The Financial Services and Markets Bill has received its second reading. With a surprise amendment from Andrew Griffith on cryptoassets, it could prove to be a watershed moment for the crypto sector in the UK. And it couldn’t be more timely considering events in recent weeks.
The circumstances surrounding FTX has been another wake up moment for the sector, but legislators were already building a new regulatory regime before the collapse began.
Regulators the world over will want to show a strong response in the wake of the troubling episode, but a knee-jerk reaction should be avoided. Large portions of the crypto sector are still working hard to innovate and build new ideas in a safe and responsible way. This must not be stymied but encouraged within a stable regulatory framework.
Through the Financial Services and Markets Bill, the Government now intends to regulate crypto as financial instruments akin to other assets such as equities – an all-encompassing approach which will effectively cover the whole cryptoasset space.
Meanwhile, stablecoins - the lubricant that greases the wheels of the cryptoasset market - are going to be regulated as a means of payment. Stablecoins provide essential liquidity and fungibility to other cryptoassets while giving users and businesses an essential on-ramp into the sector’s ecosystem.
Stability issues are now at the front of everyone’s minds, but more than anything this highlights how essential regulatory transparency is for the crypto sector, and the stabilising hand that robust inclusive frameworks will provide.
This is an important milestone for the crypto sector as the UK looks to become a global crypto hub. Regulation, long-argued over in the crypto sphere, is an important validation for a sector that is battling image problems.
But regulation, far from quashing innovation or restricting the freedom of projects to develop, will set essential ground rules and protections for market participants – from businesses and innovators to investors and end users.
eToro has been providing regulated access for investors to cryptoassets for nearly a decade already, and we see the future of the asset class as hugely exciting, especially in the UK. A robust, positive regulatory framework can help to cement this future.
From our perspective, there are five key areas we see that future regulation must achieve. Those include:
1.Enhanced consumer protection and ultimately, an alignment of the crypto protective framework with that of existing “traditional” investments.
2.A level playing field for UK crypto operators, which discourages investors seeking lesser protected “offshore” providers.
3.Clear, decisive guidance from regulators. Although the Treasury and FCA don’t see as much of an immediate use-case for non-stablecoins - in particular exchange tokens - their mainstream appeal and adoption is evident, and regulation should be prioritised accordingly, not least to enhance consumer protection.
4.Promotion of an environment which encourages financial inclusion for a broad range of clients
5.A clear message which portrays serious and believable intent to establish the UK as a leader in crypto regulation (and as a global crypto hub generally).
The Financial Services and Markets Bill seems to be moving in the right direction on this. But it has not yet cleared Parliament, and it also remains to be seen how regulators will apply these rules once in place.
Market volatility overreaction threat
Regulatory considerations are key, but the volatile current situation and ongoing fallout could drown out important conversations over the right way to achieve them.
What’s essential to remember in the current climate is that crypto is not a flash in the pan that will disappear overnight, it is an innovative sector like any other, which will move on from current market troubles and emerge stronger and healthier than before.
There’s potential for heavy-handedness which would be the wrong approach, as it will stifle innovation, and force users and investors to reach for potentially unregulated, and therefore untrustworthy, options.
We must not forget that crypto is a global phenomenon, and jurisdictions around the world are already setting out their stalls - be it to attract or deter - the sector from setting up in their backyards.
The EU in particular is leading the way with its MiCa legislation, but other jurisdictions such as Singapore are making significant headway too.
The City of London is a global financial hub and has been for many years. But get the next steps wrong and it may just miss out on the next stages of the growing universe of DeFi and crypto, and all the possibilities therein.
With the financial services sector the jewel in the crown of UK plc, it would surely be a hugely self-inflicted wound to get the rules wrong at this stage.
This will only be achievable with the right regulatory approach in place. Ultimately, through this bill the Government is taking a view on the sector and aiming to be a leader in stablecoin and cryptoasset regulation.
The Government, and Parliamentary scrutiny of the bill, must strike the right tone with the rules they’re set to legislate for. A robust and carefully considered regulatory framework is the only way to protect consumers while letting the sector thrive in the UK.
Dan Moczulski is UK MD of social investing network eToro, one of the UK's largest FCA-regulated crypto providers