The FCA’s evolving approach to cryptocurrency

Josie Welland, of financial crime specialists Rahman Ravelli, outlines recent developments and proposals regarding cryptocurrency regulation.

The Singapore-based cryptocurrency derivatives exchange Bybit has become the latest fintech company to suspend services to its UK customers following the Financial Conduct Authority (FCA) ban on such trading.

Bybit offers a range of high-end trading products for cryptocurrencies such as Bitcoin, Ether, Bitcoin Cash, Litecoin and others. But it has announced that UK-based customers have until 31 March to close out positions and withdraw their funds from the platform.

The announcement is a direct result of the blanket ban on all retail cryptocurrency derivatives trading imposed by the FCA. It can be seen as both the latest development arising from the FCA’s evolving approach to crypto and an indicator of the authority’s struggle to develop a comprehensive approach to regulation.

FCA Regulation

Since 10 January 2020, the FCA has been the anti-money laundering and counter-terrorist financing (AML/CTF) supervisor of UK cryptoasset businesses under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. As a result of this, businesses that began operating after 9 January 2020 had to register with the FCA before starting to conduct business. From 10 January 2020, existing businesses looking to carry on cryptoasset activity had to be both fully compliant with the Money Laundering, Terrorist Financing and Transfers of Funds (Information on the Payer) Regulations 2017 and registered with the FCA.

In December 2020, the FCA attempts to regulate cryptocurrency took a further twist when it announced it was creating a “temporary registration regime” for existing crypto businesses, as it had not been able to assess and register all firms that had applied for registration. The new regime allows crypto firms that have applied for registration to continue operating until July 9, 2021 – six months later than the original deadline.

Two months before that, the FCA declared that all retail cryptocurrency derivatives trading - encompassing products such as options, futures and exchange-traded notes - would be banned. This ban came into effect on 6 January 2021. This ban was played out against Bybit when, on the 24 February 2021, the FCA issued a warning about it; alerting the public that the exchange had been operating in the UK without authorisation. A week later, Bybit announced that it would suspend services to its UK customers.

Yet this ban, the subsequent warning to Bybit and the belated creation of the anti-money laundering register appear to be at odds with the FCA’s detailed plan to make the UK a fintech powerhouse.

The Fintech Review

Announcing the UK budget for 2020, Chancellor Rishi Sunak commissioned the Bank of England non-executive director Ron Kalifa - the former head of payment processing company Worldpay - to conduct an independent review of the UK fintech sector. Eight months later, on 26 February 2021, the FCA published the 108-page report. It contains clear guidelines aimed at cementing the UK’s position as a force in fintech.

The guidelines included creating a digital finance package for emerging technology, establishing a Digital Economy Taskforce and ensuring fintech forms an integral part of trade policy.

The review also indicated that the UK government should adopt a functional, technology-neutral approach to cryptocurrency and cryptoassets. Specifically, it points to the importance of regulatory flexibility – meaning that any rules the government might adopt should consider any future challenges that may arise. This seems at odds with the actions taken so far by the FCA. To date, regulators (like the FCA) and the central banks have urged investors to avoid cryptocurrencies, but Kalifa disagreed. In the report he stated “The UK has the potential to be a leading global centre for the issuance, clearing, settlement, trading and exchange of crypto and digital assets.”

Kalifa’s report also referred to the consultation paper published by the UK's HM Treasury last month, which explores possible regulation of stablecoins - also known as stable tokens - and how this class of digital assets can be used in the broader financial economy. Stable tokens are digital assets, usually pegged to a fiat currency like the US Dollar at a 1:1 ratio, that are designed to be less volatile than cryptocurrencies like Bitcoin. Yet the FCA, so far at least, has adopted a blanket ban which, Kalifa believes, is not the way forward.

Stable token regulation versus cryptoasset regulation

The FCA has previously made clear that tokens can take a hybrid form and fall into different categories at different points in time. As an example, a stable token may initially be used to raise capital and then later be used primarily as a means of exchange. This could mean that some tokens are eventually subject to multiple regulatory regimes, increasing the burden on cryptoasset issuers, exchanges and wallet providers. It is even possible that certain tokens may fall under multiple regulatory regimes at the same time.

The Treasury is proposing to regulate firms that issue or create stable tokens. However, in decentralised models there will not be a central entity responsible for issuing or burning tokens. It is unclear, therefore, how the Treasury will deal with this issue.

Kalifa suggests using the concept of “same risk, same regulation”, while being tailored to the risks arising from cryptoasset-related activities. Yet the indications are that the regimes currently in place are both out-dated and ill-suited to the cryptoassets they are expected to regulate; it is a case of using 20th century regulation for 21st century innovation. The FCA concedes this in so far as it accepts it was not able to assess and register all firms that have applied for registration because of the complexities.