The biggest factor that is said to be holding advisers back from venturing into cryptocurrencies is regulation.
Often described as the wild west of investments, cryptocurrencies are not seen as a viable investment channel by many advisers - an attitude that has been strengthened by the FCA’s own attitude towards the sector.
In its recently published guide to cryptoassets the FCA said consumers should be cautious when investing in such cryptoassets and should ensure they understand and can bear the risks involved with assets that have no intrinsic value.
In the report the regulator also clarified its regulatory stance on cryptoassets:
- Cryptocurrencies such as Bitcoin and Ethereum, which are defined as ‘exchange tokens’ by the FCA, are not regulated by the FCA but must follow anti-money-laundering regulations.
- Security tokens have specific characteristics, which means they provide rights and obligations akin to specified investments, like a share or a debt instrument will be regulated by the FCA.
- Utility tokens will fall outside of the FCA’s scope, although they might be regulated where they might meet the definition of e-money in some circumstances (as could other tokens).
The Final Guidance will inform further work being carried out in this area, including:
- A Consultation on potentially banning the sale of derivatives linked to certain types of unregulated cryptoassets to retail clients.
- Treasury’s consultation on whether further regulation is required in the cryptoasset market, particularly in relation to unregulated cryptoassets.
- Treasury and FCA work on the transposition of the 5th EU Money Laundering Directive.
When it comes to what the advisory sector thinks about cryptocurrencies and regulation, it should come as no surprise that they feel it is necessary.
Image source: Coindesk
A study by Etoro has found that over three quarters (76 per cent) of advisers support the regulation of cryptoassets.
Those in favour of regulation see it as a key way to prevent crime or fraud in the sector (80 per cent), increase transparency (73 per cent), and limit investor (66 per cent) losses.
As the regulator has clarified which elements of cryptoassets will begin to fall under its radar, this is just the beginning, according to regulation experts.
Arun Srivastava, partner at law firm Paul Hastings says, currently, there is very little pan-European regulation of cryptoassets.
But regulatory inconsistencies already exist – for example, in Germany, Bitcoin is treated as a financial instrument requiring a banking licence, whereas in the UK it is currently not regulated, at least.
A number of factors are influencing the UK regulator’s approach to policy.
On one hand, the UK wants to be seen as a leading fintech and innovation hub.
On the other, there are concerns around the risks of what are still relatively novel products.
Mr Srivastava says: “Financial crime risks top the agenda, but consumer protection and financial stability are also key concerns.
“The current approach is likely to change as more products get brought into the regulatory net.”
He believes the FCA's regulatory plans for cryptoassets gives the sector some credibility.
He adds, however, that crypto firms who have no regulatory status find it difficult to identify partners, such as banks, who will work with them.
Mr Srivastava says: “The existing regulatory rules already impose regulatory requirements on certain crypto related assets and the FCA has now confirmed this to be the case – where the perimeter lies between the regulated and unregulated sector.