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The UK financial watchdog plans to exempt cryptocurrency groups from some of its rules, even as it fully integrates the fast-growing sector into its regulatory framework from next year.
David Geale, the Financial Conduct Authority’s executive director for payments and digital finance, told the Financial Times that a simple “lift and drop” of traditional finance rules would not be effective for the crypto sector.
The regulator’s proposals, detailed in a consultation paper due for release on Wednesday, aim to adapt its existing rules to the unique nature and specific risks of cryptoassets, such as Bitcoin.
“We start from the principle that if it is the same risk you go for the same regulatory outcome,” Geale said in an interview, stressing that any changes would not lead to an overall lowering of standards.
“But then you have to recognise that some of these things are very different,” he said, adding that because the underlying technology and characteristics of cryptoassets differ from traditional finance, they require different rules.
For the past five years, UK-based cryptocurrency groups have been required to register with the FCA to ensure compliance with anti-money laundering, counterterrorism finance and know-your-customer regulations.
Last year, the government announced plans to introduce a full regulatory framework for the UK crypto market. Since then the US has adopted a much more crypto-friendly approach under President Donald Trump, putting pressure on the UK to follow suit.
Geale dismissed fears that by fully regulating crypto companies the FCA would create “a halo effect” that would give consumers a false sense of security, pointing out there is already access to several other forms of high-risk investments.
“It is a challenge, but it is a challenge that we have faced before,” he said. “We need to always be very clear that this is high risk — so people should go in with their eyes open that they could lose all their money.”
The watchdog plans to grant exemptions from certain sections of its official handbook, which outlines rules for UK-regulated financial services. However, in other areas, the FCA will tighten regulations to address specific industry risks, such as cyber attacks.
Several of the FCA’s core principles will not apply to crypto trading platforms. These include stipulations that a group “must conduct its business with integrity”, with “due skill, care and diligence” and “pay due regard to the interest of its customers and treat them fairly”.
Crypto groups will be given less stringent requirements than banks or investment firms concerning rules for their senior managers, systems and controls. The FCA justifies this by stating “cryptoasset firms do not typically pose the same level of systemic risk”.
Due to the inherent volatility of crypto asset prices, firms offering them will not be required to provide customers with a cooling-off period or cancellation rights after purchase.
The FCA also noted the “challenges” of adapting some rules to the “permissionless” distributed ledger technology used by many cryptocurrencies, which means transactions are often agreed directly between parties without any intermediary.
This meant the technology would not be treated as an outsourcing arrangement necessitating extra risk management by firms, the regulator said. It added that it meant the sector would be exempt from its product oversight and governance rules.
However, in some areas the FCA plans to adopt tougher rules for the crypto market, such as those covering operational risks, including IT outages or cyber attacks.
It said the $1.5bn crypto heist from wallet provider Bybit this year underlined the need for “strong operational resilience controls across all crypto firms”.
“If you think about the reliance on tech and the systems that sit behind this business, they are much more exposed to hacking,” said Geale. “If you set yourself up as a 24/7 business and you can’t do that then there is going to be a problem.”
The regulator aims to balance protecting consumers from the heightened risks of crypto markets with supporting the development of the new market in the UK. “This is also a growth opportunity,” said Geale.
Some areas of crypto regulation remain undecided. The FCA has asked for feedback on whether the sector should be covered by its consumer duty rules, which require firms to ensure customers get a fair deal, and if crypto customers should be able to complain to the Financial Ombudsman Service about poor treatment.
