Tag: FCA

A Closer Look at the Crypto Regulation Proposed in the UK

On By mehranmuslimiblogIn UncategorizedLeave a comment

The UK is considering introducing crypto regulation with the aim of protecting its consumers and promoting the growth of its economy. As the country strives to become a leading hub in the crypto industry, regulation is deemed necessary. Incidents such as the collapse of FTX have highlighted the urgency of regulation in this area. A clear and transparent regulatory framework will reduce the risks associated with crypto investments for consumers. The proposed regulation is still in the consultation stage and is expected to be finalized by the end of April.

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Objectives of UK crypto regulation

The main policy objectives of doing the regulation include:

  • To encourage crypto regulation
  • Educate consumers about the risks associated with crypto investments
  • Preserve financial stability of the UK
  • Preserve market integrity of the UK

The proposed crypto regulations will be rolled out in two phases when they become law. Stablecoins will be addressed in the second phase, which will happen later in the year or early next year. At the moment, NFTs are not part of crypto regulation.

The UK has categorized crypto into different categories: Exchange cryptos, algorithmic tokens, governance tokens and fan tokens. Bitcoin and Ethereum fall under exchange tokens.

Initial governance method used

Crypto activities are currently not regulated by the Financial Conduct Authority (FCA). Decentralized finance makes it even harder to regulate, given its decentralized nature. Despite this, the UK introduced KYC and AML requirements for crypto exchanges in January 2020, requiring all exchanges to register with the FCA and subjecting violators to two years imprisonment. Many companies found the process lengthy and cumbersome, leading to some companies leaving the UK.

 Brief summary of the proposed  regulation

Crypto assets activities

They were the main target of the regulation. There is, however, one rule for all cryptos. This may be ridiculous as the crypto options are many. It would also be better if the regulation would be tailored according to risk. It is hard to tell the crypto activities occurring within Britain’s borders.

Crypto regulation will apply to crypto assets occurring within the UK. There is still the risk of UK citizens acquiring crypto from less regulated areas outside the UK.

As mentioned earlier, regulation of crypto assets will take place in two phases. The activities under phase two will include ICOs, crypto borrowing and lending, crypto custody services.

Decentralized coins such as Dai will not be subject to regulation. They will be treated as unbanked assets like BTC and ETH since they are unbanked. Dai may be affected since it is backed by USDC since it is a stablecoin requiring regulation. The UK is not planning to ban algorithmic stablecoins. Decentralized, algorithmic and NFTs are favored as the regulation only applies to cryptos not crypto coins and tokens. Regulations will come later.

Regulations related to new crypto

New crypto includes coins and tokens listed on exchanges and not necessarily creation of coins and tokens. According to the new requirements:

  • Investors are given accurate info
  • Investors are compensated if misled
  • Forging crypto offerings should be banned
  • Exchanges to do a due diligence on all cryptos they list and give detailed info to users
  • Exchanges act as issuers of crypto with no issuers such as BTC.

Cryptos already listed have not been addressed. It is unclear if they will be subject to the same disclosure rules.

 Regulations on Exchanges

Exchanges will be required to:

  • Be More liquid and be resilient
  • Be More transparent
  • Have Accurate on and off chain data

Exchanges will also need to do detailed data reporting, and establish a bankruptcy process.

Regulation on other crypto intermediaries such as market makers

They will need to address conflict of interest, sufficient liquidity, and detecting market manipulation. Generally, market makers have the same requirements as exchanges.

General market abuse requirements

In crypto there are many market abuse incidents that are not covered under financial regulation. The new regulation will control market abuse such as pump and dump schemes and market manipulation. Defaulters will face punitive action. The public will also be taught how to identify market manipulation.

Regulation of crypto borrowing and lending

Some exchanges such as FTX were using customer funds and illiquid tokens as collateral for loans because crypto lending and borrowing is not regulated. The new regulation will ensure risk disclosure, balance sheet disclosure, and clear user contracts.

Conclusion

The United Kingdom is currently undergoing the consultation phase for the proposed crypto regulation aimed at protecting consumers, boosting the economy, and maintaining the financial stability and market integrity of the country. The regulation will aim to educate consumers about the risks associated with crypto, provide accurate information to investors, and control market abuse. The new regulation will bring clarity to the crypto industry and enhance the UK’s position as a crypto hub. Overall, the proposed crypto regulation is a significant step forward for the UK in establishing a fair, transparent, and secure environment for the growth and development of the crypto industry.

