Whatever it takes: What should FCA consider in UK’s crypto hub race?
Interest in digital assets has been rising, attracting the attention of policymakers and regulators worldwide.
The UK’s financial regulator, the Financial Conduct Authority (FCA), has been continuously facing criticism from British lawmakers and the crypto industry members for their stand on strict regulations and, therefore, seemingly a utopian desire to become a crypto hub in the next few years. For instance, one major claim against FCA entails the slow approval of licences for crypto firms.
However, the latest news indicates that the UK is moving from the piecemeal approach to wholesome regulation. This comes after the House of Commons passed amendments to the Financial Services and Market Bill on 25th October 2022, featuring an alteration to bring forward cryptocurrencies into the scope of regulated financial services. It means crypto firms would have to play by the government rules to protect consumers. It also makes them prone to fines or losing licences if they fail to comply.
The authorities shouldn’t divert from the idea and vision of making the UK an international crypto and digital assets hub. Considering all the criticism that FCA is facing and without denying its validity, I suggest we should take a look at the situation from a different angle.
There is Need for Wholesome Regulation
Interest in digital assets has been rising, attracting the attention of policymakers and regulators worldwide. We have seen various regulatory advances, such as the Market in Crypto-Assets (MiCA) provisional agreement in Europe and the Framework for International Engagement on Digital Assets in the US. That depicts effort and desire to provide regulatory clarity in the crypto market. However, safety and consumer protection are among the key concerns and gaps in this market, thus bringing about a dying need for wholesome regulation.
Through regulations, it’s easy and more effective to place consumer protection at the core. One of the drawbacks of the crypto market is the presence of scams and Ponzi schemes that lead investors to lose billions of money annually. Market manipulation is another challenge. Regulation will help address abusive trading practices/conduct and prioritise protecting consumers from fraud and manipulation. As a result, it weeds out bad actors and boosts investors’ confidence to enter the market.
More importantly, regulatory frameworks are vital in setting standards for cyber security and data protection of users in the crypto space. Regulators could implement measures or provide guidance to help genuine investors protect their assets against increasing cyber threats, fraudulent activities, and hacking.
Consequently, sufficient regulations enhance users’ safety, potentially influencing mass/ mainstream adoption of crypto assets. It’s a win-win situation for investors and crypto firms.
On the other hand, some countries have a low barrier to entry. For instance, there are no strict regulations in Dubai and no “filter” for crypto companies, making it difficult for users to filter a crypto firm. There are some reports showing that at least 30-50 leading crypto entrepreneurs have relocated their businesses to Dubai and other crypto-friendly jurisdictions. Unfortunately, crypto scammers and fraudsters like operating in unregulated environments with minimal supervision of such activities and asset classes.
Unlike Dubai, the UK has a sustainable financial system with a long history. That’s why regulators look at crypto and related processes through a prism of traditional finance. The UK has been a strong global financial centre for decades and plays a critical role in shaping post-crisis financial regulations. More importantly, they know all the risks the hurry brings. Therefore, it’s good that the UK is acting gradually and carefully in pursuit to be a hub of innovation.
Scams Outweigh Innovations
Scam revenue throughout 2022 has seen a declining trend linked to falling prices of digital assets, thus making crypto investment opportunities less enticing. However, despite the anticipated biggest crash, scams have flourished in different forms, from investment and phishing and fake crypto exchanges/ wallets to SIM-Swap scams.
Research by Group-IB found that the number of fake domains linked to crypto giveaway scams grew 5X (335%) in H1 2022 compared to all of 2021. Additionally, a Q3 report from Certik outlined that approximately 58% of all scams on Web 3.0 platforms in Q3 2022 were exit scams/ rug pull scams and robbed investors of over $56 million. Recently, data from the UK police unit, Action Fraud, shows that crypto fraud rose by 32% to about $273 million within a year.
Although there is a chance of “killing innovation,” the problem of crypto scams is vast: there are more scam projects than “great ideas” out there. Jo Torode, a senior financial crime lawyer, says cryptocurrencies need regulations that don’t stifle innovation. He further outlined that appropriate regulations would offer legal and regulatory protection to individual investors and high-street customers.
It means that we should prioritise user protection, especially regarding finances and the possibility of losing everything at stake before it’s too late. For instance, when targeting ads popped up, no regulations were imposed because governments did not understand the value and volume of regulations. Now, countries are imposing regulations post factum. As a result, users’ safety is already at risk and privacy concerns among consumers are proliferating.
So, what is different about crypto? Is it worth imposing regulations post factum when the harm is already done? Feasibly, acting ahead of the curve and thinking more about the people involved and their safety is a more practical approach rather than chasing the “craze” of becoming a crypto hub. Taking this into account, maybe FCA is right for being careful at first rather than redressing avertible mistakes in future.
Now that Rishi Sunak, a crypto enthusiast, has been appointed to the post of Prime Minister, it will be an exciting period to see what impact this will have on the crypto politics within the country.
Despite FCA taking a conservative approach to regulations, it may be right at the same time. Being more permissive would easily give scams more space, and the value is huge. Instead, we should make user protection a priority.
More importantly, it’s better to be careful at the initial stages than work on mistakes later; it’s a good foundation for the future if we want a long-term relationship with crypto.
Nevertheless, FCA and UK officials should cease making loud statements, yet they’ve already admitted to being in the learning and recruitment stages. In truth, there is still much work for the UK crypto hub dream to become a reality.