Establishing a regulatory framework for cryptoassets in the UK

OMFIF’s Digital Monetary Institute hosted an in-person roundtable on the UK’s regulatory requirements and implementation strategies for cryptoassets. Philip Middleton, deputy chairman of OMFIF, was joined by Matthew Long, director of payments and digital assets at the Financial Conduct Authority, to examine the implications of a new framework.

The roundtable convened key public and private sector representatives from central banks, government, technology providers, commercial banks and other financial service practitioners to explore what industry stakeholders need to do to restore investor confidence and rebuild trust. The efforts necessary to ensure fair and transparent market integrity for consumer protection were also explored, particularly in light of the FCA’s new rules for those marketing cryptoassets to UK consumers.

The session outlined the FCA’s three main objectives: protect consumers from bad conduct, protect the integrity of the UK financial system and promote effective competition in the interest of consumers. The conversation began with a comprehensive outline of the current operational and technological risks, with an overview of the challenges regulators face. The very nature of cryptoassets makes them a global phenomenon that requires a global response. However, the phenomenon of global transactions is not a novelty for regulators.

The FCA is deeply focused on ensuring a reputable marketplace, highlighting the importance for developing robust consumer protection standards and market integrity, both domestically and globally. It was also noted that some existing International Organization of Securities Commissions principles can apply and offer potential guidance to the FCA’s cryptoasset regime. This included transaction monitoring, anti-money laundering practices, market data processing and auditing firms to ensure these rules are followed. These supervisory practices enable authorities to mitigate market abuse and identify abnormalities to safeguard market transparency. The room noted that the cryptoasset ‘travel rule’ is one example among others where achieving this can be arranged.

The conversation moved on to the need for educating and informing consumers clearly, as well as the responsibilities that lie with the service provider. Consumers must understand the risks, but some definitions of certain cryptoasset products still need clarification. The nature of these complexities may therefore steer regulatory decisions to implement ‘same risk, same regulatory outcome’ approaches.

The discussion was brought to a close by moving the narrative from cryptoassets to digital assets and exploring the range of opportunities, technologies and use cases that the sector encompasses.

As the environment moves forward and as stablecoins and central bank digital currencies potentially find a role in the financial ecosystem, the FCA and the UK government continue their commitment to supporting innovation and competition in financial services. They hope to progress the conversation in their first financial market, ‘Digital Securities Sandbox’, which facilitates the testing and adoption of digital securities. The consultation utilises digital asset technology across financial markets and should help regulators in the next phase of establishing a regulatory framework for cryptoassets in the UK.

OMFIF looks forward to following up the conversation with future developments and findings from the sandbox, as the FCA continues its high-quality and progressive regulation of finance.