The UK’s financial regulator, the Financial Conduct Authority (FCA), has continuously faced criticism from UK lawmakers and members of the crypto industry for its stance on strict regulations and, therefore, its seemingly utopian desire to become a crypto hub in the next few years. For example, one major claim against the FCA involves the slow approval of licenses for crypto companies.
However, recent news shows that the UK is moving away from a gradual approach to sound regulation. This comes after the House of Commons passed amendments to the Financial Services and Markets Bill on October 25, 2022, which includes changes to bring cryptocurrencies into the scope of regulated financial services. This means that crypto companies would have to play by the government’s rules to protect consumers. It also makes them prone to fines or losing their licenses if they don’t comply.
The authorities should not deviate from the idea and vision of the UK becoming an international hub for crypto and digital assets. Considering all the criticisms the FCA faces and not denying their validity, I suggest we look at the situation from a different angle.
There is a need for sound regulation
Interest in digital assets is growing, attracting the attention of policymakers and regulators around the world. We have seen various regulatory developments, such as the Interim Agreement on the Market for Crypto-Asset (MiCA) in Europe and the Framework for International Engagement on Digital Assets in the US. This reflects the effort and desire to ensure regulatory clarity in the crypto market. However, consumer safety and protection are among the key issues and gaps in this market, leading to a dying need for sound regulation.
Through regulations, it is easier and more effective to put consumer protection at the center. One of the disadvantages of the crypto market is the presence of scams and Ponzi schemes due to which investors lose billions of money annually. Market manipulation is another challenge. Regulation will help address abusive trading practices/conduct and prioritize consumer protection from fraud and manipulation. As a result, it removes bad actors and strengthens the confidence of investors to enter the market.
More importantly, regulatory frameworks are key to setting standards for cybersecurity and user data protection in the crypto space. Regulators could implement measures or provide guidance to help genuine investors protect their assets from growing cyber threats, fraudulent activities and hacking.
Consequently, sufficient regulations increase the security of users, potentially influencing mass/mainstream adoption of crypto assets. It’s a win-win situation for investors and crypto companies.
On the other hand, some countries have low barriers to entry. For example, there are no strict regulations or “filters” for crypto companies in Dubai, making it difficult for users to filter out crypto companies. There are some reports showing that at least 30-50 leading crypto entrepreneurs have moved their operations to Dubai and other crypto-friendly jurisdictions. Unfortunately, crypto fraudsters and scammers like to operate in unregulated environments with minimal oversight of such activities and asset classes.
Unlike Dubai, the UK has a viable financial system with a long history. That is why regulators look at crypto and related processes through the prism of traditional finance. The UK has been a strong global financial center for decades and has played a key role in shaping financial regulation since the crisis. More importantly, they know all the risks that rush entails. So it is good that the UK is moving gradually and carefully in its bid to become a hub of innovation.
Fraud outpaces innovation
Scam revenues in 2022 are on a downward trend associated with falling digital asset prices, making crypto investment opportunities less attractive. However, despite the expected steepest decline, scams flourished in various forms, from investment and identity theft and fake crypto exchanges/wallets to SIM-Swap scams.
Research by Group-IB revealed that the number of fake domains associated with crypto gift scams increased 5-fold (335%) in the first half of 2022 compared to all of 2021. In addition, Certik’s Q3 report points out that approx. 58% of all Web 3.0 platform scams in the third quarter of 2022 were exit scams/carpet pulling scams and ripped investors off more than $56 million. Recently, data from the United Kingdom’s police unit, Action Fraud, shows that crypto fraud has increased by 32% to around $273 million within a year.
Although there is the possibility of “killing innovation”, the problem of crypto fraud is huge: there are more fraudulent projects than “great ideas”. Senior financial crime lawyer Jo Torode says cryptocurrencies need regulations that don’t stifle innovation. He further pointed out that appropriate regulations would offer legal and regulatory protection to individual investors and buyers in a high location.
This means that protecting users should be our priority, especially in terms of finances and the possibility of losing everything at stake before it’s too late. For example, when targeted ads appeared, regulations were not imposed because governments did not understand the value and scope of regulations. Now countries impose regulations post factum. As a result, user security is already compromised and privacy concerns among consumers are growing.
So what’s different about crypto? Is it worth imposing post factum regulations when the damage has already been done? Feasible, acting ahead of the curve and thinking more about the people involved and their security is a more practical approach instead of chasing the “craziness” of becoming a crypto hub. That being said, perhaps the FCA is right to be cautious at first, rather than correcting mistakes that can be avoided in the future.
Now that Rishi Sunak, a crypto enthusiast, has been appointed as the Prime Minister, it will be an exciting time to see what impact this will have on crypto politics in the country.
Despite the FCA’s conservative approach to regulation, it may be right at the same time. Being more lenient would easily give fraud more room, and the value is huge. Instead, user protection should be our priority.
More importantly, it is better to be cautious in the initial stages than to work on mistakes later; it’s a good foundation for the future if we want a long-term relationship with cryptocurrencies.
Despite this, FCA and UK officials should stop making loud statements, but they have already admitted that they are in the learning and recruitment phase. True, there is still a lot of work to do to make the dream of a UK crypto hub a reality.