UK crypto regulation must keep pace with the sector

The UK’s Financial Conduct Authority (FCA) warned companies in a July update that it would take robust actions against anyone illegally promoting crypto assets to UK consumers, including blocking offending websites, social media accounts and apps, and placing companies on the FCA’s warning list.

With high rates of fraud and financial crime having shaken consumer confidence in the digital assets sector in recent years, the FCA’s new rules should ease concerns around crypto companies misleading consumers. However, the fact that these rules only extend to the marketing of products and services, and will only be complied with by licensees or registered entities, will likely do little to help police the sector and protect consumers.

Crypto investors remain perilously exposed to fraud and theft of their digital assets due to the generally lawless environment in which they are traded. While restrictions on illicit marketing are welcome, such moves only scratch the surface of what is required to make the sector truly safe for investors, and the FCA still has a lot of work to do to ensure consumers’ safety.

While proponents of the sector seek to draw in many prospective investors by playing on the ‘disruptive’ nature of the crypto space, it is exactly that feature which makes it so attractive to fraudsters. Crypto still remains largely beyond the reach of both domestic and global financial regulation, making it a haven for criminals and leaving investors dangerously exposed, with almost no recourse for redress if they are the victim of crime.

With fraud and financial crime in crypto still a prevalent issue, the UK must be seen to a leader in investigating and prosecuting in the sector if it is to become seen as a safe haven for consumers and investors in the digital assets space. The goal is complicated by the borderless nature of digital assets, with cryptocurrencies marketed, bought and sold across jurisdictions with relative ease. This will no doubt require regulators and authorities to place an increased emphasis on cross-jurisdictional co-operation to combat this.

While any crypto regulation the UK seeks to adopt must tackle the issue of financial crime in the sector, a recent report from the All-Party Parliamentary Group for Crypto and Digital assets recognises both the risks and the opportunities that crypto presents. In this sense, acting fast and smart in regulating the sector could not only help mitigate the dangers of fraud and financial crime, but also allow the UK’s crypto industry to thrive.

As this report suggests, speed is of the essence, and policymakers must act fast to ensure that it delivers comprehensive, world-leading crypto regulation that establishes the UK as a leader in crypto regulation and further cements its position as finance and technology hub. This must be backed up with the necessary resources provided for UK regulators and, as such, the government should certainly consider adopting a self-funding sector model if it hopes to not only safeguard the industry, but allow it to grow.

While regulation has the capacity to help safely grow this sector, the Treasury Committee's recent suggestion of regulating trading in unbacked cryptocurrency as gambling is disappointing, and risks doubling down on the view that the UK is closed for business when it comes to crypto and tech, especially at a time when the US is operating as a hostile environment for crypto.

Modern regulated economies must engage with the evolution of finance, and develop a sophisticated regulatory regime which is not achieved by simply dismissing crypto investment as gambling. The government must develop the UK as a properly regulated hub for digital assets where customers' assets are secure and protected, rather than trivialising them. The government must stringently regulate crypto exchanges to build consumer confidence, and the Treasury Committee report wishing the crypto genie could be put back in the bottle misses the point.

For now, it remains to be seen how the FCA and its counterparts overseas can globally police this sector, but crypto regulation must clearly move quickly if it is to keep pace with the rapidly-evolving sector.

Richard Cannon is a partner at Stokoe Partnership Solicitors.