On October 29, the UK's Cryptoasset Taskforce published a report outlining the benefits and drawbacks of cryptocurrency and blockchain technology, and how the UK government plans to mitigate risks, especially to consumers. According to the report, the FCA is considering banning certain crypto products.
The Cryptoassets Taskforce – which is comprised of officials from the Treasury, the Financial Conduct Authority (FCA), and the Bank of England – starts its report by outlining several beneficial use cases for blockchain technology.
It finds that blockchain technology can be used in the UK's trade finance industry to speed up settlement times and increase efficiency though automation. The task force feels this could be accomplished through replacing letters of credit with executable distributed code contracts (better known as smart contracts), which would automatically create an immutable record of ownership during each step of the process.
During its research into DLT use cases, the task force found that the technology also has the potential to enhance the reliability of data chains, improve the efficiency of the end-to-end financial settlements, and tokenize physical assets such as art and real estate.
Yet it also uncovered some potential problems that need to be overcome before adoption of DLT can really take off. One key area it identifies is the struggle to create blockchain platforms that are interoperable with both legacy systems and other blockchain platforms. Additionally, the report raises issues of governance and consumer education.
With regards to blockchain, for now UK officials at the FCA and Prudential Regulatory Authority (PRA) will "take technologically neutral approach to regulation…[meaning] regulators do not mandate regulated firms to use a particular type of technology to facilitate their services."
Meanwhile, the FCA and Bank of England will continue to research how regulation will affect emerging technology.
When looking into the effects of cryptocurrency on consumers, the task force is more bearish, at least in the short term, finding "limited evidence of the current generation of cryptoassets delivering benefits." It does, say, however, that "benefits may materialise in the future, for example through the use of ICOs as a capital raising tool."
The task force is particularly concerned over large and unexpected financial losses crypto investors may suffer due to the volatility of crypto prices, as well as the purchase of unregulated cryptoasset products, especially given the public's lack of education about said products.
The task force presents some ideas on reducing risks to investors, stating:
"HM Treasury, the FCA and the Bank of England will take action to mitigate the risks that cryptoassets pose to consumers and market integrity; to prevent the use of cryptoassets for illicit activity; to guard against threats to financial stability that could emerge in the future; and to encourage responsible development of legitimate DLT and cryptoasset-related activity in the UK."
The government will now consult on how to regulate ICOs, explore how to better regulate exchanges and wallet providers, and draft a regulatory framework regarding the regulation of security tokens.
According to the report, the FCA will consider prohibiting the sale of "all derivatives referencing exchange tokens such as Bitcoin, including CFDs, futures, options and transferable securities."
The task force believes this would not only protect retail consumers from buying unregulated crypto assets that are either useless or do not meet their specific needs but will also protect the integrity of the UK's crypto industry.
Additionally, the FCA will not "authorise or approve the listing of a transferable security or a fund that references exchange tokens (for example, exchange-traded funds) unless it has confidence in the integrity of the underlying market and that other regulatory criteria for funds authorisation are met."
The report states that the FCA will have to be satisfied that listing this type of digital asset will not be detrimental to the investor's interests, and it has yet to list any form of exchange-traded products.