In the space of less than 24 hours, the UK’s Financial Conduct Authority (FCA), the European Parliament and the Financial Stability Board (FSB), published three documents which demonstrate a keen interest in (a) using; and (b) beginning to regulate, crypto-currencies and the blockchain.
At least at this stage, it seems that the UK regulators are more likely to use, and to encourage the use of, these technologies; whilst others think about regulating them. That might sound like an argument in favour of #Brexit, but many #FinTech entrepreneurs would rather be regulated, than not.
In his speech at the FCA UK FinTech: Regulating for Innovation event, Christopher Woolard, the FCA’s Director of Strategy and Competition, said, “… distributed ledger technology has the potential to revolutionise financial services … However, … there are a lot of regulatory and consumer issues … to be discussed as the technology evolves. For example, how individuals gain access to a distributed network and who controls this process, [and] what data security exists for users … Innovation can be an iterative process … During … development, it’s crucial that innovators are allowed the space to develop their solutions. The FCA continues to monitor … this technology but is yet to take a stance … In the meantime, we continue to work with firms … to ensure consumer protections are being factored in during the development phase … We are particularly interested in exploring whether block chain technology can help firms meet know your customer or anti-money laundering requirements more efficiently and effectively. We are engaged in discussions with government and industry on this issue“. Woolard also noted that the FCA “plan[s] to have [its regulatory] sandbox … up and running later this spring“; and that it “will offer a range of options for firms such as authorisation for testing; no enforcement action letters, and individual guidance and waivers for all firms“. This should make it easier for innovators to test and develop their ideas before they incur material authorisation and compliance costs, instead of the other way around. This is a big step from a UK regulatory perspective – although more could still be done.
In a draft report on virtual currencies, the European Parliament’s Committee on Economic and Monetary Affairs Rapporteur Jakob von Weizacker said that, whilst crypto-currencies and the blockchain “have the potential to contribute positively to consumer welfare and economic development [they] entail risks which need to be addressed appropriately, including … (a) the potential for money laundering, terrorist financing and tax fraud … (b) the absence of flexible and reliable governance structures …; (c) the sometimes limited capacity of regulators in the area of new technology …; and (d) the legal uncertainty surrounding new applications of the blockchain …” The draft report therefore:
- “Suggests … enhancing regulatory capacity so that a timely and proportionate response will … be forthcoming if and when the use of some [blockchain] applications … become systemically relevant“;
- “Encourages government[s] to test [blockchain] systems … to improve the provision of services to citizens…“;
- “Recommends that government[s] explore the use of real-time [blockchain] based supervision and reporting tools as part of a RegTech agenda… “;
- Welcomes the inclusion of crypto-currency exchanges in the amended 4th anti-money laundering directive, and recommends an extension to wallet providers “if and when the use of [crypto-currencies] become so prevelant that users … no longer routinely need to exchange their [crypto-currencies] into legal tender“; and
- “Calls for a … Task Force … under the leadership of the Commission, … to provide the necessary technical and regulatory expertise to support the relevant public actors … in their efforts to ensure a timely and well-informed response to the new opportunities and challenges arising with the introduction of [the blockchain]“.
This is entirely consistent with recent European Union developments. (Our blog posts on these developments are here.)
In the meantime, Mark Carney, Chairman of the FSB, has written to the G20 finance ministers and central bank governors to explain that the FSB is supporting the objectives of the Chinese G20 Presidency by “assessing the systemic implications of financial technology innovations, and the systemic risks that may arise from operational disruptions“. The FSB will discuss its findings at a meeting in March, and report to the G20 before its meeting in April, 2016. Although it’s perhaps not very likely in the near term, this work could eventually cause the Bank of England to take another look at crypto-currencies and the blockchain. For now, the Bank, and Mark Carney, its Governor, “continue … to monitor developments in this area“.