Regulations, regulations, and more regulations
Just as CoinGeek has predicted for years now, the law is catching up with the digital currency industry. Last week, the Bank of England (BOE) and the U.K.’s Financial Conduct Authority (FCA) made statements and issued updated guidance for industry participants.
The Bank of England noted that as the industry grows, it will pose a risk to the wider financial system. It also released an updated regulatory framework. Meanwhile, the FCA spoke of several concerns that digital currency firms should keep in mind as the deadline for its AML digital asset register approaches.
Starting with the Bank of England
The Bank of England acknowledged that “crypto-asset technology” is creating new financial assets and new means of intermediation. It stated that, right now, the size of the sector is still small as compared to the traditional financial sector. However, it noted that should it continue to grow at the pace it has been, the interlinkage between the two will increase, and the activity in the digital currency sector will begin to influence and reshape activity in the traditional financial sector.
The central bank acknowledged the benefits of blockchain technology, including lower transactions fees, greater user choice, and interoperability between payment systems. However, it emphasized that these benefits can only be realized in a safe, well-regulated environment.
With this aim in mind, the Financial Policy Committee (FPC) “will seek to ensure that risks to financial stability arising from those market activities are mitigated.” In other words, the activities of the industry will be regulated and contained so that they will not pose a wider risk to financial stability even as they grow.
Today, the FPC is monitoring the activities of the industry and looking out for risks to financial stability. Specifically, they’re looking at:
- Risks to systemic financial institutions
- Risks to core financial markets
- Risks to the ability to make payments
- Risks to the real economy and balance sheets
“The FPC is of the view that as crypto-assets and DeFi grow and develop, enhanced regulatory and law enforcement frameworks are needed, both domestically and on a global level,” the Bank of England stated.
Elaborating, the FPC said that where the technology is performing an equivalent economic function to one in the traditional financial sector, this should take place “within existing regulatory frameworks.” In other words, activities such as lending and borrowing will be subject to the same AML/KYC rules as the traditional sector, and anything like banking activity will be subject to the same rules around reserve requirements, customer protection, etc.
Now for the Financial Conduct Authority notice
On the same day that the Bank of England published its statement, the FCA published one of its own. The financial regulator issued a notice reminding all firms with exposure to “crypto-assets” of their existing obligations when interacting with or exposed to them.
What are those obligations? The FCA spelled out some of the risk areas that registered firms need to consider.
1. Being clear with customers. The FCA acknowledged that much of the activity in the industry still sits outside of its purview. Therefore, firms should be clear with customers about what is regulated and what is not. Take note, Bitpanda.
2. Financial Crime and registration of crypto-asset businesses. Firms must comply with Money Laundering, Terrorist Financing, and Transfer of Funds regulations (MLRs). This includes being registered with the FCA, having appropriate systems and controls, and assessing the risks.
3. Prudential considerations. The FCA pointed out that while there are no prudential treatments specific to digital currency assets, regulatory obligations still apply. This involves assessing and mitigating potential harm to clients, the markets the firm operates in, and to itself.
4. Custody considerations. All FCA-regulated firms agree to a set of principles. Principle 10 compels the firms to arrange adequate protection for clients’ assets.
Among other things, misleading customers, failing to prevent money laundering and terrorist financing, losing client assets, or exposing them to risk without a proper assessment will not be tolerated. And no, ignorance of the law is not a defense because plenty of guidance has been published about all of this.
More movement towards the new era of digital currencies and assets
As the statements of these two U.K. financial institutions show, and as we’ve been saying for years now, the cypherpunk-inspired ‘Wild West’ era of Bitcoin and digital currencies is over. Existing regulations already apply to exchanges, wallet providers, miners, and other ecosystem participants in most countries. Where gaps exist, new regulations are being signed into law at a pace that’s difficult to keep up with.
What does all of this mean? It means we’re entering a new era in which the crime and corruption that has largely characterized the industry will no longer be tolerated. Those with duties to prevent it will be held to account, and projects designed to facilitate law-breaking will be chased into the shadows and become increasingly insignificant.
As we enter this new transparent, regulated phase of the industry, the true potential of Bitcoin and blockchain technology will shine. While the industry “OG’s” will no doubt lament it, those of us who believe in the potential of Bitcoin to reduce financial crime, bring about increased economic efficiency, and unleash new industries will be celebrating.
Watch: CoinGeek New York panel, Government & Public Sector Applications on Blockchain
New to Bitcoin? Check out CoinGeek’s Bitcoin for Beginners section, the ultimate resource guide to learn more about Bitcoin—as originally envisioned by Satoshi Nakamoto—and blockchain.