24/07/23

FINTECH: UK is to regulate cryptocurrencies and trading as financial services and not gambling

As published on: goodmoneyguide.com, Monday 24 July, 2023.

What was the UK Government’s response to the Treasury Committee?

The Government hadn’t formally commented on the committee’s proposals until now.
But this week in response to those suggestions, the U.K.’s Economic Secretary to the Treasury, Andrew Griffith MP, rejected the idea in a letter to the committee, which said that his department firmly disagreed with the committee’s proposal, and specifically with the idea that:

“Retail trading and investment activity in unbacked crypto assets (be treated) as gambling rather than as a financial service”

The letter went on to say :

“The Committee’s proposed approach would therefore risk creating misalignment with international standards and approaches from other major jurisdictions including the EU, and potentially create unclear and overlapping mandates between financial regulators and the Gambling Commission.”

And that:

A financial services regulatory framework is more appropriate for addressing the risks of unbacked crypto assets and creating the conditions for safe innovation.

This can – and will – come with a set of robust measures to mitigate consumer risks mentioned in the Committee’s report, including the risks of “consumers getting misinformed”

What is the Government planning to do instead?

The UK government is currently working on its own cryptocurrency regulation. Legislation that was debated on and put before parliament last month.

Speaking about that proposed legislation, Mr Griffith said:

“HM Treasury and the FCA will work with the industry to ensure crypto firms are made fully aware of the standards required for approval at the FSMA gateway”

(FSMA is the Financial Services and Markets Act of 2000)

He added that:

“Further communications will be provided in due course to ensure standards for approval are clearly available to crypto firms operating in the UK.“

The Treasury’s response to the committee’s report also said that it recognised the potential for crypto assets and their underlying technologies to bring benefits to financial services and the markets, particularly in the area of payments.

The government proposed legislation on cryptocurrencies, technologies and other assets would give the FCA a degree of oversight and would create a new regulatory framework (under FSMA 2000) for people carrying out certain activities within the industry.

The UK Financial Stability Board set out a series of proposed guidelines for crypto regulation, as part of a 77-page report published back in October 2022.

And as Andrew Griffith pointed out nowhere in that report does it mention the idea of bringing crypto markets under the auspices of the Gambling Commission.

What have Crypto brokers said about the Government’s response?

One of the largest crypto trading brokerages, based in the UK, is Israeli-owned eToro.

The Managing Director of eToro’s UK Operations, Dan Moculzski, told the Good Money Guide:

“The FCA is much better placed to handle the crypto sector than the Gambling Commission, as evidenced by increased customer protections and regulations surrounding certain financial products which have already moved into the sphere of the financial watchdog. Crypto assets function as financial products making the FCA much better placed to monitor and regulate the sector from the get-go”

He added that:

“Crypto is ultimately cutting-edge financial technology. This comes with inherent risks, but treating such instruments as financial products is ultimately much more productive than using gambling rules, which simply don’t encompass the right kinds of risk mitigations. “

“As the Government points out, this would also put the UK at odds with its international peers at a time when enhanced crypto regulation is clearly an attracting factor for a burgeoning industry looking for stable jurisdictions to operate from.”

My view

There is no doubt in my mind that retail cryptocurrency trading in the UK should be regulated and that the regulation should be sensibly and cogently drafted, to ensure that we don’t have a repeat of what happened when the FCA banned derivatives on CFDs.

That drove traders offshore, away from trading with regulated entities and into the wild west of unregulated crypto trading.

New legislation needs to protect market participants without killing off the underlying market in the UK. Which now has an opportunity to provide a well-regulated domicile for law-abiding crypto firms and market participants, and to screen out at least some of the bad actors and scammers from the sector for good.

Tags

Fintech Crypto Regulation Financial Services UK