Setting The Scene
Since its launch, the cryptoasset market has developed at a rapid pace, with total market capitalisation for cryptoassets estimated to be USD2.6 – 3 trillion in 2021. The market for decentralised finance (DeFi), although small in current scope is expanding quickly too from less than USD10 billion in 2020 to nearly USD100 billion in 2021. In consumer research conducted by the Financial Conduct Authority (FCA), the uptake of cryptoassets among UK consumers has further increased with 2.3 million (from 1.9 million last year) adults estimated to hold cryptoassets. The government has been keen to note the growing interconnectedness between cryptoassets and the wider financial system.
In January 2021, HM Treasury launched a Consultation and Call for Evidence on the regulatory approach to cryptoassets and stablecoins. The intention of the consultation was to source views on how the UK can structure the regulatory framework to harness the benefits of new technologies, support innovation and competition, while mitigating risks to consumers, market integrity and financial stability.
Diving into the future of regulatory development, the government has proposed a staged and proportionate approach to regulation, which is sensitive to risks posed, and responsive to new developments in the market. As part of its commitments to diversify its regulatory portfolio, the government is developing a Financial Markets Infrastructure (FMI) Sandbox to support firms wanting to innovate through the use of tokenisation and Distributed Ledger Technology (DLT) to provide FMI services. The consultation points out a need for sufficient flexibility to be built into the regulatory framework to allow regulators to adapt rules and requirements as international work in this arena continues to develop. It will also benefit from the agility that will be afforded to UK financial services legislation by the Future Regulatory Framework (FRF).