The proposed regulatory framework for crypto exchanges (Treasury consultation ending – 30 April, followed by FCA Consultation) will be based on the existing Regulated Activities Order (RAO) for fully regulated trading venues already authorised.
The trigger for needing this ‘new Crypto authorisation’ will be: Operating a crypto exchange.
1. Basis of regime – RAO with regard to specific nuances of crypto and risks [ Eg: Protect people from Cyber threats and risks – particularly with recent global increases in fraudulent scams draining peoples pensions, assets and bank accounts using various flavours of confidence tricks and sham unregistered crypto exchanges ]
2. Authorisation rules – firms will need to apply for authorisation. Focus likely to be on:
-Operations, business plans
-Governance arrangements
-Risk management
-Systems & Controls
3. Location:
-are firms incorporated in the UK?
-are UK based Persons, both individuals or firms ,receiving crypto services?
The consultation notes a 100% increase in UK based crypto investors in the last 2 years alone. Circa 2,000,000 UK resident Crypto asset investors.
4. Capital requirements:
-Liquidity for ongoing operations with a likely focus on adequate resources to wind-down in an orderly manner, that protects clients interests, assets and industry integrity. [FCA CASS handbook resonates here ]
5. Client protection and Governance:
-fair transparent fee
-conflicts of interest identification and management (Echos of FTX clear conflicts of interest here)
-Robust Governance arrangements
-Proper complaint handling process
-CASS
6. Operational Resilience:
-Adequate resources from people, processes and robust Systems & Controls. Specially strong enough to deal with crypto market volatility
-Outsourcing Oversight & BCP [ SYSC Handbook ]
7. Data Reporting:
-availability of BOTH on and off chain data
-sharing data to help prevent market abuse with clients & regulators
-likely a myriad of crypto transaction reporting data with, maybe, specialist blockchain surveillance providers
[ With Web3 – will regulators use technology to harvest blockchain data directly or prefer to place reliance on responsible centralised exchanges that are authorised & regulated with accountable Senior Managers? ]
8. Client Asset / Firm Resolution & Insolvency:
-Insolvency powers will apply to crypto exchanges, great for clients
[ FTX Japan that had to have such arrangements in place are likely to return asset to clients, unlike other FTX firms globally. Japan had strong CASS rules in place]
-Likley to be a specific Crypto Specialist Administration Regime to be created to cater for the differences between crypto assets and standard securities.
[ This is a major challenge for regulators who need to be able to clearly define commodities, like Bitcoin vs. securities, which at the moment appear to be ‘the rest’ of crypto in most jurisdictions]