Meanwhile, across the pond, the UK’s Financial Conduct Authority (FCA) is going hard after crypto. It looks great on paper to be doing that on the surface, doesn’t it? In short, protect consumers from the wild west of digital assets. Necessary, for sure—but I can’t help but think they’re throwing the baby out with the bathwater. Are we really protecting consumers, or are we killing innovation and forcing crypto activity offshore?
Over-Regulation Equals Better Outcomes?
That's the million-dollar question, isn't it? So, contrary to assumptions, the FCA is not as interested in protecting consumers. At times, you get the impression that it thinks imposing more and stricter rules will magically produce superior outcomes. We know that life—and most especially, the world of finance—never works out like that.
Think about it this way: imposing overly restrictive rules on crypto businesses in the UK doesn't magically eliminate the risks associated with crypto. Rather, it creates the danger of pushing those firms overseas to jurisdictions with less burdensome regulatory landscapes. And where does that leave UK consumers at the end of the day? Those folks are now trading on unregulated platforms with even less protection than before. That’s the equivalent of fighting a flood with a Swiss cheese bucket.
I am based in Singapore, I have observed that Singapore has a more balanced approach, fostering innovation while managing risk. The UK could learn from Singapore's approach.
Innovation Held Hostage By Regulation?
The FCA’s proposed limits on crypto purchases made with credit cards would set a troubling precedent. Furthermore, the prohibition of crypto lending products further compounds these concerns. I get the impulse to try to stop ordinary people from borrowing against risky assets. At the same time, these measures might kill the innovation and needed adoption of new technologies.
Consider decentralized finance (DeFi). Most DeFi protocols depend on lending and borrowing as the glue of their operations. By limiting availability of these services, the FCA jeopardizes the expansion of this innovative sector. Are we unwittingly slaying the goose that will lay our golden egg? The FCA’s likely counter would be that they’re protecting consumers from themselves. But are they really protecting people, or is it a form of infantilization?
Staking in crypto may be more complicated than it sounds. According to a recent poll, 27% of UK adults who hold crypto have tried staking. Improving data transparency is certainly needed, but overreaching restrictions might threaten a powerful innovation before it has a chance to widely develop.
Sophisticated Investors and Vulnerable Individuals
The FCA’s approach appears to assume that all investors in crypto are equally ignorant or vulnerable. Is that really the case? There's a big difference between a seasoned investor who understands the risks of crypto and a novice who's just jumping on the bandwagon. Should we be treating them both the same way?
The finance ministry’s intention to regulate cryptocurrencies within the confines of current financial regulations would cover exchanges, dealers, and issuers. Though well-intentioned to limit bad behavior, it risks choking off positive innovation.
As Hannah Meakin from Norton Rose Fulbright points out, a key issue will be how we encourage innovation while providing a proper level of oversight. I’m concerned that the FCA is going too far in the direction of oversight and not enough toward support. This shift might be at the expense of innovation.
I appreciate that consumer protection is the FCA’s primary concern. Nobody wants to see American investors lose their hard-earned life savings on laughably speculative investments. What’s true is that innovation is vital to our economic growth and global leadership, in progress as well as in competitiveness. Now more than ever, we need a regulatory framework that finds an appropriate balance between protecting consumers and fostering innovation. At this early stage, I’m not yet sure that the FCA has struck that balance.
Approximately 7 million UK adults, or one in ten, currently own cryptoassets. It’s clear that a one-size-fits-all approach to regulation isn’t the best way forward. We need a system that distinguishes between sophisticated investors and vulnerable individuals, allowing the former to take calculated risks while providing genuine protection to the latter.
The FCA’s approach might indeed be well-intentioned, but it risks stifling innovation and forcing crypto activity underground or offshore. We require instead, and deserve, a more sober and nuanced, more informative and more balanced approach. Let’s acknowledge the promise of crypto but address the key issues of consumer protection. If we don’t work toward this, we run the risk of throwing the baby out with the bathwater.
