How the bookworm has turned

Have you ever noticed how something once alternative or niche suddenly becomes mainstream?

Growing up in the 80s and 90s, it was never normal or popular to be a bookworm. But I devoured books and lurked in my local library. Today, every old public phone box in a once-dingy-but-now-hip urban centre is a micro library. Tickets for the Hay Festival are as elusive as those for Glastonbury.

And years before the Chelsea Flower Show became an event on a par with Hay and Glastonbury, I was an avid gardener. My husband and I were allotment evangelists long before the waiting lists for them were a thing. A poll of 18-34 year olds showed that more than 80% think gardening is now ‘cool’. And some 54% would rather go to a garden centre than a night club. Gardening is on track to becoming a very mainstream hobby even for younger generations.

You could say I have embraced my inner alternative geek throughout my life and throughout my career, which has focused on fighting financial crime and has culminated in my role at the FCA.

Unlike a start-up or certain tech giants, the FCA may not be at first glance an obviously ‘cool’ workplace for the popular crowd to choose. We do not have any bean bags, puppy yoga sessions or an indoor foodtruck serving jackfruit tacos.

Yet this year at the FCA, we had just under 10,000 applications for our graduate traineeship scheme! Maybe we are not that alternative after all.

The turning tide

So what is popular or mainstream today? SUVs on the school run, so popular a decade ago, have been replaced by EVs - I must admit I was an early adopter - or cargo bikes as these are more socially acceptable. How about crypto? Well, several years ago, crypto was very much on the alternative spectrum and very niche. It was part of anti-establishment rebellion, a way to circumvent the systems that some thought imposed needless restrictions.

But nearly a decade and a half since its creation, crypto - that one-time symbol of alternative rebellion - has become more widespread. And yet so few consumers know what it is, how it works and what they are getting into.

As this once alternative investment becomes more popular, we need an open debate about risk, mitigation and the limits of regulation.

I was in the US meeting our regulatory peers in Washington and New York at the time of FTX’s collapse and it was instructive to see them work effectively and at pace to try to stop the fallout spreading.

While we have been relentless about warning that consumers need to be prepared to lose all their money if buying cryptoassets - and actually issued a warning a week before FTX collapsed about its unauthorised operation in the UK - we have always been open to innovation.

Cryptoassets and blockchain offers opportunities for more efficient and innovative financial services and products. For example, they can make international cross-border payments faster and cheaper, which could support international trade or help our global workforce more easily send money to friends and family overseas. These are worth exploring.

Increasing take up

Despite the recent crypto winter, where massive losses were sustained, the take up of crypto is on the rise year-on-year. That means more consumers need protecting from the potential harms. And with more consumers and investors piling in, the risks also grow exponentially in our interconnected systems. That is why things have to change. As crypto matures as an industry, so must the firms that offer it and the rules that underpin it.

According to the Fidelity Institutional Investor Digital Asset Study in 2022, 42% of US institutional investors and 67% of European institutional investors held crypto.

Individual consumers have also piled in, with 1 in 10 of the adult population having owned crypto at some point, according to a government study. Just over half - 53% - of those who have bought crypto have 1,000 pounds or less and 7% hold more than 5,000 pounds in crypto.

The UK is one of only two highly developed countries that rank in the top 20 of countries for adopting crypto.

Crypto risks and scams

That growth in popularity has attracted a growth in opportunists as well as opportunities.

Cryptocurrency based crime hit an all-time high last year, according to Chainanalysis.

Illicit addresses received 20.6 billion dollars over the course of 2022, up from 18 billion dollars in 2020.

When analysts looked at illicit addresses sending crypto, nearly 24 billion dollars was sent in 2022, a 68% rise from the previous year.

The number of reports to the FCA of cryptoasset scams have progressively increased over the years. In 2019 there were 1,619 reports compared to 6,372 in 2021.

We at the FCA have a substantial role to play in preventing harm to consumers from financial crime.

None of the cryptoasset firms registered with us have been approved to offer crypto ATM services. Last year we warned operators of crypto ATMs in the UK to shut their machines down or face enforcement action.

When they failed to do so, we conducted joint raids with the West Yorkshire Police and soon after the Met Police. We will continue to take robust action wherever we see breaches, scams and fraud.

Crypto has a high risk of exploitation by serious organised criminals and is used in ransomware attacks. There are bad user cases as well as good. It’s important that this level of risk is understood and that future regulatory regimes strike an appropriate balance.

Getting over the line

At the FCA, our current remit over crypto is limited to making sure that crypto firms that operate here comply with anti-money laundering and counter-terrorism legislation. Only when the government legislates will we have more powers to regulate crypto.

The UK’s Money Laundering Regulations require UK-based cryptoasset exchanges and custodians to apply for registration with us – but this does not bite on overseas firms who may target UK based consumers. Of the applications we have determined, nearly three quarters - 195 - were either refused or withdrew their application.

Yet we’ve supported firms to meet the right standards, and have registered 41 crypto firms of all sizes, showing these standards are achievable.

For those in the audience who wonder what they have to do to get registered, please have a look at our website, where we set out key requirements for the process, and some feedback on good and poor practices. They are not complicated.

Financial promotions

Moving from the alternative spectrum into becoming widespread will attract change. And one of the areas where we will see the most tangible change will be in the regulation of financial promotions.

This will come into our remit once the government legislates and firms will have 4 months to implement the changes. The rules will be published after the legislation is put forward.

Firms should start preparing for this now: we expect crypto promotions to be treated on a par with other high-risk investments and failure to comply will be a criminal offence. Like other high risk investments, consumers will be given a cooling off period to decide whether they want to invest their money.

