The parliamentary report advocates that the crypto-asset sector must be regulated as a matter of urgency to protect consumers. It states that the "current ambiguity" surrounding the regulation of crypto-assets is unsustainable.
“The authors agree with the parliamentary report in that regulation is required to create certainty in the sector and to protect consumers. However, it should be recognised that bad regulation is worse than no regulation and that any regulation should reflect that each crypto asset differs. Some should be regulated investments or regulated as e-money. Others are simply prepayments for goods or services and should not be regulated as financial instruments at all,” said Mr. Foster.
The parliamentary report notes that current regulation could be extended, or new regulation or law could be brought in. Opting for the former, the report suggests that crypto-asset issuances and crypto-asset exchanges should be placed under the jurisdiction of the Financial Conduct Authority by extending the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO).
“Many crypto-asset companies (both issuers and exchanges) want to be domiciled in the UK due to the jurisdiction’s reputation as a global financial centre and for access to capital markets. However, they are sophisticated organisations and will simply move offshore if regulation is misconceived. One-size-fits-all regulation would inevitably hinder the development and innovation of the UK as a world leading fintech jurisdiction and will leave consumers in a similar unprotected position, added Mr. Foster.
"The authors strongly disagree that bringing all crypto-assets under the RAO is a viable regulatory solution," concluded Mr. Foster.
To protect consumers and to allow the crypto-asset sector to develop in the UK, the authors recommend the following (as outlined in more detail in their paper which can be found here):
A. a comprehensive taxonomy should be developed. This will ensure certainty of meaning as regulation evolves;
B. a grading system should be introduced (building on the Malta, Gibraltar and Switzerland models) which allows crypto-assets to be effectively categorised and which reflects the evolving nature of a particular crypto-asset;
C. crypto-assets should be regulated depending on their category (a pre-payment for a T-shirt should not be regulated the same as a share of profits of a business);
D. guidance on AML/KYC standards and reporting requirements should be drafted and reflect the grade of the crypto-asset;
E. crypto-asset exchanges and custodians of customer assets should be regulated; and
F. a complementary tax regime should be developed in parallel with the regulatory regime.
Journalists interested in speaking to Baker Botts corporate technology partner, Neil Foster, or the below authors, please contact firstname.lastname@example.org.
• Neil Foster, Baker Botts Partner
• Daniel Green, Baker Botts Associate
• Hazem Danny Al Nakib, Managing Partner, Sentinel Capital Group Inc.
• Patrick Curry, CEO, British Business Federation Authority
• Toby Lewis, CEO, Novum Insights
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