The regulator’s deputy governor and chief executive, Sam Woods, wrote to firms’ CEOs today (March 24) with the survey, which was sent in tandem with a notice from the Financial Conduct Authority to regulated firms on the risks of cryptoassets.
The PRA’s survey applies to regulated credit institutions and designated investment firms which either have non-negligible, direct exposures to cryptoassets, provide products or services in respect of cryptoassets, or plan to have any such exposure, or provide any such product or service, in the coming two years.
It is likely that the long-term treatment [of crypto-assets] will differ from that under the current framework.Sam WoodsWoods said in his letter: “Given the expansion in crypto activities being contemplated by firms, we are undertaking a survey of firms’ current and planned exposures over 2022.”
He asked firms to complete as many parts of the template which are relevant to them by June 3, using data up to December 31, 2021.
the data collection includes sections on liquidity, operational risk, derivative exposures and counterparties and current and future plans, among other things.
In his letter, Woods also highlighted aspects of the existing PRA framework it “would expect firms to consider” when measuring and mitigating the risks resulting from crypto activities.
“Given the limited existing exposures by firms, and pending international regulatory updates, this letter aims to highlight aspects of the existing framework that we would expect firms to consider when measuring and mitigating risks resulting from crypto activities,” the PRA boss explained.
“While no one part of the current framework fully captures crypto risks, a combination of strong risk controls, operational risk assessments, robust new product approval processes, Pillar 1, Pillar 2, and ongoing monitoring arrangements has the potential to provide firms with an appropriate interim treatment.”
In the long-term, Woods said it was likely treatment of cryptoassets will differ from that under the current framework.
An area currently under a “closer look” by the PRA, according to Woods’ letter, is the disclosures for firms which have exposures to cryptoassets through a third-party.
“Firms should consider their ability (both legal and operational) to access and gain control of relevant assets in the event of third-party service provider failures,” Woods warned.
“We will be taking a closer look at those disclosures and processes for firms that have exposures to cryptoassets.”
Currently, discussions are ongoing internationally on the prudential treatment of cryptoassets in the UK, according to Woods.
Today, the Bank of England has also published a ‘Financial Stability in Focus: Cryptoassets and decentralised finance’ report, and responses to the Bank of England’s discussion paper on new forms of digital money.
FCA issues list of crypto risks
Alongside the PRA’s letter, the FCA also published a list of “areas of risk” it said regulated firms “need to consider”.
In short, the watchdog said:
- There is risk of consumer confusion where regulated firms provide services involving cryptoassets;
- It is a criminal offence for firms carrying on cryptoasset activity to not be registered with FCA;
- Firms should be reviewing FCA’s Unregistered Cryptoasset Businesses page;
- Clients with cryptoasset wealth should be risk-assessed using the same criteria applied to other forms of wealth ;
- The new investment firm prudential regime (IFPR) includes cryptoassets business;
- Where cryptoassets are specified investments (ie, security tokens), custody of these assets is likely to be subject to the FCA’s Client Assets Sourcebook regime; and
- The FCA will be “engaging with industry participants to seek insights” as it further develops its views on cryptoasset legislation.
Where the regulator said there is a “risk of consumer confusion” when regulated firms provide services involving cryptoassets, the FCA told firms they are required to help consumers understand the extent of business which is regulated and “clearly distinguish” those elements which are unregulated business.
The watchdog also reminded firms that since January 2020, firms carrying on cryptoasset activity in the UK must be registered with the FCA - not to be is a criminal offence, the watchdog warned.
Currently, there are a handful of crypto-related firms on a temporary FCA register, including digital banking giant Revolut which offers crypto trading services.
As of March 31, however, firms must have authorisation from the FCA to be on its permanent register.
ruby.hinchliffe@ft.com
