Government and Financial Conduct Authority Responses to the Committee’s Twenty-Second Report: Crypto-assets

Eighth Special Report

On 19 September 2018 the Treasury Committee published its Twenty–Second Report of Session 2017–19, Crypto-assets (HC 910). The Government’s response was received on 20 November 2018 and the Financial Conduct Authority response was received on 29 November 2018 and are appended below.

Appendix 1: Government Response

I am writing in response to the above report published by the Treasury Select Committee on 19 September 2018. I would like to thank you and the Committee for your work to produce this report on cryptoassets and the issues surrounding them.

The joint HM Treasury-Financial Conduct Authority (FCA)-Bank of England Cryptoassets Taskforce was established by the Government earlier this year, to explore the risks and potential benefits of cryptoassets and the use of the under lying distributed ledger technology (DLT) in financial services and consider appropriate responses. The Taskforce’s report, which was published alongside the Budget on 29 October 2018, sets out actions the three authorities will take to protect consumers and markets, allow innovation to thrive, and maintain the UK’s international reputation as a safe and transparent place to do business in financial services with high regulatory standards. The full report is available at: https://www.gov.uk/government/publications/cryptoassets-taskforce.

As detailed in the Taskforce’s report, the Government shares the Committee’s concerns about the substantial risks to consumers and market integrity associated with cryptoassets, as w ell as their potential use for illicit activity. As such, the Government and regulators’ immediate priorities are to mitigate these risks. However, the Government also recognises the potential presented by DLT and considers that, while there is limited evidence of the current generation of cryptoassets delivering benefits, this may change in the future. The Government and regulators will therefore continue to encourage innovation and responsible development of legitimate DLT and cryptoasset related activity in the UK, while also taking strong action to manage risks.

Cryptoassets and financial services regulation

Both the Committee and the Taskforce highlighted the need to ensure UK consumers are aware of the risks of in vesting in cryptoassets, and the lack of regulatory protect ions associated with many of these product s. The Taskforce’s Report noted that consumers should approach purchasing cryptoassets with a high degree of caution and be prepared to lose money. The authorities have taken steps to warn consumers of these risks and will continue to do so.

As set out by the Taskforce, some types and uses of cryptoassets fall wit hin the existing financial services regulatory perimeter. Others fall outside the existing regulatory framework and pose new challenges for financial regulation.

Cryptoassets that are security tokens fall within the existing regulatory perimeter as specified investment s. However, the Taskforce recognised that the novel nature, complexity and opacity of many cryptoassets means it is difficult to determine whether they qualify as security tokens. To provide further clarity in this area the FCA will consult on perimeter guidance on the application of regulation to these tokens by the end of this year. In addition, the Government will consult early next year to explore whether other cryptoassets, that have comparable features to specified investments but that fall outside the current perimeter, should be captured in regulation. Subject to the outcome of this consultation, the Government stands ready to legislate to expand the regulatory perimeter to ensure that FCA regulation can be applied to all cryptoassets that have comparable features to security tokens, regardless of the way they are structured.

Some other types of cryptoassets, including exchange tokens such as Bitcoin, are unlike other financial services products and present new challenges to traditional forms of financial regulation. The Taskforce concluded that further consultation is required to consider the most appropriate response to these cryptoassets. Therefore, the Government will issue a consultation in early 2019 to further explore whether and how exchange tokens and related firms, such as exchanges and wallet providers, could be regulated effectively, in the case that other measures out lined in the Taskforce’s Report do not adequately address all relevant risks.

The Government also recognises the specific concerns raised in the Committee’s Report about the risks to consumers investing in tokens issued through Initial Coin Offerings (ICOs). However, the Government also believes benefits could potentially develop in the future through the use of ICOs as a capital raising too l. As out lined above, the Government and the FCA will take steps to manage these risks and ensure the consistent application of regulation to all tokens that have comparable features to specified investments, regardless of how they are structured. This will help to protect investors, eliminate fraudulent activity and ensure market integrity, w hi le allowing legitimate activity to thrive in the UK should ICOs prove to have benefits in the future.

Money laundering and other illicit activity

The Government shares the Committee’s concerns about the possibility of cryptoassets being used to facilitate money laundering and other illicit activity. The Government is developing one of the most comprehensive responses globally to the use of cryptoassets for illicit activity. The Government will address these risks by going significantly beyond the requirements set out in the EU Fifth Anti-Money Laundering Directive (SMLD). As recommended in the Committee’s Report, the Government has asked the FCA to consider taking on the role of supervising firms in fulfilling their anti-money laundering and counter-terrorist financing obligations. The Government will consult on its proposed actions in the new year, and will legislate during 2019 to give effect to this response.

International coordination

In considering many of these issues, i international coordination will be essential given the global nature of the market. A consistent international approach and action by other jurisdictions will also help mitigate risks to UK consumers, many of whom invest in cryptoassets through firms based outside the UK. UK authorities will continue to be actively involved in a variety of international fora, and the UK will be a thought leader in shaping future regulatory approaches.

Distributed ledger technology

The Government considers that DLT has the potential to deliver significant benefits in financial services and other sectors. However, the technology is at an early stage of development. As set out in the Taskforce’s Report, the FCA and the Bank of England will continue to encourage and enable experimentation and innovation, so that DLT and other new technologies can develop and be adopted safely in the financial system. The Government is also acting to support DLT in and beyond financial services. For example, the Government has invested over £10 million through Innovate UK and the research councils to support a diverse range of DLT projects, and many Government departments are building proofs of concept to trial the use of the technology.

Allow me to again thank the Committee for its contributions on this issue. The cryptoasset market and DLT are rapidly evolving. It is therefore crucial we take the time, both domestically and internationally, to fully consider the most appropriate and proportionate response to mitigate the risks posed by cryptoassets, enable developments in the underlying technology, and allow innovators in the financial sector that play by the rules to thrive.

John Glen





Published: 20 December 2018