The growing interest in crypto-assets is difficult to ignore or to consider as just a passing theme.
Much like any new financial product, the regulator has considered the need for regulation of crypto-assets. The unfolding disaster that is Mirror Trading International (MTI) has simply confirmed the urgent need for crypto regulation.
While no timeline exists and regulation is still theoretical at this stage, the regulatory sandbox created by the FSCA ensures that new products from start-up and fintech companies, are given the opportunity to be properly tested, and relevant regulation is considered, designed around how products are developing. The regulator needs to understand the new world and to make sure that appropriate market rules are put in place. Regulatory authorities are typically on the backfoot as they sometimes struggle to keep up with product innovation.
One outcome that could be applied to crypto-assets might be how hedge funds were regulated. The regulation clearly stipulates rules for qualified or retail investors, and for crypto-assets, they may do the same. Crypto-assets are likely to be designated as a financial product in terms of FAIS, which means those working with this product class will require a license extension to render services to members of the public. As it stands, asset managers and advisors cannot allocate funds to products that are not approved by the regulator, with a slight caveat for Category 2 licensed providers. The regulator perspective confirms it is best to avoid working with unregulated products altogether.
For those already involved in the crypto-asset marketplace, there will probably be a grandfathering process. This means you won’t be ultra vires for rendering these services prior to the rules being enacted, and you will likely have a set time period to comply with any new rules.
Many key players are involved through the Intergovernmental Fintech Working Group (IFWG), which I believe is an excellent initiative. Incidents such as MTI will act as an accelerant to finalising the next steps for regulation as it is a shining example of what can go wrong, and represents the harsh reality of crypto scams.
Had MTI been properly licensed, there would potentially be better recourse for those who have lost out. If a product is regulated and compliance officers, auditors and external valuations have signed off successfully, with reporting back to the regulator on record, it gives investors a higher level of comfort.
You would likely not take motor advice from a washing machine salesperson and thus it is very important to engage with regulatory and compliance advisors that have experience with crypto-assets and understand this new asset class.
I have no doubt that recent scandals coupled with exponential growth in crypto schemes have put regulation high on the agenda. The majority of crypto providers do no doubt wish to be regulated to give some legal and regulatory certainty to their trade, however some may enjoy the lack of oversight at this time, but I fear their days are numbered, as the regulatory authorities circle around crypto-assets.
Article by Richard Rattue, Managing Director of Compli-Serve