The recent UK Government consultation on the regulatory regime for cryptoassets potentially offers several different answers to this question, and it’s worth looking more closely at what might lie behind the curtain.
With a little allowance for poetic licence, there are, perhaps, seven good reasons to regulate an activity:
- It’s a fundamental part of the economy, so you need it to work reliably well.
- It’s (implicitly) viewed as a utility and the public expect it to be available.
- There needs to be a level playing field – numerous possible reasons for this.
- It’s global and there are/should be international standards.
- When it goes wrong, people/markets get hurt, so they need protection.
- Criminals/bad actors are looking to exploit it.
- It’s a way of fostering and directing innovation.
In financial services, most regulated activities fall into more than one of these categories.
So where does crypto fit in?
Many readers will have their own answers here, and I suspect there is a wider range of views on crypto than on, say, consumer credit, derivatives or pensions.
To obtain some crude indicators of the emphasis of the Government’s consultation, I did a few word searches. The phrase “consumer protection” crops up seven times, as does both “financial crime”, and “international standards”. “Financial stability” appears 11 times, and “market integrity” 12 times. “Proportionate” also appears 12 times, “growth” six times and “innovation” 11.
On this basis, you could probably make a decent argument that the consultation is triggered by any or all of the seven reasons listed above. Alternatively, you might argue that this universal approach might mean there is no clear rationale behind the decision to regulate, and that the consultation is an attempt to please everyone without really identifying the problem it’s trying to fix.
In fact, the Minister’s (John Griffith MP) Foreword gives a much tighter rationale. Of the key phrases above, “growth” and “innovation” both appear twice, “financial stability” and “proportionate” once, and that’s it. To hammer home the message, he states that: “Our objective is to establish a proportionate, clear regulatory framework which enables firms to innovate at pace, while maintaining financial stability and clear regulatory standards.”
It is also clearly written for the sector rather than consumer groups and other stakeholders. “Through regular engagement I have already heard first-hand some of the opportunities and challenges faced by industry in this sector, and I am keen to continue our important dialogue,” Griffith writes.
Moving into the body of the text, para 1.11 is slightly broader. “HM Treasury is pursuing four overarching policy objectives:
- encourage growth, innovation, and competition in the UK;
- enable consumers to make well-informed decisions, with a clear understanding of the risks involved;
- protect UK financial stability;
- protect UK market integrity.
It then goes on to identify “a set of core design principles – “Same risk, same regulatory outcome”; “Proportionate and focused”; “Agile and flexible”.
Taking all this in the round, it seems likely that, of my seven reasons to regulate, consumer protection (5) and financial crime (6) are not high on the Government’s priorities. Consumer protection is mentioned, but only in terms of disclosure which has a long and unsuccessful regulatory history when used in isolation. And financial crime is implied under the market integrity banner, which has historically been a trigger to de-emphasize.
This downplaying matters a good deal, as protecting over-trusting consumers from ill-advised investment and stopping the use of crypto by criminals would top most commentators’ lists of reasons for regulating cryptoassets.
At this early stage, retail investors in crypto – of which there are many, and who are often younger consumers – seem especially hard done by.
Two final thoughts …
- I’ve written before about how slowly the UK Government and the FCA have moved on crypto – in contrast to China, US, EU for example – and the Government’s proposed “phased approach” (p12, Fig 1B) continues this lethargic pace, while probably creating added scope for arbitrage around what exactly is regulated at a given time. As a result, whatever genies lurk in the crypto bottle will have escaped and established themselves long before UK regulation is in a fit state.
- There is a decent case that most major shifts in regulation happen in reaction to a crisis, so maybe we won’t get the crypto regulation we need until something serious has gone wrong.
Gavin Stewart is an independent commentator on financial regulation; former regulator; novelist; ex-international rower and sports administrator. He has 27 years’ experience working for financial services’ regulators (Bank of England, FSA & FCA), holding a wide variety of roles including as a Bank of England Supervisor, FSA Head of Strategy, Planning & Performance, and FCA Chief Risk Officer.