interactive investor comments on crypto regulation proposals

The proposals seek to bring robust consumer protections while harnessing the advantages of crypto technology to help the UK innovate.

The Treasury has today published proposals to regulate crypto and help protect consumers, while enhancing the UK’s innovation and competitiveness.

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “These proposals show that protecting investors while harnessing technology to help the UK grow and embrace innovation, don’t have to be mutually exclusive. That said, the government must ensure that crypto businesses are subject to robust capital requirements. They must also look to ring-fence any compensation arrangements to avoid crypto failures having a contagion effect on the ‘real’ economy of financial services.

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“Blockchain, the technology behind crypto, is a case in point around innovation – the transparency of this technology could make it much easier to identify market abuse. At the same time, the Investment Association (IA) have done some good work on tokenisation, which is backed by blockchain to help improve trading in open-ended funds. While this is a long-term project, the potential for investors and the broader industry is exponential.”

Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “Today’s proposals seek to enhance consumer protections, and not before time when 5-10% of UK adults now own crypto – a terrifying figure.

“Changes to instil order and structure into the unfettered crypto space and to bring a broad suite of crypto asset activities under the regulatory umbrella is welcome.

“While traditionally attracting followers due to its anti-establishment credentials, the novelty of crypto’s ‘Wild West’ label may well be wearing off after a spat of high-profile scams and, more recently, the collapse of FTX. The fact that around 85% of crypto-asset firms who applied to the Financial Conduct Authority (FCA) were unable to demonstrate they met the minimum standards required for registration under its anti-money laundering and counter-terrorist financing regime is telling.

“Young, novice investors appear particularly exposed to the dangers of crypto trading. Our research* found that 45% of young adults aged between 18 and 29 made crypto their first investment of choice during the height of the pandemic, with an alarming number funding this through a cocktail of credit cards, student loans, and other loans. It is important that steps are made to help safeguard investors, including improving risk disclosure provisions. At present, risk disclosures on cryptos are often as clear as mud – if they exist at all.

“What today’s proposals could mean for future long-term crypto investing is anyone’s guess. However, greater regulation could help sort the wheat from the chaff in the crypto arena and, in turn, lead to higher investor confidence in cryptocurrencies.

“Cryptos remain a high-risk investment because of how much and how quickly their value can change unexpectedly. But, whatever your approach to risk, cryptos should only be a small proportion of a well-diversified portfolio.”