Laith Khalaf, head of investment analysis at AJ Bell, comments on the Treasury’s latest proposals for crypto regulation:
“The government is pressing ahead with plans to regulate crypto in line with existing financial services, resisting a call from the Treasury Select Committee to treat crypto activities as gambling. Disturbances in the cryptoverse like the FTX scandal have heightened the global regulatory focus on crypto and the risks it might pose to consumers and financial stability, if left to its own devices. Rather than let the crypto wild west develop unchecked, the UK government is appointing the FCA as sheriff of this here town.
“The decision to regulate crypto using the existing rules designed for mainstream financial services looks a sensible one. The apparatus and resources for supervision are already there and working in tandem with regulators worldwide. It’s also clear that some of the key crypto activities that need regulation mirror existing services provided by mainstream financial services, and so sit better under the scope of the FCA than within gambling regulation. Whether it’s offering a crypto exchange, dealing in crypto, or issuing a cryptoasset to the public, the FCA can draw on its rules and experience of supervising these activities in traditional markets.
“There is some concern that regulating crypto in this way will legitimise it, creating a so-called ‘halo effect’. However the horse has well and truly bolted on this front, as crypto is already a mass market product. According to FCA and HMRC figures, around five million people in the UK have purchased cryptoassets, only just shy of the six million people who hold a stocks and shares ISA, a mainstream account that has been available from trusted financial providers for almost a quarter of a century. The idea that crypto investors might be influenced by a discreet regulatory stamp rather than rampant price appreciation, widespread advertising, and social media chatter, is something only the most cloistered policy wonk might cling to.
“It’s true that crypto regulation might bring more traditional financial services players into providing crypto services. Established ground rules will give them greater confidence they can navigate the market with a lower risk of regulatory opprobrium and reputational damage. This will not be unpleasant music to Treasury ears, as the government is looking to balance consumer protection with encouraging innovation. Indeed Andrew Griffith’s response to today’s Treasury publication begins ‘The government’s ambition to make the UK a global hub for cryptoasset technologies remains steadfast’.
“It remains to be seen whether the new regulatory boundaries will result in the FCA reversing its ban on crypto ETFs, seeing as one of the key justifications for that action was that cryptoassets have no inherent value. While it’s still true that the future adoption of crypto by consumers, businesses and investors is highly uncertain, the regulator might have to moderate its view on crypto’s intrinsic worth now it’s moving more firmly into its regulatory ambit.
“The new regime should at least mean that crypto products and services come with more robust health warnings attached. Crypto hit the buffers after the pandemic bubble burst, but Bitcoin has been enjoying a price resurgence this year. We shouldn’t rule out another frenzy at some point in the future, driven as frenzies are by nothing more than a perilous herd mentality. The Bank of International Settlements estimates that around three quarters of Bitcoin buyers between 2015-2022 were likely to have lost money, almost certainly because they got sucked in at precisely the wrong time. But as the father of value investing, Benjamin Graham, told us: outright speculation is neither illegal, immoral, nor (for most people) fattening to the pocketbook. The new regulation of crypto will make it safer, but extreme volatility in the asset can still be expected. For consumers, the key message remains caveat emptor.”
