financial crime report) from approximately 2,500 to approximately 7,000. The statement further highlights that the additional firms that will be required to provide REP-CRIM information irrespective of their total annual revenue including all cryptoasset exchange and custodian wallet providers.

This follows on from enhanced AML obligations. From the 10 January 2020 the FCA became the AML and counter-terrorism financing supervisor of UK cryptoasset businesses under the money laundering regulations. However, the implementation of the requirements have not been without issue. On 03 June 2021 the FCA announced that it had extended the end date of the temporary registration regime for existing cryptoasset businesses from 9 July 2021 to 31 March 2022.

Increased confidence but decreased understanding

These additional measures are certainly timely. Not least because a recent FCA Research Note: Cryptoasset Consumer Research 2021 observed that whilst public confidence in cryptoassets is growing, there is a falling overall level of understanding. In addition, the fact that most of those surveyed use an exchange for dealing with their investments further highlights not just the pressing need for the regulatory approval process for companies who deal with cryptoassets to be resolved expeditiously but also perhaps a careful examination of the fundamental question of whether to introduce a more bespoke regime.

What about consumer protections?

The FCA has quite rightly been very vocal about the risk to consumers, advising that if they invest in these types of products they should be prepared to lose all their money. With regards to regulatory scope, a 7 January 2021 HM Treasury Consultation Paper entitled “UK regulatory approach to crypto-assets and stablecoins: Consultation and call for evidence” observes that “at present a large proportion of crypto-assets fall outside or are likely to fall outside the regulatory perimeter. This means that they may not be subject to the same consumer protections or safeguards found in other areas of financial services and payments”. 

Indeed, whilst the above regulatory measures address financial crime issues, they do not always address issues of consumer protection. For example, no matter how regulated a firm is for AML and financial crime reporting, this will probably not assist consumers who lose their assets. The FCA itself is quite clear that even if a firm is registered with the FCA for AML purposes, it is not responsible for making sure cryptoasset businesses protect client assets.   

Proposed twin approach

HM Treasury’s proposed approach is to leave currently unregulated tokens and associated activities outside certain regulatory perimeters. However, to address risks such as consumer protections through other means such as more stringent regulations in relation to consumer communications via the financial promotions regime (if adopted) and AML and counter terrorist-financing regulation. It is also positive to see that the case is at least being considered for bringing a broader set of cryptoassets market actors or tokens within the authorised regime; however, the real question remains whether this approach will be enough.

Examples of a more bespoke measure - MiCA

Looking further afield, the European Union Markets in Cryptoassets Regulatory Proposal (“MiCA”) was released in September 2020. This has four objectives: to establish legal certainty, to support innovation, to instil appropriate levels of consumer and investor protection and market integrity and finally, to ensure financial stability. 

This has not gone unnoticed. The Consultation Paper notes that HM Treasury and UK authorities are closely monitoring developments including MiCA and appreciates that MiCA introduces a bespoke regulatory regime. Further, the Kalifa Review of UK FinTech observed that the UK should aim to be at least as broad in ambition as MiCA, but develop a bespoke regime that is more business driven. Interestingly many crypto providers indicated that they would positively welcome the opportunity to be regulated.

Conclusion

The Consultation Paper recognises that “the retail investment of unregulated tokens raises potential financial consumer, investment protection and market conduct concerns”. Whilst it could be argued that perhaps more focus should be made on a bespoke regime, taking all things into consideration it can be said that at the moment the approach is balanced and correct. This view is greatly fortified by the encouraging and reassuring signs that serious consideration is also being given to introducing a wider bespoke regulatory regime and an appreciation of the fact such regimes are being considered elsewhere. 

As always there is a need to have one eye to the future. It is therefore also encouraging to see from the Consultation Paper that the government is also keen to understand views in relation to the possible benefits and risks posed by decentralised finance and whether these developments should be brought within the regulated perimeter.