Future innovation in the use of cryptoassets as a means of raising capital, as a form of payment or in enabling the exchange of assets could largely depend on how strict new guidance from the UK's Financial Conduct Authority (FCA) is, legal experts in financial services and technology have said.
A new report by Pinsent Masons, the law firm behind Out-Law.com, identified the UK as a major global influencer of regulatory policy on cryptoassets, and experts at the firm said they expect the FCA's guidance to be of interest to a global audience of businesses exploring their use.
The FCA opened a consultation earlier this year on draft new regulatory guidance on cryptoassets. The consultation closes on Friday 5 April, with finalised guidance from the regulator expected to be published by the summer.
"We have seen a gradual convergence of regulatory priorities in the cryptoasset environment," said fintech expert Luke Scanlon of Pinsent Masons. "Anti-money laundering remains a focus, and this explains the relatively uniform application of 'know your customer' rules to cryptoassets in many jurisdictions. Financial stability, however, is deemed not to be a concern currently, allowing for a range of policy motivations to drive regulatory developments."
Financial regulation specialist Andrew Barber, also of Pinsent Masons, said: "Some jurisdictions can be described as 'ahead of the curve' in creating bespoke regulatory environments for cryptoassets. This does not necessarily drive crypto investment towards those jurisdictions, however, and many stakeholders are waiting for the guidance which the FCA is likely to produce within the next few months."
The new Pinsent Masons report highlighted regulatory developments impacting the cryptoasset market in the past year across the world. Authorities in Europe, Asia and North America have all addressed the topic in the past 12 months, including regulators in Japan, Singapore, Switzerland and the US, as well as in the UK, France and EU more generally. The report charted Malta's move to become the first country to implement a comprehensive legislative framework covering virtual financial assets and, in contrast, the challenge some law makers in Russia have faced in introducing new laws on digital financial assets.
Growth in the popularity of cryptoassets has spurred increased regulatory interest in the implications for consumer risk and financial stability. In one example given in its draft regulatory guidance, the FCA said cryptoassets can cut the time and cost of cross-border money remittance with cryptoassets as a vehicle for exchange, but it warned their use poses "a range of substantial risks to consumers" as well as of financial crime and to market integrity. Similar conclusions have been reached by other regulators.
According to Pinsent Masons' report, authorities across a number of jurisdictions have moved to "clarify the definitions of financial instruments, transferable securities and payment instruments in so far as they relate to cryptoassets" as a way to address risks and close regulatory gaps. However, there has been a lack of consistency in the approach.
"Financial regulators ahead of the curve are building regulatory frameworks by categorising cryptoassets based on their intrinsic structure, as well as their designed use," the report said. "It will be interesting to see the short-medium-long term effects of such regulation and whether cryptoassets will thrive or die under the new regimes."
A more "coordinated international approach" to regulation would help businesses that are exploring how to take advantage of the benefits of cryptoassets in a way that protects consumers, according to the Pinsent Masons report.
Munich-based regulatory compliance expert Dr. Eike W. Grunert of Pinsent Masons said: "The increasing use of cryptoassets, including as a means of payment, poses significant compliance risks to corporations. These risks need to be identified and addressed through adequate compliance measures to avoid pitfalls."
Madrid-based blockchain expert Cristina Carrascosa Cobos, also of Pinsent Masons, said: "The cryptoasset and blockchain ecosystems are changing rapidly. Institutional investors and entrepreneurs approach regulatory considerations with a global perspective, but are increasingly discerning in their choices of jurisdictions."
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