These regulations will apply to all firms marketing cryptoassets to UK consumers, regardless of whether the firm – or perhaps even celebrity influencer - is based overseas or what technology is used to make the promotion.

We are working with international counterparts to spread the word and help enforce compliance as we recognise many adverts may stem from abroad.

We will take robust action where we see firms promoting cryptoassets to UK consumers in breach of these rules. Sanctions will range from taking down websites, to issuing public warnings, to enforcement action.

We know that advertising is powerful. And never has it been so important to test the validity of those claims as during a cost of living crisis, when consumers may be increasingly desperate to make money quickly and take excessive risk, sometimes falling prey to scams. Through our ScamSmartand InvestSmart campaigns, we have warned consumers of the risks and have an online portal where they can report scams and check our warnings list.

We have had some success with getting Google and Bing to stop promotions of firms on their platforms that are not authorised by us. we hope others tech giants follow. We will continue this focus and hope other tech giants will follow.

Crypto consultation

Beyond financial promotions, we have also been working closely with the Government on its proposals to regulate stablecoins that can be used for payments and on their consultation on the regulation of the wider cryptoassets regime.

You have just a few days - until 9am on 30 April in fact - to have your say on the proposals for regulating the cryptosphere so please look on the gov.uk website as input from industry is essential if we are to all make a success of these opportunities.

We are also part of a Cryptoasset Taskforce which brings together the Treasury, the Bank of England and the FCA, to assess the potential impact of cryptoassets and distributed ledger technology and what the policy response should be.

Our growth in this area relies on high standards. That is why the consultation will look at the issuance, trading and lending of cryptoassets, amongst other things.

But even with safeguards such as ring-fenced funds in place, the cryptoasset sphere will still not offer the same level of market integrity and protection for consumers as traditional markets.

We must be clear that consumers are highly unlikely to be covered by the Financial Services Compensation Scheme and the Financial Ombudsman Service if they buy crypto and it goes wrong.

Global alliance

Because of the way crypto transcends national borders, it makes sense for us to look at ways we can boost market integrity of the asset class with our peers across the globe.

The Government’s consultation proposes giving us powers over those conducting activities related to crypto that do not have origins or a base in the UK, but do provide services to UK consumers.

This is unchartered territory and an area we will all explore together with interest.

In the future, the Treasury may also decide to introduce equivalence regimes. That will be where firms authorised abroad can provide services in the UK without needing a UK presence. For this to work, equivalent standards must be present in that country as well as suitable and effective cooperation mechanism.

Many jurisdictions around the world are still in the infancy of developing their approach to regulating cryptoassets and cryptoasset services.

However, one great example of global collaboration is the crypto and digital asset working group within the IOSCO Fintech Task Force, which was set up just over a year ago. The FCA is leading on one of its key workstreams, on crypto and digital assets, while the US Securities and Exchange Commission is leading on a second, on DeFi products and services.

We will publish consultation reports on both later this year.

The FCA - and in particular Matthew Long, our Director of Payments and Digital Assets - is leading this international regulators’ group of 130 members, which is focussing on developing regulatory standards on market integrity and investor protection for crypto across the globe.

This is on top of our work with other regulators and global standard settings bodies such as the Financial Stability Board on cryptoassets - these close working relationships include the Commodity Futures Trading Commission, whose commissioner and crypto expert Christy Goldsmith Romero will speak next. I urge you to listen to her sage words on these matters.

The efforts of these international standard setting bodies and regulators is a helpful progressive step in international co-ordination on regulating cryptoassets and mitigating harms.

One other area that we are committed to throughout our organisation and work is environmental, social and governance considerations. We have set up workstreams to further understand what future crypto standards and requirements may mean when under the ESG lens.

We will reflect on how best to factor ESG considerations in the design of the future cryptoasset regulatory regime.

We need industry input

We want industry’s input to make sure we get the future regulatory regime for cryptoassets right. We hope to build on the success of last year’s innovative Crypto Policy Sprints, with roundtable discussions intended to continue this dialogue. Effective early engagement supports regulations that benefit all and helps firms be prepared when regulations come into force.

I should also plug our current Discussion Paper on updating asset management regulation in the UK which examines the potential regulatory changes for the tokenisation of funds, and the inclusion of tokenised assets or cryptoassets in fund portfolios.

And of course there is our joint sandbox with the Bank of England on DLT and our own on innovation that have helped industry test developments.

Open debate over risk

Today I have outlined some of the regulatory changes coming down the line, on top of our financial promotion work and registration regime.

I have also set out the rise in uptake by both retail and institutional investors and sadly the associated rise in scams and risks.

And I have highlighted how through our joint sandboxes, sprints and consultations we are working with governments and industry, here and abroad, to seize the advantages of cryptoassets and their underlying technology to benefit consumers, markets and firms.

There are plenty of advantages in terms of efficiencies and innovation, which we want to support.

We cannot develop the regulatory regime alone – we need input from industry. But we also need input from policymakers – here and abroad - and consumers.

We need a conversation about the risks of crypto and the appetite for not just wins, but losses. Do consumers appreciate the risks of the firms they are dealing with, the investments they are making? Do they - or policymakers or institutional investors - have appetite for that risk, even if it entails losing it all? Regulation may be able to mitigate some of the harm, but it will not be able to stop all risk - in particular risk of financial loss.

Let’s work together, to shape our rules and regulations to benefit markets, consumers and firms as crypto goes from niche to mainstream. Let us do it with our minds open to the potential gains and our eyes open to the risks.