by Lisa Quest, Co-Head of Public Sector and Policy, Europe at Oliver Wyman
In October 2021, Deputy Governor for the Bank of England, Jon Cunliffe, made a speech calling for new cryptocurrency regulation as a “matter of urgency” to protect individual consumers.
In September 2022, this urgency persists. Despite the “crypto crash” earlier this year, which saw the market drop by $1trn (down by more than two-thirds from a peak in the autumn prior), the consensus is that digital assets are here to stay, and consumers are still just as exposed.
Losses of this magnitude present an essential opportunity to learn from past errors fundamentally and systemically. To protect mainstream finance and individual consumers alike, and to establish the UK as a true leader of innovative technology, we must provide concrete regulatory solutions to prevent history from repeating itself. To do this, we must continue to upskill our regulators.
The Treasury has been open with its desire to become a “global hub” for the crypto industry, but it has also been clear that it will not lower its standards to do so. With Andrew Bailey himself warning that cryptocurrencies were the “new front line” in criminal scams and that the technology created opportunities for “the downright criminal”, it is evident that the UK’s regulatory efforts have a long way to go before the Treasury’s hopes are realised.
The Financial Services and Markets Bill (FSMB) is currently making its way through Parliament and will give the Treasury broad and extensive powers to bring crypto-assets into the regulatory perimeter, for example, by amending the Regulated Activity Order (RAO).
This should greatly increase the speed and flexibility of the UK’s efforts to establish a regulatory framework without requiring a lot of primary legislation, which tends to take much longer. The Bill is also meant to make the necessary changes to improve market functionality and regulate stable coins as a form of payment.
This is promising. However, questions surround the efficacy of the FSMB’s implementation. Ultimately, the success of crypto regulation lies with bodies such as the Financial Conduct Authority (FCA) being able to effectively keep up with the fast pace that this emerging industry demands.
There is still much ground to cover before the FCA is fully equipped to supervise against the new agenda set out by the Bill. In a recent interview, the chair of the European Banking Authority, Jose Manuel Campa outlined the issues that are facing his organisation in regulating crypto, pointing to its volatility and fast-paced nature. In the future, crypto also has the capacity to be transformed into other uses that regulatory bodies are yet to anticipate. The fast-moving nature means that regulators must be proactive and constantly evolving to match the emerging risk profile.
In the UK, the FCA is facing the same challenges and significantly needs to continue to bolster its current capacity and skill set to deal with the rapid increase in companies and products driving novel risks for consumers. Experts with the necessary skills in the field are in high demand across many lucrative sectors such as banks, or FinTech companies. This means there is a limited understanding of the usage of crypto in the market and the technicalities of how information is stored, which is crucial to address in order to regulate.
As we prepare for the Bill to be debated in Parliament, we need to see the skills, capabilities and capacity of regulators stepped up to oversee this incredibly complex, dynamic, and fast-moving sector.
Bringing crypto and stablecoin into the remit of regulators will encourage competition, drive more robust investment in the sector and ensure developers have the funding they need for innovation. At present, the uncertain regulatory environment is deterring investors and holding back many exchanges from entering or expanding operations in the UK, whilst putting the brakes on the wide adoption of cryptocurrency by mainstream consumers.
As one of Europe’s leading fintech hubs the UK should have the available infrastructure, investment and talent, to be in a prime position to champion the crypto industry. But we need to incentivise talent and attract companies with a decisive and effective stance on regulation that protects consumers while encouraging the innovation that ultimately benefits them. Businesses need to believe they will be operating in a market where authorities are fully invested in the success of the sector, and consumers feel protected by regulation.
The UK’s regulatory bodies need to be able to secure top-end talent specialised in the field of crypto to assess current and future trends, in the hopes of supervising against new regulations. Not only will this protect individual consumers, but it will unlock huge investment and open the door for the UK to become a true leader in innovative technology.
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