Existing crypto-asset businesses that applied for FCA registration prior to 16 December 2020, but have not yet been confirmed, can now continue operating under a 'temporary registration regime' until 9 July 2021. Trevor O'Sullivan and Amanda Smith consider the evolving crypto-asset regulatory framework to see where it is headed.
The very existence of crypto-assets, their definition and their increased use have challenged even the most established financial services regulatory legislation and frameworks across the world in recent years.
The Cambridge Centre for Alternative Finance has undertaken three Global Crypto-asset Benchmarking Studies, the latest released in September 2020. It suggests that the crypto-asset industry has entered a growth stage and that regulators appear to be supportive of this market growth – while increasing their scrutiny towards compliance. With an estimated 101 million crypto-asset users worldwide across 191 million accounts opened with service providers by Q3 2020 – in 2018 there were just 35 million users and 139 million accounts – it is no surprise that the regulators are concerned. Furthermore, the study estimates that just over two of five surveyed firms are licensed or in the process of obtaining a licence (primarily firms located in the EU).
Global crypto-asset regulation still in its infancy
When we take a closer look at the world stage, there doesn't seem to be a collective play by the regulators. Neither is there a one-size-fits-all international standard to deal with the growing crypto-asset market.
Where countries have recognised this digital finance innovation, they appear to be headed down their own regulatory path with a few common themes between them, including to:
protect consumers and investors
maintain market integrity
reduce criminal activity such as money laundering and terrorist funding associated with crypto-assets in illegal markets.
G20 countries seem to be focusing on this latter point, at least in the short term, based upon the international standards set by Financial Action Task Force (FATF) which combats anti-money laundering (AML) and counters the financing of terrorism (CFT). In June 2019, FATF added a requirement for virtual asset service providers to implement AML and CFT preventive measures. It also called on G20 countries to lead in this area by putting the revised standards into effect in their jurisdiction. This has now occurred in many countries.
Call for a unified approach in crypto-asset regulation
In an EU report published in April 2020 titled Crypto-assets – Key developments, regulatory concerns and responses, the authors stress to the EU Parliament that a unified approach both inside and outside of the EU is fundamental. This is to ensure that initiatives are aligned to an international standard to avoid regulatory arbitrage.
The report also specifically notes that the EU’s contribution to the FATF’s international standards should continue and that "the EU could do better". It appears that regulators in EU member states have pressed ahead in their own jurisdictions. For example, France required all digital asset service providers to be registered with the Autorité des Marchés Financiers (AMF) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR) by 18 December 2020 under the PACTE Law. In comparison, the UK, albeit exiting the EU, also followed suit and issued registration requirements to crypto-related firms by 10 January 2021. (The new temporary registration regime allows firms to continue to operate until 9 July 2021, however, while the FCA clears the backlog of applications.)
Looking to the US, the Securities and Exchange Commission’s (SEC) has not prioritised crypto regulation. In an interview with Cointelegraph, SEC Commissioner Hester Peirce, said: "While we've been very slow in giving guidance, there is more and more interest from a wide spectrum of people, both inside the crypto space as well as inside the traditional financial institutions, who are asking us for guidance’’4.
It remains to be seen whether President Biden will focus on this area and we will see crypto-asset regulatory progress in the US.
The contribution by the FATF and G20 to international crypto-asset regulation and legislation is paramount to reach higher levels of regulation in this market. At present, there still seems to be significant differences in crypto-asset regulation.
FCA announces temporary registration regime
Any crypto-asset business involved in crypto-related activities in the UK must have already applied for registration prior to 16 December 2020. As the FCA was unable to assess all applications by the original deadline of 10 January a 'temporary registration regime' has been implemented to allow firms that have applied for registration to continue operating until 9 July 2021. The FCA extended the deadline "due to the complexity and standard of the applications received, and the pandemic restricting the FCA's ability to visit firms as planned".
Crypto-asset firms that did not apply for registration prior to 16 December 2020 had to stop operating by 10 January and return funds to customers. In addition, firms whose FCA applications are not successful will have to cease trading by 9 July 2021 and may be required to wind down. Management should be aware that the FCA has explicitly stated that it will be proactively supervising compliance with these new regulations, and will take swift action where firms fall short of FCA standards.
Written by Trevor O'Sullivan and Amanda Smith.
For more information on wind-down planning or contingency planning, contact Trevor O'Sullivan