City watchdog launches consultation on cryptoassets for retail investors

At a later date the Financial Conduct Authority will also be consulting on the banning of derivatives products based on cryptoassets, with contracts for difference products likely the main target.

The Financial Conduct Authority (FCA) has announced the beginning of a consultation on cryptoassets. The consultation period ends on 5 April, with a view to a policy statement in the summer with possible legislation to follow.

The move follows the report published in October last year by the cryptoassets taskforce made up of the FCA , the Bank of England and HM Treasury. The final report said that cryptoassets such as bitcoin and its many imitators should come under the purview of the Financial Conduct Authority.

The aim of the consultation is to aid the FCA in establishing a regime to provide clarity to firms in the space and to investors and consumers.

In December last year, HM Treasury published guidance on the tax regime for cryptoassets in which it made clear that capital gains tax is chargeable.

The FCA, executive director of strategy and competition, commenting on the consultation said: “This is a small but growing market and we want both industry and consumers to be clear what is regulated, and what isn’t. This is vital if consumers are to know what protections they’ll benefit from and in ensuring we have a market functioning as it should.”

In the FCA statement accompanying the announcement the regulator is at pains to point out the current unregulated nature of the sector and lack of protections but, by implication, sees crypto as hear to stay and not merely a fly-by-night fad.

The regulator notes that although the sector is still small, “an increasing number of consumers are investing in cryptoassets”.

The statement continues: “While cryptoassets have the potential to bring benefits to markets, firms and consumers, there remains considerable risks to markets and consumers.”

An argument has raged as to whether cryptoassets should be treated as securities such as stocks and shares, as currencies or merely as ‘utility tokens’ that provide access to certain products and services.

For its part, the FCA sees cryptoasset tokens as likely falling into one or more of four authorised areas: specified investments under the Regulated Activities Order; financial instruments under the Markets in Financial Instruments Directive II; e-money under the E-Money Regulations and Payment Services Regulations.

In the absence of regulations governing the sector, investors holding cryptoassets are not protected by the Financial Services Compensation Scheme or the Financial Ombudsman Service.

At a later date, the FCA will also be consulting on the banning of derivatives products based on cryptoassets, with contracts for difference products likely the main target.

The European Securities and Markets Authority (ESMA) in June last year introduced restrictions on crypto contracts for difference (CFD) products, reducing leverage to 2:1 in a UK market where leverage of 30x and more was often available. Mandatory risk warnings were also introduced for all marketing.

Fundraising boom

The lack of regulation of crypto saw a boom in fundraising by crypto start-ups last year using so-cancelled initial coin offerings (ICOs). Worldwide, £4.8 billion was raised through ICOs but many of the projects have failed or not released a product. Worse still, some were outright frauds.

The FCA has been criticised for not being as proactive as the US Securities and Exchange Commission, which has been shutting down ICOs on the basis that they are promoting securities and as such should have registered with the authorities and abided by securities law.

Partly as a result of the lack of legal certainty in the various jurisdictions internationally and the prevalence of bad actors in the ICO arena, compliant token offerings have started to appear or are being planned, known as security token offerings.

Cryptoassets are highly volatile. UK investors can gain compliant exposure to cryptoassets through the exchange traded notes available from Coinshares: XBT Provider Bitcoin Tracker and a version that tracks the Ethereum cryptoasset.

CFDs also provide protected exposure but the products offered by UK brokers do not hold the underlying asset. The Bitcoin Investment Trust from Grayscale is also available through UK brokers but sells at a wide premium and has lost 82% of its value year to date.

There are currently 2,116 cryptoassets listed on industry research website coinmarketcap with a total overall value of $120 billion. Bitcoin, the leading crypto, is currently trading at $3,598.

The FCA consultation paper is available here, and firms and consumers are invited to submit comments.

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