- The Bank of England has published draft recommendations for crypto assets and the DeFi sector, claiming that it’s only a matter of time before the sector goes mainstream.
- The bank wants to impose equivalence in the industry, meaning that crypto firms that offer services similar to a traditional entity will be subject to similar regulations.
England could soon regulate the cryptocurrency industry for the first time. The country’s central bank has published the first-ever draft regulations for the rapidly-growing industry, joining other major global powers which are seeking to bring the sector under their purview.
The Bank of England published the draft regulations today, March 24. Titled “Financial Stability in Focus: Cryptoassets and decentralised finance,” the report looked at how the industry is shaping up and what comes next.
The bank acknowledged the rapid growth of the industry, stating, “Many services now facilitated by this technology mirror those available in the traditional finance sector, including lending, exchange, investment management, and insurance.”
The BoE also noted that the underlying blockchain technology could bring a number of benefits that include lower transaction costs, higher payment system interoperability, and more choice for users. However, England can only gain these benefits if “undertaken safely and accompanied by effective public policy frameworks that mitigate risks and maintain broader trust and integrity in the financial system.”
Equivalence and regulators’ coordination
One of the principles that the BoE’s Financial Policy Committee proposed is equivalence. The regulator believes that any crypto firm offering a service that’s similar to services being offered by traditional firms has to be subjected to similar regulations.
The paper states:
Where crypto technology is performing an equivalent economic function to one performed in the traditional financial sector, the FPC judges this should take place within existing regulatory arrangements, and that the regulatory perimeter should be adapted as necessary to ensure an equivalent regulatory outcome.
This would mean that companies like BlockFi, which offer lending and interest-bearing accounts, would be regulated like traditional banks. U.S regulators have also floated the same idea, but crypto enthusiasts have been vocal against it.
BlockFi and its peers such as London-based Celsius offer over 100 times more interest than normal banks. Whether they can offer the same interest while being subjected to strict regulations like banks remains to be seen.
For such an approach to be a success, a number of regulators would have to work together to police the sector. This has proven to be a challenge elsewhere. In the U.S for instance, the SEC, CFTC, and IRS can’t even agree on whether cryptos are securities, commodities, or property respectively, with all wanting to be the appointed regulators for the industry. In England, the Financial Conduct Authority has been the main regulator for crypto companies.
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This would likely require the expansion of the role of existing macro and microprudential, conduct, and market integrity regulators, and close co-ordination amongst them.
Related: FCA opens more than 300 cases against unregistered crypto-asset firms