UK watchdog defends ‘too tough’ digital currency standards

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The U.K.’s Financial Conduct Authority (FCA) defended its rigorous digital currency regulations amidst criticism that they were “too tough” and risked stifling innovation.

In a post on its website on October 21, Val Smith, Head of Payments and Digital Assets, said it is essential to maintain rigorous standards with consumer protection and the integrity of financial markets front and center.

Smith said innovations built on “unsafe, unregulated, and untrusted foundations” would likely collapse.

What are the ‘too tough’ FCA rules?

The FCA’s blockchain and digital currency standards focus on several key areas, particularly AML/CFT compliance, consumer protection, communications standards, operational resilience, and stablecoin-specific regulations.

Any company using digital assets must register with the FCA and comply with Money Laundering, Terrorist Financing, and Transfer of Funds Regulations (MLRs). This includes ongoing record-keeping and reporting duties.

Digital currency firms must also clearly disclose the risks associated with digital assets and comply with strict advertising rules. All financial promotions must be transparent, fair, and not misleading.

On the operational resilience front, the FCA requires firms to safeguard customer funds, implement safeguards against cyber threats, and have a framework for managing operational and security risks.

Furthermore, firms offering tokenized securities or acting as custodians of digital assets must comply with the same rules as those who do so for traditional securities.

Opinion: What’s the problem, crypto bros?

Basically, the FCA wants digital asset firms to be honest, manage risk correctly, and safeguard customer funds. It speaks volumes that some in the digital currency space see these rules as “too tough” to comply with.

In 2021, digital currency exchange Binance withdrew from the registration process after the FCA raised concerns about its approach to meeting anti-money laundering (AML) and counter-terrorism financing (CTF) rules. Subsequently, the FCA issued a warning to users that Binance was not authorized to undertake any regulated activity in the U.K.

In recent years, most FCA applications have been rejected or withdrawn. What does it say about an industry when most of its operators cannot prove they are committed to honest advertising, basic safeguarding of customer funds, professional standards for managing risk, and preventing money launderers and terrorists from using their platforms?

It’s also difficult to imagine how insisting on these standards would prevent legitimate innovation. With a few notable exceptions, very little innovation has emerged from the industry since Bitcoins’ release in 2009. Almost nothing of lasting value came about in a decade with virtually no regulations at all, calling into question the premise of the argument that the FCA’s regulations would stifle innovation.

Furthermore, the U.K. doesn’t need lectures from crypto bros about what it takes to create a world-leading industry. Its financial services sector stands shoulder to shoulder with New York and Singapore, today comprising 12% of its economic output and employing more than one million people. The nation’s iGaming industry is the largest in Europe, with 75,000 people employed in a sector contributing £5 billion ($5.4 billion) to the economy.

The FCA’s approach is correct for the long run, perhaps not in every detail, but in spirit. Squeeze out the bad actors, welcome only those willing and able to commit to strict standards, and focus on utility and innovation with consumer protection and financial integrity in mind.

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