Regulation in the wake of the FTX collapse

In April 2022, John Glen, then Economic Secretary to the Treasury, made a big commitment to make the UK a global hub for crypto business. On the same day, HM Treasury published its response to the consultation on the regulatory approach to cryptoassets and stablecoins. The response outlined the Government’s intention to bring stablecoins, where used as a means of payment, into the regulatory perimeter. The rationale for doing this is that certain stablecoins have the capacity to potentially become a widespread means of payment including by retail customers, driving consumer choice and efficiencies. The Government also confirmed that it will consult on regulating a wider set of cryptoasset activities, in view of their continued growth and uptake worldwide.

The Government also conducted a Call for Evidence on the investment and wholesale uses of distributed ledger technology (DLT) in financial markets.

The Government recognised the substantial benefits and transformative impact that could be delivered by DLT when adopted in Financial Market Infrastructures (FMIs). In April 2022, the Government confirmed it is developing an FMI Sandbox to support firms wanting to innovate.

The Government has also consulted on plans to give the FCA more powers to regulate cryptoasset promotions. In its consultation paper the Government said it intended to act to ensure the appropriate regulation of cryptoasset promotions through secondary legislation.

Recent events since April 2022, in particular the failure of FTX, has lit a fire under the push for tailored rules for the market. Rebecca Driver, Member of the Financial Services Consumer Panel, said that the collapse of FTX reinforced to her the idea that if the product is creating the same sort of risks that you have in other spheres, it should be regulated in the same way or at least in a comparable way.

During a Treasury Committee oral evidence session Andrew Griffith, the Economic Secretary to the Treasury said that given the failure of FTX, part of the future for the crypto asset industry in 2023 is getting regulation right ‘not to have no regulation or to bake it in fully, as if this is already an established market and a fact, but to get that balance right.’

He emphasised there are measures in the Financial Services and Markets (FSM) Bill that will make way for crypto to be regulated in the UK. The Bill brings stablecoins, into the scope of regulation when used as a form of payment, paving their way for use in the UK as a recognised form of payment.

Clauses 21 and 22 and Schedule 6 extend existing payments legislation to include payment systems and service providers that use digital settlement assets, including forms of crypto assets used for payments, such as stablecoin backed by fiat currency. This brings such payment systems within the regulatory remits of the Bank of England and the Payment Systems Regulator.

Clauses 65 and 8 clarify that the Treasury has the necessary powers to regulate crypto asset activities within the existing financial services framework, as extended by this Bill. This will ensure that HM Treasury is equipped to respond to developments in cryptoassets more quickly and ensure that HM Treasury and the regulators can update the cryptoasset regulation as international standards are developed. Moreover, the effect of these two clauses, is that Government has the flexibility to introduce regulation in an agile way using secondary legislation; including appropriate regulation of cryptoasset promotions (Clause 65(2))

To foster innovation, Clauses 13 to 17 and Schedule 4 enable the delivery of financial market infrastructure (FMI) sandboxes, allowing firms to test the use, the applications, of new and potentially transformative technologies.

When asked about FCA’s views on crypto asset regulation, Sarah Pritchard – Executive Director for Markets at Financial Conduct Authority – said the FCA is working to support the introduction of rules on financial promotion. While the FCA has not confirmed the final set of rules for how that will operate, they have said that we can very much expect them to take a similar approach to the new rules they confirmed for high-risk investments back in August 2022.

As mentioned previously, the Government has said it intends to launch a consultation on its regulatory approach to a wider range of cryptoassets. The explanatory notes to the FSM bill as introduced in the House of Lords, state that ‘the Government intends to launch a consultation on its regulatory approach to wider cryptoassets beyond stablecoins used for payments, including those primarily used as a means of investment (such as bitcoin) later in 2022’. In January 2023, Andrew Griffith confirmed that the Government will be coming forward with two consultations in a matter of weeks. One about the general regulatory approach to crypto-assets and the other about a sovereign central bank digital currency. Implicit within that is that the Government are probably not going to be legislating in 2023 on further regulation.

On the FSM Bill, Andrew Griffith noted that he hopes that it will be done by Easter. The FSM Bill was already debated in the House of Commons and had its second reading in the House of Lords in early January.

While the Government proposed a staged and proportionate approach to regulation, one of the main criticisms during second reading of the FSM Bill in the House of Lords was that, while the Bill brings crypto in the regulatory environment and allows for further regulation in the future, it seems like a missed opportunity not to regulate further.

Alison Thewliss similarly thinks the Government is falling behind, mentioning that Europe has recently implemented its markets and crypto assets regulations—MiCA. Responding to her Andrew Griffith said that MiCA covers some but not all the areas they would aspire to cover. He argued that when they will come forward with the consultations they will talk about other activities.

For how the UK media covered the FTX collapse and what it means for the cryptocurrency space, read our report using insight from Vuelio Media Monitoring.