There is safety in numbers: cryptoassets in a regulated market

According to a recent article in the mainstream media, the UK government indicated that they want to become a ‘global hub’ for the cryptoasset industry.

Gabriel Cozma, Head of Lysis Financial at Lysis Group, shared his views regarding this matter. Looking ahead Gabriel indicated that the reason why the UK might want to become a centre point for cryptoasset firms is because historically, the UK has been viewed as a leading global financial hub. They are seen alongside other major global players as setting the trend when it comes to innovation in the financial sector.

The UK has also been associated with establishing standards for financial services regarding regulations and therefore viewed as a leading regulator alongside other prominent economies. This is important because other regulators tend to follow in the footsteps of leading regulators. Hence, the UK leads and encourages innovation and when it comes to cryptoassets specifically, there are many different views and some hesitations regarding this asset class because it is something new and entirely different compared to the traditional and could have a significant impact on the entire financial industry. This is because a cryptoasset can be defined as any digital asset that uses cryptographic technologies to maintain its operation as a currency or decentralised application. As with other types of technologies, this new type of technology is therefore bound to evolve and has enormous potential to be adopted by the traditional global financial services industry. Interestingly though, this link already exists through payments, but additional links develop over time, not only for the investment world but also for the banking sector, in general.

The regulatory approach The media article indicated that the UK business sector does not always view the Financial Conduct Authority (FCA), and other regulatory bodies, in a positive light. Gabriel indicated that one possible reason for this could be the fact that if cryptoasset firms want to operate in a regulated market, they are bound by rules and regulations which they might perceive as restrictive. They might also be of the opinion that the regulators could overestimate the risk linked to cryptoassets. However, regulations serve as the backbone of strong financial systems and the main objectives of regulators are to protect the consumers, the firms, shareholders, and the market itself but this type of protection, in a regulated system, can only be effective, if everyone is part of the system and adhere to the rules.

Another important aspect that was highlighted in the article involved the UK Treasury’s proposals to adjust existing laws to also govern electronic money such as funds stored on mobile phone apps, and stablecoins. This will position them under the purview of the FCA. Gabriel commented by saying that this proposal is currently under review and that other entities such as the EU is also exploring the use of stablecoins. He added that stablecoins are slightly different because it was designed to have a stable price and is linked to an asset such as an existing currency for example the pound or dollar. Stablecoins are also more closely linked to actual currency and could have the same stability. He further added that this raises the question of “Why would someone use stablecoins when the currency it is linked to, already exists?”. However, if stablecoins prove to be a better and a more effective way of facilitating trade, then it is definitely something worth exploring, especially if it is embraces by the greater banking sector.

Also, if the technology proves to be safe and stable enough to convince the market that it could actually improve the way that the payment system works, then it could be a viable option. He did caution by saying that currently, there is not enough information available to make an informed decision and to predict what might happen with cryptoassets, going forward. According to him, the FCA is fast-tracking information to keep up with the changing environment of cryptoassets and should be well versed in understanding the full extend of the risks linked to stablecoins after which the majority of global central banks could follow suit in the interest of managing risk.

Though, Gabriel pointed out that since technology is evolving very quickly, business models are also changing rapidly which could pose a serious challenge for regulators to keep up with constant changes in the cryptoasset environment. Establishing a global regulatory body Gabriel stated that with the UK’s interest of becoming a ‘global hub’ for cryptoasset firms it could definitely serve as a catalyst for the establishment of a global regulatory body. Cryptoassets, in general, have a relatively high mobility of moving and storing increased volumes of assets for example certain firms are already enabling the instant transfer of cryptoassets through mobile phone applications as payments. This could result in a serious problem because although there are many positive aspects linked to the mobility of higher cryptoasset volumes, there are just as many negative aspects. This is simply due to the fact that the same technology could be applied in unregulated markets which is very likely to create a spike in money laundering activities and other unlawful acts.

Although the cryptoasset transaction chain is relatively transparent, it is only transparent up to a point because the individual who holds the key, or owns the asset, might not be known and this can be problematic. This is where global standards and controls could make a significant difference to ensure that cryptoasset firms operate in a regulated environment where the consumer is protected because the controls are effective and aligned. Choosing the right partner In closing remarks, Gabriel stated that nothing can beat experience and since the Lysis Group has assisted many cryptoasset firms to obtain FCA registration, they are uniquely qualified and understand the exact requirements needed to prepare for a registration application. They also have the capacity and integrated approach to assist cryptoasset firms to not only obtain registration from the FCA, but to also establish the Financial Crime Framework needed to remain compliant during their operations.

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