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As the FTX blow up causes havoc across the world, crypto-asset players have told a cross-party group of members of UK parliament (MPs) that the industry would fare better if there was a regulatory framework in place.
The Treasury Select Committee’s inaugural crypto-asset session took place on Monday (November 16), with new chair Harriet Baldwin also on her first outing in the role.
“With the collapse in so many different crypto-assets in 2022, would you say that crypto-assets are the tulip bulbs of the 21st century?” she asked.
Baldwin’s blunt question is unsurprising considering the recent collapse of FTX, and before that the Terra-Luna stablecoin fiasco earlier in the year. These events have prompted concern from regulators and politicians in the US, Singapore and further afield.
However, this question was played down by witnesses at the hearing, who pointed out that recent crypto volatility is not too different from traditional finance.
“The huge failures last week are largely down to issues related to failures around governance, around risk management, around excessive leverage, and if we believe the reports, around the inappropriate use of clients assets,” explained Daniel Trinder, vice president of government affairs at Binance.
These are traditional failures that have plagued traditional finance, he suggested. “I don’t think that there is anything inherent about the failures that I’m aware of.”
Crypto covers many different tokens, projects and businesses, suggested Susan Friedman, head of policy at Ripple, adding that her company is just one component of the ecosystem.
“It is important we don’t paint all of the industry and all tokens with one broad brush,” she said.
Meanwhile, Galaxy Digital’s Tim Grant said it would be “wrong to throw the baby out with the bathwater and say that all crypto-assets are purely speculative, and don’t have some sort of economic value”.
What is necessary is regulation, said Ian Taylor, a representative of CryptoUK, the UK’s trade association for crypto-assets.
“Perhaps if we had had regulation, some of these recent events would not have happened. We’ve seen some pretty poor business practises over the last few weeks.”
Taylor’s thoughts come as the UK’s Financial Conduct Authority (FCA) also weighed into the FTX debacle, stating in a bulletin on its website that “any FTX customers who have financial concerns can receive free, impartial financial guidance from Moneyhelper”.
The regulator also emphasised its limited capabilities to intervene in the situation.
“In the UK, regulation of crypto-assets is limited to registering of UK-based crypto-asset exchanges for anti-money laundering purposes. As a result, FTX was not authorised, regulated or registered by the FCA.”
In spite of their defence, Baldwin, a former financial services minister, continued to probe what the value of these assets are and why the constituents that she represents should hold them.
Taylor pointed out that there are plenty of tokens that do hold value to the consumer, and defended the erratic rise and fall in the value of bitcoin, referencing recent tough macroeconomics.
“It’s true that the price has dropped significantly but if you draw your chart back in time two years, it is up significantly.”
A more comprehensive framework
Meanwhile, Grant indicated that being able to protect consumers from dodgy digital assets would be enabled by regulation. “That is going to be predicated by us having a good regulatory regime that allows that to happen. At the moment, that is not strictly the case.”
“A regulatory framework is certainly needed that provides for consumer protections, but that framework also needs to be nuanced enough to be able to recognise business-to-business models, as well as consumer-based models,” noted Friedman, adding that it also needs to recognise the diversity of the crypto ecosystem.
Friedman, a former US Treasury staffer, also made reference to the EU’s crypto-asset framework, the Markets in Crypto-Assets (MiCA) regulation.
“MiCA addresses these issues square-on, they call for disclosures, they call for certain parameters around stablecoins, they require certain asset backing, they require client segregation of funds for certain exchanges,” she pointed out.
“Without suggesting that the UK should adopt MiCA wholesale, there are portions of that regulation that I think formulate best practice,” she continued, adding that the regulation could enable the same kind of consumer protection as MPs are looking for.
Although the UK had left the EU by the time that the MiCA proposal was made, it has slowly ebbed towards a similar model, perhaps inspired by the volatility in the crypto market, particularly over recent months.
For example, the UK previously only intended to regulate stablecoins in the Financial Services and Markets Act. However, an amendment put forward by the economic secretary to the treasury, Andrew Griffith, and now passed by the government, will give the FCA the power to regulate all crypto-assets.
Trinder also pointed out that improvements can be made to the crypto-assets market beyond just regulation.
“The market structure needs to become more simplified, the information more accessible to investors across all, basically,” he acknowledged. “The market has to become much more transparent.”
