A US organisation has called on the Financial Conduct Authority to narrow the scope of its planned regulation of the cryptocurrency sector. Syed Rahman and Ulrich Schmidt consider the argument.
The Financial Conduct Authority (FCA) has been asked to limit the extent of its imminent cryptocurrency regulations.
The US-based advocacy group, the DeFi Education Fund (DEF), wants regulation to only apply to entities that have unilateral control over user funds or transactions. It has stated that control should be the deciding factor when determining the scope of regulations.
At this point, it is worth explaining the distinction between entities with and without such control.
A centralised exchange (where funds are held in custodial wallets) is owned by an entity which attracts regulatory oversight and scrutiny but also allows investors to make investments and grow the exchange/company. A custodial exchange, can, therefore, manage users’ accounts and private keys and can control access to their assets. It is akin to a bank, which can grant and remove access at any time if prompted to do so by law enforcement or the courts. Coinbase and Kraken are examples of this. As they exert control over the users’ accounts and their access to their accounts, they need to be subject to strict regulations from the authorities, which is what DEF is stating.
Then there are decentralised exchanges, which do not exert any control over their users’ accounts or private keys. They simply provide a digital architecture/forum which can be used by anyone. All users have full control over their accounts and access cannot be removed or granted by the exchange. It is DEF’s submission that as a decentralised exchange cannot exert control over its users or their actions, it should not be regulated in the same manner as a centralised exchange.
Rational
DEF’s arguments are rational. Yet there are arguments in favour of some regulation of decentralised exchanges, albeit maybe not in exactly the same way as with centralised exchanges. To make a comparison, we hold social media companies to account for not removing certain content, even though they do not exert complete control over their users.
As such, we are likely to see a level of regulation for decentralised exchanges. Later this year, the FCA should publish its list of indications of control/(de)centralisation, which should provide us with further guidance.
DEF’s comments came as a result of the FCA putting its proposals for crypto regulation out for consultation. Interested parties had until February 12 to make representations to it.
The regulator’s proposed crypto regulation will cover areas including admissions and disclosures, market abuse, crypto trading platforms, intermediaries, lending and borrowing and decentralised finance and prudential requirements. The regulation, which is expected to come into force next year, will see cryptocurrencies regulated in a similar way to other financial products.
Goal
The FCA’s stated goal is to introduce a crypto regulatory regime that protects consumers, supports innovation and promotes trust. It has published information to help firms prepare for it. This information covers crypto asset-regulated activities, the FCA’s standards for crypto asset firms and individuals, its approach to supervision and enforcement, a gateway of authorisation for firms wanting to undertake crypto asset activities, and a proposed transitional provision that will allow existing crypto asset firms that fail to secure authorisation to wind down their UK business in an orderly way.
The FCA said in January that the following months will see it publish policy consultations setting out its proposed rules and guidance, consider the responses to those consultations, and then set out its final rules and guidance in policy statements.
