July 02, 2019

While speaking at the Cambridge Center for Alternative Finance annual conference, Christopher Woolard of FCA examined the ongoing work in regulation of crypto-assets and the potential challenges in regulating financial innovation in this area. He highlighted that early engagement is incredibly valuable for monitoring, supervisory, and policy purposes. Working with innovative firms helps to achieve a better bird’s-eye view, thus enhancing understanding when the overall landscape is blurry and ­changing quickly. He also discussed how FCA looks to critically analyze different cryptoassets and why labels such as "stablecoin" are not very helpful.

Mr Woolard explained that market participants use "stablecoin" as a broad term that encompasses a variety of different types of cryptoassets. An October 2018 joint report by BoE, FCA, and HM Treasury categorized crypto-assets into exchange tokens, security tokens, and utility tokens. A stablecoin could also refer to a crypto-asset backed by fiat currency. In certain cases, a fiat-collateralized crypto-asset could constitute e-money if it meets the definition provided in the Electronic Money Regulations. He said that this makes us question how useful the term stabledcoin is when it comes to labeling all these different tokens. He added that a stablecoin could fall within or between one of the several regulatory categories. If a cryptoasset is e-money, then the issuer needs to be authorized as an e-money issuer and needs to comply with all relevant requirements under the E-Money and Payment Services Regulations. The term stablecoin could equally apply to algorithmically controlled tokens or those backed by real world assets such as securities or, indeed, other cryptoassets.

He added that FCA seeks to consider any crypto-asset, including those labeled stablecoin, on a case-by-case basis and encourages both consumers and firms to do likewise. Stablecoins would need to be evaluated on their characteristics, but could amount to regulated products, including, for example, collective investment schemes. This analysis is particularly important when identifying whether a specific crypto-asset sits within the regulatory perimeter or outside of it. Depending on its structure it could be many things—for instance, a derivative, a unit in a collective investment scheme, another kind of security or e-money. He also discussed how innovators should navigate the landscape and what approach regulators should take. "Innovation won’t pause whilst regulators in different jurisdictions each scramble to get the best snapshot—that is why it is critical that regulators work in concert internationally on fast-moving, cross-border issues."

According to Mr. Woolard, big surprises in financial markets do not generally end in positive outcomes for consumers, regulators, or firms. Therefore, FCA invites firms to consider applying to its innovation firm support services, such as direct support, which provides regulatory feedback for eligible innovative propositions or the Regulatory Sandbox, which provides firms with the opportunity to setup compliant and controlled tests. FCA has worked with many innovative firms on crypto-assets to-date—over a third of propositions accepted to test in the Sandbox so far have involved an application of distributed ledger technology. Not only does this help bolster competition by helping innovative firms overcome regulatory barriers, to the benefit of markets and consumers, but also to learn more about fast-moving, developing technologies potentially disrupting financial services over time, added Mr. Woolard.

 

Related Link: Speech

 

Keywords: Europe, UK, Banking, Securities, Crypto-Assets, Distributed Ledger Technology, Stablecoin, Fintech, Regtech, Regulatory Sandbox, FCA

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