On 22 May 2018, the Financial Conduct Authority (“FCA“) and the Bank of England (“BoE“) offered their written submissions to HM Treasury’s inquiry on digital currencies. The inquiry was launched on 22 February 2018 with written evidence having already been submitted by a number of market participants, including Barclays and MasterCard.

Consistent with the approach both the FCA and the BoE have taken so far when commenting on digital currencies, the two submissions do not include any big surprises or radical views. They do, however, offer valuable input in relation to their regulatory approach towards cryptocurrencies and confirm the current state of play, to the extent possible considering the currently evolving environment.

In their submission, the FCA confirms that crypto-assets, primarily designed as a means of payment or exchange, are generally not within the regulatory perimeter. However, given their diverse characteristics, each case will have to be considered separately taking into consideration the unique nature of the instruments and structure in question. The FCA helpfully includes a table (please see below) identifying different forms of crypto-assets and offers an initial indication of their regulatory treatment.

The FCA notes that, even though crypto-asset exchange activities are not currently covered under the money laundering regulations, they are included in the EU Fifth Money Laundering Directive which was very recently adopted by the Council of the EU and is expected to be published in the Official Journal of the EU later this year. The FCA recognises the benefits of crypto-assets, including in relation to international money remittance and the issuance and settling of financial instruments, but also points out the potential risks attached, including price volatility, market manipulation and money laundering. It also notes the potential benefits of Distributed Ledger Technology (“DLT“).

Similarly to the FCA’s messaging, the BoE draws a distinction between crypto-assets and DLT and, taking a technology neutral approach, notes that DLT may have significant potential for the efficiency and resilience of the financial system, but is not without challenges, including in relation to scalability and reliability, privacy and security. The BoE states that crypto-assets are very unlikely to replace commonly used payment systems as they are failing to satisfy the three key functions of money, i.e. act as a store of value, a means of payment and a unit of account, with cyber risk being an additional concern. These points have already been made in a recent speech by Mark Carney, the Governor of the BoE. In BoE’s view, crypto-assets do not pose a material threat to financial stability in the UK as the relevant exposures of the financial institutions are minimal and the total crypto-asset stock is relatively small.

According to the BoE’s submission, the Financial Policy committee will continue to monitor closely crypto-asset-related developments in order to identify any potential systemic risks. The Prudential Regulation Authority is also assessing how prudential regulations should apply if crypto-assets were held by banks or financial institutions and considering whether additional requirements should be imposed in order to cover associated risks, including extreme levels of volatility. Lastly, the BoE touches on the development of a central bank digital currency (“CBDC“) flagging both potential benefits and risks. The BoE does not oppose the idea of a CBDC, but concludes that it will not be issuing one in the medium term.

Table included in the FCA submission to HM Treasury inquiry on digital currencies