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UK financial regulator warns again regulatory overreach

On By mehranmuslimiblogIn crypto, Regulations, StablecoinsLeave a comment

Charles Randall, the Chair of the United Kingdom’s Financial Conduct Authority (FCA) has warned that whilst regulators should increase consumer protection for consumers investing in crypto tokens, they should also be wary of going too far.

Randall made his comments during a speech for the Cambridge International Symposium on Economic Crime, when talking about the risks for consumers who dive into the crypto world without really knowing how to manage these risks.

Tackling crypto promotions a priority

Significantly for those crypto projects that might be considering hiring a high profile influencer to help promote their tokens, Randall tackled this head on. In particular he mentioned Kim Kardashian’s recent Instagram promotion of EthereumMax (EMAX); a brand-new token issued by “unknown developers.” He commented that this “may have been the financial promotion with the single biggest audience reach in history.” 

Whilst Randall didn’t say that EthereumMax was fraudulent, he said that he had used it as an example of the issues around influencers and paid-for advertising, pointing out that using a celebrity like Kim Kardashian meant the campaign had a massive reach and that it had the potential to mislead under-informed consumers. He emphasised that this is the kind of marketing activity that regulators should be taking greater notice of in the interest of consumers, because “many consumers remain blind to the financial risks they are courting by trusting influencer endorsements and savvy online token campaigns.”

Randall went on to tell the audience that 2.3 million UK citizens own crypto and that 14% of them had bought it using a credit card, which in his view was a worrying scenario. Moreover, 12% of the UK’s crypto holders mistakenly believe the FCA, or the Financial Services Compensation Scheme, would protect them should things go wrong, according to the FCA’s research.

Don’t strangle crypto with excessive regulation

However, Randall appeared to be wary of too much regulation in the case of cryptocurrencies. As he said, the British consumer had multiple opportunities to invest in other unregulated speculative activities — from gold and foreign currencies to Pokemon cards — despite there being “no shortage of consumer harm in many of those markets.” He said:

“So why should we regulate purely speculative digital tokens? And if we do regulate these tokens, will this lead people to think that they are bona fide investments? That is, will the involvement of the FCA give them a ’halo effect’ that raises unrealistic expectations of consumer protection?”

Stablecoins and security tokens offer useful ideas

The FCA currently regulates cryptocurrency exchanges in the UK, and has banned the sale of crypto derivatives to retail customers. Going forward, Randall proposed that its measures should focus on stablecoins and security tokens, which would be a limited intervention. He said that both of these forms of digital asset offered, “encouraging useful new ideas” for cross-border payments, financial infrastructures and financial inclusion, and should not be hampered by “overbearing red tape.” Instead, he argued for a moderate approach, in line with existing rules for other FCA-regulated entities, to ensure that token issuers and blockchain firms are solvent and transparent.

Brexit brings FUD to finance

On By mehranmuslimiblogIn Brexit1 Comment

Brexit is like a long-running soap opera, or a comedy. At times it has come close to being a ‘real life’ version of ‘Fawlty Towers’, the comedy series starring Monty Python’s John Cleese as the ‘Little Englander’ manager of a seaside hotel. It has also resembled a Monty Python sketch, as the Dutch prime minister Mark Rutte, suggested.

But, while we may look on with our mouths wide open in shock at the shambolic mess at the Mother of Parliaments, there are of course serious concerns about the effects of the endless delays. Just yesterday the leaders of the EU 27 granted the UK a further extension until 31st October to sort it out. Is it going to be enough, UK businesses are asking, and they are more fed up with the uncertainty about the future of the UK and its future trading relationship with the EU than many others. And, understandably so. Over the past few months we have heard any number of stories about how the loss of the Single Market and a Customs Union will impact on British businesses in the manufacturing sector, and the automobile industry has already taken a hit, albeit for other reasons as well as Brexit. However, the UK economy relies much more heavily on service industries, especially financial services.

