33 Finance Monthly. Bank i ng & F i nanc i a l Se r v i ce s assets at present. Nevertheless, the FPC acknowledges that disruptive and traditional finance are likely to become increasingly intertwined. Accordingly, the FPC is keen that gaps do not emerge or widen in the regulatory perimeter that could pose a threat to financial stability. The FPC cites some initiatives that have already been taken by UK authorities to address some of the macro and micro-prudential risks posed by crypto assets. For example, the FCA references the Dear CEO Letter published by the Prudential Regulation Authority (“PRA”) on 24th March 2022 concerning the treatment of crypto-asset exposures by banks and investments firms that fall within its remit. Furthermore, the FPC considers the implications of conduct and financial crime risks in its analysis. For instance, measures taken by UK financial regulators to hinder efforts to use crypto assets as means of circumventing HM Treasury’s Russia sanctions were welcomed by the FPC. In our view, lawmakers should take care to ensure that crypto-asset regulation in the UK is not comprised of a patchwork quilt of initiatives. Plainly, such a landscape would be difficult for their intended subjects to navigate. Moreover, this is liable to creating exactly the types of gaps that the FPC hopes can be kept to a minimum. At the root of this is an apparent contradiction at the heart of UK policymaking. One month the Chancellor of the Exchequer announces a crackdown on crypto-asset promotion, the next he is extolling the benefits of making the UK a “crypto hub”. Regulation will always lag technological innovation (although it can sometimes encourage it too – Regulation National Market System is often credited with fuelling the growth of high-frequency trading in the US). Still, poorly conceived regulation that merely reacts to present demands or fears is likely to lead to suboptimal outcomes – for both the regulator, the regulated and the consumer. The well-documented difficulties that crypto-asset providers have experienced in seeking anti-money laundering registration with the FCA exemplifies this point. The FCA’s aims are laudable: it is using the tools at its disposal to try and cover a perceived legislative gap to protect consumers from unscrupulous actors. Nonetheless, this approach risks forcing legitimate actors offshore. UK consumers would likely still find these actors. Is this desirable? So much to ponder! Finally, what can firms do if they are struggling to stay on top of all this change? Engaging a high-quality consulting firm to assist with regulatory change management can really pay dividends. This is especially the case in crypto assets. Ever greater financialisation has resulted in the most liquid cryptocurrencies becoming underlyings for exchange-traded derivatives and contracts for difference. It has also led to regulatory concepts governing traditional investments gaining influence in disruptive sectors. Consequently, seasoned investment compliance professionals can help crypto-asset firms build an optimal governance and control framework. This will become critical to meeting the challenges posed by the fast-evolving regulatory environment. Whereas MiFID II captures investment firms, MiCA seeks to regulate: (i) issuers of crypto assets and stablecoins, (ii) crypto exchanges (think multilateral trading facility (MTF) for Bitcoin and such like); and (iii) wallet providers.
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