The Crypto Factor: Convenience, trust and safety – a closer look at the future framework to regulate cryptoassets
CBDCs (Central Bank Digital Currencies) is the term used to describe the digital form of central bank money while stablecoin is a digital token issued by the private sector to maintain a stable value at all times in relation with national currencies. The Bank of England, according to their latest discussion paper, has reiterated that there is not yet a decision regarding CBDC but there is an active exploration exercise around opportunities and risks associated with new digital money technologies and forms. Key factors of those new forms are the convenience, trust, and safety, which could lead commercial banks adaptation of balance sheets in response to liquidity ratios.
TheCityUK, as an industry-led body, which represents the UK-based financial and related professional services, has issued their latest report including an overview of available cryptoassets types, key policy issues regarding a suggested regulatory framework and the potential approach that the UK Government could consider following. Cryptocurrencies have many cross-border applications, which require a proper alignment of core regulatory approaches to ensure interoperability, certainty and minimising the risks. TheCityUK recommends that the UK government should act quickly to set up high standards in the regulation of cryptoassets and DLT (Distributed Ledger Technology) where those are applicable. In parallel, technology specific features and risks shouldn’t be overlooked. CItyUK’s recommendation suggests that the sector should remain engaged but also that the regulators should recognise the potential behind the transformation of stable coins and CBDCs. They ask the UK government to take under consideration, during the design process of future regulatory framework, that existing regulatory solutions can be adapted faster to enable an innovation-friendly ecosystem, and that technology neutrality should be maintained including clear definitions and scope. Finally, the report highlights the need for clear legal definitions on characteristics and taxonomies relating to cryptoassets.
Some of the jurisdictional issues identified focus on the way UK policy makers would control market participants who deal with UK customers, but are based outside the UK. To achieve a proper solution, TheCityUK recommends the use of Article 72 of the Financial Services and Markets Act (Regulated Activities) Order 2001, which allows the sale of investments to sophisticated investors if the transactions are intermediated by a locally licensed firm. Using a model that already works successfully is a good starting point for an effective cryptocurrency regulatory environment. According to the Kalifa review of UK FinTech, the UK has the potential to build such organic developments and lead a global centre for all types of crypto- and digital assets trading processes. This is also being backed up by the Bank of England’s recent announcement that it will introduce ‘omnibus accounts’ to enable a wider range of payments systems, utilising DLT. It is important to highlight that since January 2020, many businesses have started carrying out cryptoasset activities and are required to be compliant with Money Laundering, Terrorist Financing and Transfer of Funds regulation, plus the Financial Conduct Authority (FCA) rules. On an international level, there is a need for structured coordination around cryptoassets activities, taxonomies, and regulatory controls. UK authorities are recommended to engage internationally through the G20, G7 FATF (Financial Action Task Force), FSB (Financial Stability Board) and other forums to achieve a supervising cross-border activity around regulatory principles.
According to the TheCityUK report, the key regulatory issues are found around consumer protection, legal and regulatory certainty, the use and regulation of new technology, competition and choice and finally cross-border alignment. TheCityUK’s suggested approach to policy development includes considerations for policymakers, such as the importance that the UK act quickly and set a gold standard in cryptoassets and DLT regulation, as a world-leading risk-based regulatory framework, while specific features of the new technologies should not be overlooked whilst not removing the flexibility technology brings. Another key suggestion is to avoid regulating all the DLT usages but in parallel, the sector should continue its engagement through a risk-based approach. Finally, the transformative potential of CBDCs and stablecoins is an area where existing regulations should be adjusted and re-configured to allow the smooth distribution of new forms of money. Finding and applying the appropriate balance between innovation and regulation will always be a challenge but employing all of the above, could position the UK at the forefront from an innovation perspective worldwide.
The Bank of England (BoE) discussion paper also highlights the implications for macroeconomic stability through the increased use of new forms of digital money. These include public confidence, liquidity resilience in the banking sector, various credit conditions, how the money market is functioning and also the implementation and transmission of any monetary policy. The regulatory environment should be clearly established before any stablecoin issuance. The FPC (Financial Policy Committee) set an expectation that a stablecoin based payments chain should be regulated to standards equivalent to those of traditional payment chains. Another important expectation is the use of stable coins as money, in a way that meets the same standards provided by commercial bank money use (bank deposits). While the BoE awaits the outcome of HMT’s consultation on stablecoins, it has identified five core principles which are commonly agreed as part of CBDCs future exploration: financial inclusion, competitive CBDC ecosystem, assessment of non-CBDC payment innovations delivering the same benefits, protection of users’ privacy and no harm to a bank’s ability to meet monetary and financial stability.
Throughout, the Chartered Banker Institute will need to explore the new infrastructure and understand how to equip future bankers with the appropriate tools and knowledge to support a digital currency. In doing so, the Institute should stay focused on the potential ethical gaps and adjustments, which the new currency could bring to those working with it and provide the necessary guidelines and training to improve the ways of working for future bankers. A key focus would be to connect banking professionals worldwide to share the new concept and learn from the proof of concepts and trials.
At the same time, the Chartered Banker Institute will continue to play a very important role by providing and accrediting revised and enhanced training modules/courses, executive MBA programmes or Diplomas, training and certificates focusing on digital banking, customer experience, risk management, green finance and other key aspects of banking. I speak from personal experience, as a member of the Institute – I urge others to connect and join these debates, as it is through our personal commitment as responsible bankers, that we can contribute to creating a sustainable future banking environment.
CityUK (2021), Cryptoassets: Shaping UK regulation for innovation and global leadership, https://www.thecityuk.com/assets/2021/Reports/f25cf00836/Cryptoassets-Shaping-UK-regulation-for-innovation-and-global-leadership.pdf
BoE (2021), Bank of England Discussion Paper on New Forms of Digital Money and summarises responses to the 2020 Discussion Paper on Central Bank Digital Currency, https://www.bankofengland.co.uk/news/2021/june/new-forms-of-digital-money-discussion-paper-and-summary-of-responses-to-the-discussion-paper-on-cbdc