The UK Financial Conduct Authority (FCA) is consulting on the proposed application of existing FCA Handbook rules to firms conducting regulated crypto asset activities in a bid to develop a competitive and sustainable sector.
Existing rules include those related to High Level Standards such as the Senior Management Arrangements, Systems and Controls (SYSC) Sourcebook (including governance, Senior Managers and Certification Regime, financial crime and operational resilience), and Business Standards (specifically the Environmental, Social and Governance Sourcebook).
Lending and borrowing
The largest and most popular firms currently operating in the UK market typically provide vertically integrated services to retail consumers, generating revenue and profits from fees. Many firms offer crypto asset trading services to consumers (typically through a mobile app), while also offering custody services for any purchased crypto assets. Firms may offer ancillary services such as staking or lending products to their customers. Many firms also offer products and services to wholesale clients.
During the period 2020-2022 crypto asset markets underwent a strong increase in demand for lending products. However, many firms providing these activities did not clearly communicate the risk associated with these products. This may have resulted in some consumers being unaware of the level of risk they were taking on when purchasing these crypto asset and associated products, ultimately resulting in harm when several of these firms (Celsius, BlockFi) failed.
“We are considering requiring firms holding qualifying crypto assets or client money to issue periodic statements with key information, such as up-to-date valuations. This would also apply to firms offering staking, lending, or borrowing. Statements must be provided at least annually in a durable medium, unless clients have online access and have viewed a current statement within the past quarter,” the FCA wrote in the consultation.
Crypto roadmap
The FCA is also seeking views on its approach to the Consumer Duty, Business Standards such as the Conduct of Business Sourcebook, Product Intervention and Product Governance Sourcebook, Redress (Dispute Resolution: Complaints) and application of the Financial Ombudsman Service under the new crypto asset regime.
“Currently, our crypto asset rules cover financial promotions and preventing financial crime. As part of our Crypto Roadmap, our regulatory remit will expand to a more comprehensive crypto assets regime to be set out in HM Treasury’s forthcoming legislation,” the FCA wrote in a statement. “Under our proposals, consumers will be better protected from poor operational business practices, helping to build trust in the sector. Firms will need to be operationally resilient and requirements on firms to have systems and controls to fight crime will be strengthened.”