Money is flowing back to the EU

Since the UK voted to leave the EU in June 2016, the passporting rights of the City’s institutions has been of concern. There have been many warnings that the biggest players would decamp to Paris, Frankfurt or Dublin, but so far this hasn’t happened in a major way. However, we have seen money flow out of the UK to the EU. For example, Frankfurt Main Finance noted that it would be moving $800 billion back to Germany this year. And it is estimated that a trillion dollars worth of assets have been relocated from the City to other EU countries.

As Roger Aitken writes for Forbes, the chaos has had a “chilling effect” on financial institutions. How can they plan for the future, or introduce new strategies, when they have no idea what is looming around the corner? As he says: “With no clear framework for how cross-border transactions and interactions will be coordinated in the aftermath of any exit, the desire to take any risks is entirely absent.”

It’s an opportunity for some

Yet there are those who see Brexit as an opportunity. Asaf Elimelech, CEO of trading platform Plus500, which provides online trading services with contracts for difference (CFDs) has noted: “Brexit may be an unwelcome distraction in political terms, but it has been a fertile source of CFD trading opportunities for customers.” However, his seems to be a lone voice in the wilderness.

By contrast, EverFX, the official sponsor of Sevilla FC, has put a halt to its application for a Financial Conduct Authority (FCA) licence that would allow it to operate in the UK. Its CEO George Karoullas

said: ““The whole Brexit debacle has spread a feeling of uncertainty across all industries and economies in Europe, and the trading vertical is not an exception. We consider the U.K. one of the most lucrative, interesting, and challenging markets in the world, and were thrilled at exploring what it has to offer.”,

For now the uncertainty potentially continues until the end of October. The City’s financial institutions have no clearer view of whether they will be able to maintain passporting rights that allow EU firms to have a single license in an EU country and apply it across the region’s Single Market without further approval hurdles, and until that is resolved, we can expect to see hope fade and fear increase amongst the financiers and bankers. The drastic effect that Brexit is having, and will continue to have for some time, on the British economy cannot be underestimated, yet the Leave Voters still think it will all be just fine. Perhaps they should reflect on the fact that the rest of the world sees it very differently, and so does business, which is living with fear, uncertainty and doubt (FUD).

Coinbase counsel predicts crypto regs push in 2019

On By mehranmuslimiblogIn Bitcoin, BlockchainLeave a comment

Marcus Hughes, the British lawyer and lead counsel for San Francisco-based crypto exchange Coinbase, predicts that 2019 is going to be the year that we see big changes in bitcoin regulations.

Hughes remarked, “Within the next year or two, we’ll see big developments, and regulation will take shape this year, particularly in Europe.”

He pointed to the fact that the United Kingdom’s Financial Conduct Authority (FCA) is in the process of carrying out a consultation regarding crypto derivatives. This could see a ban on the sale of derivatives based on cryptocurrencies such as bitcoin. Furthermore, the British government has pledged to empower the FCA to oversee all crypto assets.

An article in the UK’s Daily Telegraph at the end of 2018 also revealed that the FCA is investigating 18 companies “in connection with cryptocurrency transactions amid escalating concern over the threat posed by Bitcoin and other digital assets to the integrity of financial markets.” But that is not all: the FCA has opened 67 inquiries since November and is clearly stepping up its scrutiny of all firms involved with crypto in any manner.

Nicky Morgan MP, who hairs the influential Treasury select committee, said, “t is clear that the government and the FCA share the committee’s concerns on crypto-assets, including the lack of regulation, minimal consumer protection and anonymity aiding money laundering … The committee will keep a close eye on these consultations and will continue to press for regulation.”

And the European Banking Authority is calling for standardised regulations for cryptocurrency operations within the European Union. This is to remove the potential for “unfair regulatory arbitrage while protecting bitcoin and cryptocurrency investors across the bloc.”

Hughes said about this scenario: “We could end up with E.U. member states creating their own crypto laws, but it’s certainly possible we’ll get a unified approach in Europe. It would make life for companies like Coinbase a lot easier.”

He also has his own views on the future of bitcoin, which also reflect those of Coinbase: “We need to move beyond the speculation phase of bitcoin and cryptocurrency to the utility phase. The utility phase will mean bitcoin and crypto becomes more widely accepted and understood.”

He also commented on the arrival of institutional investors in the crypto sphere, saying: “I would be surprised if other traditional financial services executives didn’t make the move across to the bitcoin and cryptocurrency world. As the industry matures and is better regulated it will need the talent and experience to manage it.”