Crypto - Q2 2022

Discussions focused on regulation and how the FCA can ensure financial stability for firms and investors, but also adequate customer protection in its policy solutions. The FCA is expected to share the outputs from the event in the summer.

What management should consider: the CryptoSprint event demonstrated the FCA’s efforts for creating effective, forward-thinking, and innovative regulation in the crypto space. Firms can expect the FCA to continue its efforts in this regard; and, for policies to be consulted on in the near future.

Report on response to the non-bank lending request from the CfA on digital finance

This report sets out the findings of the EBA in response to the European Commission’s Call for Advice on digital finance and related issues. The formats of crypto-asset lending were analysed along with borrowing activities in decentralised form, staking and crowdlending. Policy proposals cover:

• Harmonising and strengthening authorisation and supervision in the Consumer Credit Directive (CCD) and in the Mortgage Credit Directive (MCD), including revision of their scope
• Revising the scope of prudential consolidation to cover areas currently considered outside of the financial sector
• Improving reporting requirements for credit activity by non-bank lenders
• Clarification of supervisory requirements in cross-border non-bank lending
• Enhancing disclosure requirements for digital lenders including advertising and complaint handling requirements
• Strengthening the requirements for creditworthiness assessments
• Expanding AML/CTF rules to cover non-bank lenders
• Establishing overnight and monitoring systems at EU level for regulated and unregulated non-bank lenders to assess risks at a macroprudential level
• Developing EU wide rules to introduce activity-based macroprudential measures to cover all credit providers
• Consider an in-depth analysis to assess the costs and benefits of a harmonised framework for non-bank lenders

What management should consider: There are two themes that cut across all the above proposals – potential new rules on credit activity; and reporting. Whilst it is difficult to accurately predict what the new rules could be, firms should start looking into their risk and control environment and ensure that at the very least, risk appetite, and governance (including MI reporting) arrangements are effective. Given the speed of change in this sector, it may not be too long before at least some of these policies are implemented.

Government sets out plan to make UK a global cryptoasset technology hub

In a speech at the Innovate Finance Global Summit, John Glen, Economic Secretary to the Treasury, set out the UK Government’s plans to make the UK a global cryptoasset hub. He introduced proposals including a Financial Market Infrastructure Sandbox (FMIS), research to explore how blockchain technology can be used in sovereign debt instruments, development of a tax system to accommodate the increased use of cryptoassets (including DeFi loans), the commissioning of a Royal Mint NFT, and the introduction of a CryptoSprint event by the FCA which has already been undertaken.

What management should consider: This can be taken as a signal of the UK Government’s intention to be dynamic and innovative in its approach to cryptoassets in order to attract firms in this sector and develop the UK into specialists in the area. This could mean that policy development in this space could be expedited in the UK. There is likely to be increased supervision and regulatory requirements on this field in the near future as the market continues to rapidly grow to a level that, if it crashes, could pose a significant risk to the financial system.

More detail on Glen’s speech can be found here: Initiatives to make the UK a hub for cryptoasset firms.

Central Bank Digital Currencies (CBDCs)

• Andrew Hauser, Executive Director for Markets at the Bank of England, discussed the adoption of a CBDC in the UK. His speech covered five broad topics: retail CBDCs impact on central bank balance sheets, stablecoins, digital currencies as a transmission mechanism for monetary policy, digital currencies on the delivery of monetary control and how digital currencies will change the size and composition of central bank assets.
• Fabio Panetta, a member of the Executive Board of the European Central Bank, continues to lead the ECB’s efforts towards the creation of a Digital Euro. In a speech at the National College of Ireland, he discussed the potential benefits of a Digital Euro including a sound and reliable means of payment that preserves the coexistence of sovereign and private money. A Digital Euro would also give firms room for innovation, especially in the area of payment solutions, as well as promoting financial inclusion. Panetta has adopted the motto “pay anywhere, pay easily, pay safely” to summarise the ECB’s vision for the Digital Euro.
• As a member of the Executive Board of the Deutsche Bundesbank, Burkhard Balz delivered a keynote speech on the topic of CBDCs at the European Payments Conference. He discussed the use of the e-Yuan in China, which by the end of 2021 had over 140 million digital wallets issued. He covered the benefits, including the use for cross border payments as well as safe, instant and efficient digital payments. Balz also discussed some of the challenges a CBDC could present, including in terms of cybersecurity, AML/CTF and trust in the payment system.
• The General Manager for the Bank of International Settlements, Agustín Carstens and H.M. Queen Máxima of the Netherlands, the United Nations Secretary-General's Special Advocate for Inclusive Finance for Development, published an op-ed on CBDCs. They focused on financial inclusion and how CBDCs could overcome some barriers faced by some 1.7 billion unbanked adults across the world. CBDCs could provide safe, cheap, fast and easy transfer of money and allowing some of those outside of the formal financial system to build savings and have access to credit. Despite the potential advantages, they acknowledge the widespread policy reforms required before any CBDC rollout.

What management should consider: Central banks around the world appear committed to the creation of CBDCs, with significant investment and recourses planned. Firms should keep a close eye on policy proposals and market developments and determine how the introduction of CBDCs could affect their activities, their balance sheet and their customers.

More details on CBDC developments can be found here:

A Central Bank Digital Currency in the UK: the exploration continues

The digital euro: the future of central banking in Europe?