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The Treasury Committee launched its Digital Currencies inquiry on 22 February 2018. Over six months, the Committee received 53 written submissions and hosted three oral evidence sessions. The report may be found here. I think it is a readable document. In addition to lambasting the FCA for feeble efforts in the space to date, and then implying the FCA may have exceeded its jurisdiction, the report provides a clear explanation of how the Committee understands the crypto-world. (The report prefers the moniker "crypto-assets" to "cryptocurrencies".)

For my preference, the report leans too heavily on the views of one or two witnesses who are bordering on aggressive toward crypto, and focusses too much on Bitcoin rather than seeing cryptocurrencies and blockchain technology as a constantly evolving ecosystem.

But even so, the conclusions and recommendations are broadly reasonable and may be found here. The key points are:

  • Crypto-assets are risky and a target for criminal activity;
  • Crypto-assets currently fall outside of the FCA's regulatory perimeter in the UK. ICOs, and crypto-assets, exploit a regulatory loophole. This situation is unsustainable; and
  • Crypto-assets and ICOs should be brought within the FCA’s perimeter as a matter of urgency.

In calling for regulatory certainty, the Committee dangles the carrot of Britain becoming a leading global presence in the crypto-asset space if we get our approach to the sector right. But, what form will UK regulation of crypto-assets take? And when can we expect it to be introduced?

The report calls for activities involving crypto-assets to become "regulated activities" and thus inside the FCA's regulatory perimeter. In practical terms, however, the report has no binding effect. It is a suggestion; a meaningful one from a respectable source but merely advisory at this stage. In order to change the relevant rules, the Treasury needs to make a proposal which will be open to consultation. After the closure of the consultation, the final rule change will be published, and an implementation date set.

However, in order to reach the proposal stage, the Treasury will need to have a view on exactly what changes they want to make. It is not as simple as saying "crypto-assets and ICOs are regulated". The relevant terms need to be defined and the range of activities to be regulated will need to be scoped out. This is all virgin territory, so likely to involve much discussion and negotiation; with stakeholders, legislators and regulators.

Add to that, that any change is going to mean an expansion to the role and remit of the FCA, and there will need to be discussions to ensure that the FCA is clear what they are being asked to do, that they have the capacity to handle it, that they have the technical expertise to understand the sector, and that they have considered (and addressed) the consequences of any changes (for example, they'll likely need to update their forms, handbooks and regulatory guides at a minimum). And, of course, the FCA needs to have the funding to do all this.

A recent change to the Regulated Activities Order (which is the change suggested in the report), was first consulted on by the Treasury in September 2016, and came in to force in January 2018. And that was far more straightforward than the changes we are looking at now.

So, on the one hand, with political will and civil service bandwidth, it could be that crypto-assets and ICOs become regulated in the UK in the next few (say, six) months. On the other hand, this is a complex change, with lots of moving parts and international ramifications. It is being proposed against a backdrop of Brexit, a government with a small majority and myriad other issues looming large.

Accordingly, I cannot see these proposals being fast tracked and hitting the industry in the short-term. If I have to guess a timeframe, I expect the earliest that any change could be made would be 18 months but 24-36 months feels more probable at this stage.

This was first published on the 21 September 2018 by RPC.

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