UK’s Financial Regulator Chief Lures Crypto Firms

Nikhil Rathi, the Head of the U.K.’s Financial Conduct Authority (FCA), gave a speech at City Week 2022 on April 26, in which he stressed the importance of supporting innovation to encourage the U.K.’s economic growth and its international competitiveness. For Rathi, this means continuing to be a leader in crypto regulation to attract most of the FinTech investments. 

For the last weeks, the FCA has changed its approach to crypto firms, sending more messages about the friendliness of the U.K. regulatory environment, at least in part, after the U.K. government announced in early April new measures to accommodate the crypto industry in the country. 

Read More: UK’s Crypto Plans May Seek to Reverse Regulators’ Actions 

In his speech, Rathi stressed the influence the U.K. has had on the rest of the world, setting a standard of flexibility and safety. And he has good reasons to commend the British model: the U.K. represented nearly half of all European FinTech investment last year. In Rathi’s words, “[the U.K.’s] pioneering ‘sandbox’, a regulatory safe space to test innovative products, has been much copied and now serves as a blueprint for over 40 regulators globally. It has supported the growth and innovation of over 50 blockchain firms.”  

But Rathi was also aware of the feeling among crypto firms that the regulator was significantly strict in the registration process to become a registered company in the U.K. Only 33 companies have gained registration, and the regulator put emphasis on the need to respect anti-money laundering rules to justify this low number of registrations. 

The regulator is selective because, “for innovation to endure and benefit consumers as well as entrepreneurs and investors, it cannot trade off against basic expected standards.” In fact, an important part of Rathi’s speech focused on safety. He said, “alongside encouraging innovation and having an open mind to new technologies, we need checks and measures that protect our system and consumers from serious financial crime.”  In crypto, the U.K.’s remit is currently limited to ensuring anti-money laundering rules apply to crypto firms. In particular, minimum standards to make sure cryptocurrencies “are not used to funnel money to fuel crime, terrorism or war.” 

The regulator argued that many businesses were rejected because they had inadequate provisions to prevent harm or even identify it in the first place. But then Rathi said that the regulator has worked with firms to help improve their capabilities instead of just rejecting them with no feedback or advice — in Rathi’s words, “this should not be interpreted as anti-innovation.”

In his view, the Government’s recent announcement of a flexible approach to regulation may help the regulator to better deal with any risks arising from crypto assets, yet he didn’t suggest a softer implementation of the rules. 

Rathi also addressed investor protection. He cited research showing that many people who invest in crypto are unaware of the risks they are taking. Almost half of the research participants were unaware that they could lose their money. Many people exaggerate their knowledge. Apart from the FCA’s narrow responsibility of ensuring anti-money laundering, most adults are unaware that bitcoin is not regulated by the FCA. He said “[the U.K. needs] to draw clear lines. We need clarity around ruling out future Financial Services Compensation Scheme (FSCS) coverage for investment losses from crypto, even when advised.  As we have consistently warned, if you invest in crypto, you need to be prepared to lose all your money.” He ended his speech noting that the FCA’s strategy will have an overarching focus on reducing and preventing serious harm, setting and testing higher standards, promoting competition and positive changes, “so [the U.K. is] always programmed and equipped to tackle big problems and embrace major opportunities, whatever they may be. 

Read More: UK Financial Regulator’s Strategy Plan Includes Crypto, AML, Big Tech