By Byron Ousey
HM Treasury has just published a lengthy document which marks the first stage in a consultative process with industry and stakeholders about UK’s regulatory approach to crypto assets. The timing was prescient since its coincided with Bitcoin surpassing $41,000 for the first time which unleashed a huge swathe of commentary in the mainstream financial and business columns as well as on social media platforms.
Two years ago, the UK government launched a cross-authority Taskforce with the aim of exploring the impact of a rapidly developing crypto asset market. At that time the Taskforce found that distributed ledger technology (DLT) – the digital system used by Bitcoin – could have significant impact across a range of industries with potential to deliver real benefits for financial services. DLT is a type of technology that enables the sharing and updating of records in a distributed and de-centralised way. At the time the Taskforce judged that that the crypto asset market was at an “immature” stage of development.
Fast forward two years and the landscape is changing rapidly. In a post-Brexit world, the UK has to maintain its position as a world leader in financial technology. In practice that means creating a regulatory environment in which firms can harness new technologies to innovate and compete on the world stage. For example, there is increasing evidence that DLT could have significant benefits for capital markets, potentially fundamentally changing the way they operate. But, in a wider sense. a rapidly evolving landscape could pose a range of risks to consumers, and depending on their uptake, the stability of the financial system and integrity of the market. Hence the need to deliver a proportionate regulatory system that balances this range of risks with the need for continuance of innovation and market efficiency.
In essence, it means that the regulators have to bring a large proportion of crypto assets inside their respective perimeters.
The HMT document provides plenty of clues of the areas for consultation and the gathering of evidence. The word “token” is used to describe “stablecoins”: an evolution of crypto assets which could lead to a new classification of asset that is agnostic to the technology underpinning it
In the Treasury’ March 2020 Budget, reflecting the pace of change. it outlined a consultation on bringing certain crypto assets into the scope of financial promotions regulation to enhance consumer protection. This work finished in October last year and further detail will be set out in due course. The consultation also included the need for a broader regulatory approach to crypto assets, including “stablecoins” which aim to hold their value, typically against a reference asset, meaning that they can be reliably used as means of exchange or store of value for retail or wholesale transactions.
One interesting aspect is that in June last year it was reported there was more value in transactions using “stablecoins” than in Bitcoin for the first time. It means that regulatory challengers are continuing to build up at pace. A whole new world of technology is opening up embracing payments system that utilise e-money tokens (a digital payment instrument), security tokens (digital forms of traditional securities), utility tokens (used to buy a service) and exchange tokens (used as a means of exchange, like Bitcoin, Ether and XRP.).
A colossal amount of consultation has already taken place covering minimum policy expectations for stablecoins. Other work is being conducted into clarifying the regulatory perimeter under the Financial Services and Markets Act 2020, as well as implementing the Fifth Anti Money Laundering Directive, banning the sale, marketing and distribution of derivatives that reference certain types of crypto assets and issuing consumer warnings about crypto asset scams.
In a broader context, the Financial Conduct Authority (FCA) is providing oversight in support of the technology innovators Interestingly, DLT continues to be the most popular technology tested in the UK. with roughly a third of all firms using it to facilitate their products and services. Over the coming months, including the Chancellor’s March Budget, more information will begin to flow from government including responses to the consultation from industry groups which have to be submitted by March 21.
Meanwhile market mania abounds around the bet on Bitcoin as a digital currency. At the time of writing, the price of Bitcoin had dipped by $9,000, just an example of the extreme volatility in an asset which is tightly held, illiquid and traded in secret. Fool’s gold or a time to buy? was a weekend headline in The Times. Worryingly for the bubble watchers. there is clear evidence that Bitcoin is now winning wider acceptance for institutional investors. For example, it was reported that Ruffer’s UK investment Trust, had invested 2.5 percent of its portfolio in crypto assets while America’s $30bn Grayscale Bitcoin Trust allows investors to buy shares that are underpinned by Bitcoin. Hedge funds, too have entered the market using derivatives as a hedging tool.
Where will all this lead? There are some far sighted views from Bitcoin lovers who believe fervently that the digital currency will ultimately become the ultimate hedge against fiat money, better than gold or silver. Understandably, there is a sharply contrasting viewpoint from the conservative financial community. “Ask me again in 200 years” in the mantra.
A more interesting question is how will the market for crypto assets develop in this current decade. Clearly, HM Treasury, the Bank of England, and the financial regulators will want to keep an agile watch over the landscape while making sure that the UK maintains its lead as a financial technology innovator.
Time will tell. Watch this space