UK watchdog suggests self-regulatory organization could better handle crypto firms

Participants of two CryptoSprint events organized by the UK’s main financial watchdog underscored the importance of private key security and hinted that a self-regulatory organization could be better at overseeing pseudonymous creators.

The UK’s Financial Conduct Authority (FCA) presented the conclusions from its CryptoSprint events held in May and June following the announcement that the UK aspired to become a crypto hub. The sessions brought together over 180 crypto industry experts, academics, and policymakers, who discussed who crypto regulation should apply to and how to handle crypto custody, among other issues.

“People are really energized by this,” said Sarah Pritchard, executive director of the markets department at the FCA, adding that CryptoSprint debates were aimed at ensuring that “innovation is balanced with high standards.”

No reinventing the wheel

Participants suggested that to accommodate the pace at which crypto develops, a principles-based approach could prove useful. They also argued for a “clear digital taxonomy,” ideally created at the international level, which could be updated regularly.

“Existing rules and tools should be used where possible,” participants concluded, emphasizing that it was important to avoid “reinventing the wheel.” The idea that crypto markets could be partially governed by a dedicated self-regulatory organization (SRO), whose scope could include pseudonymous creators and those outside the UK’s jurisdictional reach, also gained traction.

CryptoSprint attendees agreed that crypto projects developed in the UK should follow certain standards regarding a “disclosure regime” so market participants can “assess risks and benefits.” This could include a white paper, detailed objective documentation, and periodic materials including “risk warnings or volatility metrics.”

What is custody, anyway?

“When determining where regulations should be placed, participants thought that an understanding of the level of decentralization in a crypto asset proposition is important,” the FCA concluded, noting that attendees underscored the scarcity of fully decentralized projects and described the opposition between centralized and decentralized organization as a “spectrum.”

Ideas pertaining to regulation included giving DAOs a legal status as well as “focusing regulatory responsibility for mitigating risks on centralized on and off ramps like exchanges.” It also became clear that the global nature of crypto markets can make it difficult to create regulations at a country level.

Custody turned out to be a particularly difficult topic due to the lack of clarity around the term. CryptoSprint participants stressed that custodians should apply “robust operational and governance controls” to protect their users’ private keys. The issue of protecting UK crypto customers from harm incurred by non-UK crypto entities was also brought up.

Sprint, perhaps, but no rush

Many of the challenges CryptoSprint events addressed remain unclear and require further consideration, making it unlikely that a sweeping legislation proposal like that prepared by Senators Lummis and Gillibrand in the US will emerge in the UK anytime soon.

The FCA appeared to admit this itself, noting that the May and June CryptoSprints offered “valuable information to inform our ongoing policy thinking.”

Workstreams on specific issues, including environmental social and governance (ESG), redress, market conduct, operational resilience, and insolvency, have been set up to continue work on future regulation. While it’s unclear who would be part of those workstreams, the FCA claimed it was committed to “engaging with industry experts.”

Meanwhile, Tether is getting ready to start issuing a new GBP-backed stablecoin. When would holders be able to use it to pay for afternoon tea? That’s anyone’s guess.