Emerging Risks: crypto-assets under international and domestic regulatory scrutiny

30 October 2019. Published by Carina McFadden, Associate and Ashley Daniells, Associate

The latest in our emerging risks series of blogs discusses the long-running saga of cryptocurrency regulation. At an international level, the Financial Stability Board has been looking at the regulation of stablecoin. On the domestic front, the Financial Conduct Authority has published a consultation paper regarding the recovery of their costs for supervising cryptoasset businesses.

It is now over ten years since the invention of Bitcoin by its unknown creator.  However, international interest in the investment in the incalculable number of crypto-assets shows no sign of waning.

This blog post will focus on two recent publications regarding the monitoring and regulation of crypto-assets, namely:

1. The Financial Stability Board's review of the potential systemic global impact of stablecoin cryptoassets; and

2. The Financial Conduct Authority's consultation on the cost of supervising the cryptoasset industry in the United Kingdom.

Financial Stability Board Reviews Stablecoins

One type of crypto-asset that is particularly in the international spotlight are stablecoins.

In brief, stablecoins are a type of a crypto-asset designed to maintain a stable value relative to another asset, such a unit of currency.  Stablecoins have gained traction as they attempt to offer the best of both worlds - the instant processing and security or privacy of payments of cryptocurrencies and the volatility-free stable valuations of government issued currencies.  However, the term itself should not be read as an endorsement as to their value, stability or legal standing.

The Financial Stability Board (FSB) is an international body that monitors and makes recommendations about the global financial system.

On 18 October 2019, the FSB issued a note on the regulatory issues surrounding stablecoins, which it had delivered to the G20 meeting of finance ministers and central bank governors in June 2019. 

It was the G20 leaders' intention at the June 2019 meeting to make united efforts to address major global economic challenges. The result of that meeting was the G20 Osaka Leaders' Declaration which included an acknowledgement as to the potential risks concerning the crypto-asset industry, stating:

"Technological innovations can deliver significant benefits to the financial system and the broader economy. While crypto-assets do not pose a threat to global financial stability at this point, we are closely monitoring developments and remain vigilant to existing and emerging risks. We welcome on-going work by the Financial Stability Board (FSB) and other standard setting bodies and ask them to advise on additional multilateral responses as needed."

The FSB's note builds upon work undertaken by the G7 working group, published by the Committee on Payments and Market Infrastructures in October 2019.  Both the FSB and the G7 recognise the potential benefits of stablecoins contributing to the development of global payment arrangements that are faster, cheaper and more inclusive than present arrangements whilst highlighting the significant risk of these particular crypto-assets.

The FSB's note addresses, in particular, the announcement by private sector firms of their intention to launch stablecoin-type arrangements for domestic and cross-border retail payments.  The FSB note, therefore, states that this development has the potential to reach a global scale which, in turn, could alter the G20's current view that crypto-assets do not pose a risk to global financial stability as stablecoin arrangements could potentially become a source of systemic risk as they have:

  • a large potential user base and have the potential to grow quickly.  As a result, stablecoins could become of systemic importance in individual jurisdictions, including through the substitution of domestic currencies or even on a global scale.

  • features of different types of financial services such as payment systems, bank deposits and foreign currency exchanges as a result of which they may give rise to new financial stability risks.

  • the potential for extensive and impactful linkages to the existing financial system.

  • the potential to cause instability to financial markets through adverse confidence effects such as concerns about market manipulation and lack of market integrity, anti-competitive behaviour, lack of adequate data protection, money laundering, terrorism financing and other illicit financing activities.

It is the FSB's intention that, in an attempt to counter these potential systemic risks, it will:

  • review existing supervisory and regulatory approaches and emerging practices in this field, focussing upon cross-border issues as well as taking into account the perspective of emerging markets and developing economies.

  • consider whether existing supervisory and regulatory approaches are adequate and effective in addressing financial stability and systemic risk concerns as set out above; and

  • advise on possible multilateral responses, if deemed necessary, including developing regulatory and supervisory approaches to addressing financial stability and systemic risk concerns at the global level.

The FSB therefore plans to submit a consultative report to the G20 Finance Ministers and Central Bank Governors in April 2020, and a final report in July 2020.

To read the FSB's note, please click here.

The Financial Conduct Authority consults on the cost of supervising cryptoasset businesses

In July 2019, the UK Government announced that the Financial Conduct Authority (FCA) will be the anti-money laundering (AML) and counter terrorist financing (CTF) supervisor of UK cryptoasset businesses under the money laundering regulations (MLR), from 10 January 2020.

A UK cryptoasset business must therefore comply with the requirements of the MLRs from 10 January 2020 and the FCA will start supervising businesses from 10 January 2020, irrespective of whether they have registered or not.

The FCA's consultation paper sets out they expect that:

  • New cryptoasset businesses (that intend to carry on a cryptoasset activity after 10 January 2020) must be registered before they can carry on the activity; and
  • Existing cryptoasset businesses (which were already carrying on cryptoasset activity before 10 January 2020) may continue their business, in compliance with the MLR, but must be registered by 10 January 2021 or stop all cryptoasset activity.

Applications for registration will open on 10 January 2020.

The FCA's proposals will see it recover its costs from cryptoasset businesses through a one-off registration fee and an annual fee.

As cryptoasset activities will be new activities under the MLRs, the FCA has limited information on the different business types and the relative complexity involved in assessing them.  Couple this with the decentralised nature of this business, rapid technological development and that there are over 1,000 cryptocurrencies available, it is no surprise that the FCA is consulting to consider its next steps.

The regulator proposes to distribute recovery of the costs of setting up and operating the registration process equally between all applicants. The FCA estimates the total cost of this process is approximately £400,000 and it is currently aware of about 80 potential applicants, though more are expected over time.  The FCA accordingly proposes to set the registration fee at £5,000. This fee will also be paid by businesses that are already authorised or registered with the FCA and which must register with the FCA to carry on cryptoasset activity.

In terms of the FCA's ongoing regulatory costs in this field, they will seek to recover these via periodic fees (i.e. variable annual fees).  It is proposed that the amount a business will have to pay annually will be calculated based on its usual ‘tariff’ basis. The FCA has proposed that:

  • It will create a new fee block for cryptoasset business;
  • The tariff will be based upon income with the FCA's standard definition of income applying;
  • Fee-payers will report on the basis of their accounts, for their financial year ending during the previous calendar year. This means that the 2020/21 fees would be based on their accounts for their financial year ending up to 31 December 2019; and
  • It will consult on what an appropriate minimum fee threshold should be for this business class.

 The deadline for responses on the registration fee is 11 November 2019, whilst the deadline for answers over the periodic fee is 10 December 2019. RPC will be sure to discuss the findings once released.

To read the FCA's consultation paper, please click here.