Much has been written on the topic of crypto-asset regulation from an issuer / intermediary perspective - is the crypto asset a specified (i.e. regulated) investment? Does the token constitute a “transferable security” meaning it falls within the prospectus regime? Do the marketing materials constitute financial promotion?
The FCA has issued various consumer warnings and statements on the regulatory position of ICOs. There is also an ongoing review of cryptocurrencies by the Treasury, Bank of England and FCA Taskforce, which forms an integral part of the FCA’s 2018/19 Business Plan.
But what about the regulatory issues for firms authorised by the PRA / FCA who currently invest in crypto-assets, or are planning to do so in the future? On 28 June 2018, the PRA issued a welcome reminder of its expectations and the regulatory responsibilities that should be at the forefront of investors’ minds in the form of this “Dear CEO” letter.
The UK’s financial regulators have been vocal about their concerns around the high price volatility and illiquidity of crypto-assets; the potential for misconduct (in particular, the risk of fraud, money laundering and terrorist financing); and associated reputational risks.
These risks are relevant to the regulators’ statutory objectives and also feed into the to FCA’s Principles for Business and the PRA’s Fundamental Rules, which require authorised firms to:
The PRA’s letter is an important reminder that these principles and rules are particularly pertinent to firms that are authorised by the FCA / PRA (as applicable) and have invested (or intend to invest) in crypto-assets.
From a risk strategies and risk management perspective, the PRA expects:
In the letter, the PRA states that (where relevant) firms should set out their consideration of risks relating to crypto-exposures in their Internal Capital Adequacy Assessment Process or Own Risk and Solvency Assessment. This should include:
The letter also confirms that, depending on the precise features of the asset, crypto-assets should not be considered as currency for prudential purposes. This means that firms will not be able to rely on these assets as capital for the purposes of demonstrating financial soundness and solvency.
The message from the PRA is essentially ‘watch this space’. Discussions regarding the prudential treatment of crypto-assets continue amongst regulators at both a national and international level.
On 16 July 2018, the Financial Stability Board (FSB) published a report describing international work that has been carried out on crypto-assets. It is interesting to note that the Basel Committee on Banking Supervision (BCBS) is conducting a stocktake of how its members currently treat their exposures to crypto-assets as part of their domestic prudential rules. Based on the results of this review, the BCBS will consider whether to formally clarify the prudential treatment of crypto-assets across the set of risk categories (including credit risk, counterparty credit risk, market risk and liquidity risk, etc).