Bank of England and Regulators Assess Crypto Regulation in Swarm of New Reports

The Bank of England’s Financial Policy Committee and other U.K. regulators are reviewing crypto regulation following the release of a financial stability report related to crypto assets and decentralized finance.

The Bank of England's report was released on Thursday, along with cross-referencing documents from the Financial Conduct Authority (FCA) and the Bank of England's Prudential Regulation Authority (PRA).

In its 40-page report, the Bank of England Committee (FPC) said crypto assets and DeFi posed a "limited" risk to the stability of the UK financial system, but argued that "as these assets interact with the wider financial system The linkages are getting tighter," and the stakes are rising. In response, the Financial Policy Committee committed to assessing these risks and making recommendations.

The report found that existing regulatory frameworks are sufficient to mitigate the risks that cryptocurrencies serve the same purpose as traditional finance. The FPC “welcomes” Treasury’s proposals for stablecoin regulation, including a proposal to bring banks into the process, and expressed support for international efforts to regulate DeFi applications.

The FPC advised financial institutions to "take a particularly cautious and prudent approach to any adoption of crypto assets or DeFi" until the regulatory framework is more robust. It was in this context that PRA Deputy Governor and CEO Sam Woods wrote a "Dear CEO" letter to banks, insurance companies and designated investment firms regarding the risks of crypto assets, explicitly referring to the FPC report and the FCA notice.

Given the growing interest of recipients, much of Woods' correspondence reminds recipients of existing policy and regulatory frameworks. The letter also calls for the completion of a survey of the organizations’ existing cryptocurrency exposure and annual plans by June 3.

The FCA notice reminds regulated firms of their “existing obligations when interacting with or coming into contact with crypto assets and related services”. It sets out these obligations, including being "clear to clients" in terms of regulation, risk, prudence and custody.

The FCA has a particular focus on anti-money laundering and registration, pointing to its extensive list of unregistered crypto asset businesses. The agency has been investigating some of those businesses. All unregistered and provisionally registered cryptocurrency businesses must register by March 31 or risk closing in the UK.

That’s not all in the crypto-related document released by the Bank of England on March 24. "Responses to the Bank of England's Discussion Paper on New Digital Currencies" also appeared. It referred to a discussion paper on central bank digital currencies published by the Bank of England last year. The FPC noted that the Bank of England and the Treasury will “start consultations” on a CBDC this year.