Legislation is on the way but consumers will continue to be ripped off until authorities utilise existing powers
The shape of EU and UK crypto regulation is now clearer than it was before. We have a deal in Europe on the markets in cryptoassets (Mica) regulation, the financial services and markets bill is being read by the UK parliament and new UK Financial Conduct Authority rules are coming for high-risk investments.
What does this mean for the scope of regulation, investor protection, supervision and enforcement?
The UK will start by regulating a few specific crypto assets and service providers, while the EU is pretty much going for the whole lot. Mica has a broad definition of a “crypto asset”, but the UK is dipping its toe in the water with a narrower “digital settlement asset”.
This essentially covers stablecoins used as a means of payments, but not (for now) crypto assets as investments. This choice seems to be about facilitating innovation — and FCA caution, as explained by its outgoing chair. The EU’s wider investment focus means that issuers of new crypto assets (with important exceptions like purely mined coins) need to publish and be liable for a prospectus-like white paper that sets out their plans.
The differences in regulation extend to service providers. The UK is likely to focus on fewer services, such as exchange and custody. Mica’s more expansive definition covers trading, advice, transmitting orders and more, as well as custody and crypto-to-crypto and crypto-to-fiat exchange.
The UK’s next planned step is to legislate for crypto investment risk warnings. Investors need to have a clear understanding of what protection they are (or are not) getting. UK consumers have learnt the hard way (in the London Capital & Finance minibond scandal) that the scope of regulation can be confusing.
The FCA’s new rules now set an admirably blunt and prescriptive risk warning: “This is a high-risk investment and you are unlikely to be protected if something goes wrong”. This will hopefully be quickly extended to crypto investments — and matched by EU regulators.
As crypto assets are not protected by deposit insurance or other compensation schemes, supervisory effectiveness is key. Mica and the UK will impose liability on service providers for custody losses, such as cyber attacks on digital wallet.....
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