135.There are two ways in which regulation of crypto-assets can be introduced in the UK: incorporating crypto-asset activity into the existing regulation or designing a new framework of regulation specifically for crypto-assets.
136.The FCA has previously explained to the Committee that under the existing framework of regulation, “certain types of financial services activity require a licence or ‘permission’ before they can be carried on.” The FCA noted that “the definition of these activities, and the ‘specified investments’ to which the activity relates […] are described at a high-level in the Financial Services and Markets Act 2000 (FSMA), and in more detail in the Financial Services and Markets Act 2000 (Regulated Activities) Order (the RAO).” The firms conducting these regulated activities must be authorised by the relevant regulator. For example, retail banks are authorised, regulated and supervised because deposit-taking is specified as a regulated activity in the RAO. Once an activity is specified in the RAO, the relevant regulators, such as the Bank of England or the FCA, then create the regulatory system for that activity. Thus, to regulate crypto-assets under the existing framework, crypto-asset activities must be specified as a regulated activity in the RAO.
137.Introducing regulation by adding a new regulated activity to the RAO has been done before. For example, peer-to-peer (P2P) lending was not regulated initially but was subsequently added to the RAO and became a regulated activity. “Operating an electronic system in relation to lending”, i.e. operating a loan-based crowdfunding platform (also known as a peer-to-peer lending platform) was added to the RAO as a new regulated activity under Article 36H, effective from April 2014. This brought P2P lending within the FCA’s regulatory remit, enabling the FCA to consult on its regulatory approach for P2P lending and subsequently introduce rules and regulations. The regulatory requirements the FCA introduced for P2P lending platforms included:
138.In its written evidence to the Committee, Crypto UK argued that incorporating crypto-asset activity into the existing RAO was the “simplest” option for imposing regulation on crypto-assets.
139.David Raw, Deputy Director of Banking and Credit at HM Treasury, indicated that HM Treasury has not yet decided on how to incorporate crypto-assets into the current regulatory framework, but is considering expanding the RAO as a method:
It could be that the right answer […] is to amend the Regulated Activities Order and put in place a regime that looks similar to the regime we have for peertopeer, where there are restrictions in relation to the sale to consumers and protections in place in terms of the amount of capital that exchanges need to hold or the way in which things are marketed to consumers. I am not sure that means treating them like banks, but that could be a model we end up following.
140.The alternative option to introducing regulation of crypto-assets through the RAO is to set up a new framework of regulation for crypto-assets that is separate to existing financial services regulation, the FSMA and the RAO. Crypto UK noted that this separate framework “can be tailored to meet the exact requirements of industry and […] perhaps provides the most flexibility.” However making the necessary alterations to all the existing legislation would take considerably more time.
141.The Committee considers that introducing the regulation of crypto-assets and associated activities by extending the Regulated Activities Order would be the quickest method of providing the FCA with the necessary legal powers to execute its duties of protecting consumers and maintaining market integrity. Designing a new framework of regulation would inevitably take much longer and given the growing risks surrounding crypto-assets and subsequent consumer detriment, the introduction of regulation should be treated as a matter of urgency.
142.The Committee recommends that the Government consider what “activity” related to crypto-assets should be specified in the RAO and the ramifications of this introduction. As discussed earlier, this should include at a minimum the issuance of ICOs and the provision of crypto exchange services.
173 , 30 January 2018
174 , 30 January 2018
175 FCA Consultation Paper, , October 2013
176 FCA Consultation Paper, , October 2013
177 FCA Consultation Paper, , October 2013
178 Crypto UK () para 4.12
180 Crypto UK () para 4.17
Published: 19 September 2018