LONDON, 24 September, 2018 – Neil Foster, a partner in Baker Botts’ London office provided the following comments on the recent report published by the House of Commons Treasury Select Committee related to ‘crypto-assets’.
The purpose of the enquiry was to examine the role of digital currencies in the UK and evaluate the regulatory response. The findings as to the current state of crypto-asset regulation are included in the report, as well as recommendations for future regulation.
“The report was critical as to the lack of consumer protection in relation to crypto-asset issuances and trading, the Committee did take the view that the underlying, blockchain, technology has utility and that if proportionate regulation is pursued, the UK could become a global centre for crypto-asset activity,” said Mr. Foster.
“Clarity is needed. London is a leading center for fintech and there is a lot at stake. Token issuers would benefit from clear and understandable regulation and, ideally, confirmation that generating crypto-assets is not a regulated activity. It is also key that all stakeholders are aligned, so that banks can provide bank accounts, for businesses with water-tight KYC procedures, and HMRC can provide clear guidelines on corporation tax, CGT and especially VAT," added Mr. Foster.
The Committee clarified that crypto-assets are not currently within the scope of FCA Regulation as they will generally not meet the criteria required to be considered specified investments. Furthermore, crypto-assets issuances in the UK are unlikely to fall under FCA Regulation, in part, the report stated, because they do not promise financial returns.
Although this position is beneficial for companies issuing crypto-assets, such as utility or security tokens, the Committee concluded that this lack of regulation resulted in a significant risk to consumers.
The Committee recognised that the current regulatory ambiguity is not sustainable and that this is a risk to consumers and is preventing development of the legitimate crypto-asset sector.
To resolve this issue, the Committee recommend that the introduction of regulation should be treated as a matter of urgency. The quickest method of providing the FCA with the necessary powers to regulate crypto-assets would be to include crypto-asset activities as regulated activities under the Regulated Activity Order.
“The Committee was clear that the Government should carefully consider the consequences of any regulation. Notwithstanding the need for consumer protection, the Committee recognised that the UK could become a global centre for crypto-asset activity and that if proportionate regulation were introduced, the crypto-asset market could develop to a mature business model with sustainable growth,” concluded Mr. Foster.
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