What has happened?
The Cryptoasset Taskforce has published a report on the UK's policy and regulatory approach to distributed ledger technology (DLT) and cryptoassets, setting out some of the risks and opportunities they present and outlining the way forward in respect of regulation.
What does this mean?
First announced in March as part of the UK's FinTech Sector Strategy, the Cryptoasset Taskforce consists of the Financial Conduct Authority (FCA), HM Treasury and the Bank of England (BoE) and is tasked with developing an approach to cryptoassets and DLT.
In its final report released yesterday, the taskforce concluded that while DLT is at an early stage of development, it could deliver "significant benefits in both financial services and other sectors".
For example, DLT could enhance system resilience, improve the efficiency of end-to-end settlement processes and reporting, auditing and oversight, and enable greater automation.
As an emerging leader in the DLT space, the UK should therefore capitalise on these opportunities, even if some challenges to wider adoption remain, including issues around the interoperability of systems, banking relationships, settlement finality as well as competition, governance and civil law (such as, the enforceability of smart contracts and data protection).
"The Taskforce does not consider there to be regulatory barriers to the adoption of DLT. The [Prudential Regulation Authority] and FCA will continue to take a technologically neutral approach to regulation, as well as providing a platform for innovation," the report said.
The report added:
"Both the FCA and the Bank of England will continue to explore whether there are any unintended consequences of regulation to the innovations of new technologies, including DLT."
Noting that cryptoassets (defined as exchange, security and utility tokens) are not widely used in the UK and that the country is not a major market even though interest is growing, the taskforce concluded that there is "limited evidence of the current generation of cryptoassets delivering benefits".
This may change in the future, but in the meantime, the taskforce said that existing cryptoassets pose a variety of risks, notably harm to consumers (who may face large losses), market integrity (owing to manipulation and other market abuse strategies) and financial crime.
The taskforce said that HM Treasury, the FCA and the BoE "will take action to mitigate the risks that cryptoassets pose to consumers and market integrity; to prevent the use of cryptoassets for illicit activity; to guard against threats to financial stability that could emerge in the future; and to encourage responsible development of legitimate DLT and cryptoasset-related activity in the UK".
To deliver these actions, the three authorities will consult on:
- guidance to clarify which cryptoassets fall within the existing regulatory perimeter and which outside (by the end of 2018);
- whether the regulatory perimeter should be extended in relation to cryptoassets that are similar to specified investments but that currently fall outside the perimeter (by the end of 2018);
- potentially banning the sale to retail consumers of derivatives referencing certain types of cryptoassets (for example, exchange tokens), including contracts for differences, options, futures and transferable securities (by Q1 2019);
- implementing one of the most comprehensive responses globally to the use of cryptoassets for illicit activities by applying and going further than the fifth EU Anti-Money Laundering Directive (consultation in 2019 with legislation in 2019); and
- revised guidance on the tax treatment of cryptoassets (by early 2019).
A consultation will also be issued in early 2019 to explore whether and how exchange tokens and related firms such as exchanges and wallet providers could be regulated effectively.
Commenting on the report, Hogan Lovells Technology Partner, who leads the firm's global blockchain group, said:
"The report is broadly positive and will be welcomed by the industry as another step forward in understanding how the UK regulators and policy makers want to approach regulation of cryptoassets. It is helpful that we are moving to a consultation phase on the next steps in the regulation of cryptoassets, which will give the market greater certainty.
"Most of the direction of travel that is mentioned in the report seems entirely consistent with the direction adopted by other regulators and what we would expect. The move to introduce controls on AML, for example, reflects recent calls from FATF. However, it is surprising to see the potential ban on crypto derivatives to retail consumers and consultation on how regulation could be applied to exchange/payment tokens. It is not clear that any additional protections would be needed for crypto-based derivatives over and above current protections for derivatives sold to retail investors or how attractive such products actually are to retail investors. It will also be important that any regulation is balanced and does not hinder innovation as this nascent stage."
The three authorities will also continue to warn consumers of the risks of investing in cryptoassets; monitor market developments and financial stability risks; and work with international counterparts to consider appropriate domestic and international responses.
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