Bank of England Releases First Draft Crypto and DeFi Regulations

England

The Bank of England has published a draft recommendation on the regulation of the crypto market and the DeFi sector. It follows the principle of equal treatment, which in this case means that crypto companies with similar services to traditional companies should be regulated similarly.

England could soon be one of the first countries to regulate the crypto industry. The British Central Bank today published the first draft of regulations for the fast-growing industry ..

Titled “Financial Stability in Focus: Crypto Assets and Decentralized Finance, the report examines how the industry is evolving and what to expect in the future.

Noting the rapid growth of the industry, the bank stated, “Many services now also enabled by this technology are analogous to those of the traditional financial sector, including lending, exchanges, investment management and insurance.”

The central bank explicitly recognizes that the underlying blockchain technology can bring a number of benefits, including lower transaction costs, greater interoperability of payment systems and more choice for customers. However, these benefits could only be achieved if they are “carried out safely and accompanied by effective policy frameworks that mitigate risks and maintain confidence in the financial system and its integrity.”

Coordination of regulation and equal treatment of competition

In principle, the Bank of England’s Fiscal Policy Committee’s proposals are based on equal treatment of all market participants. The bank believes that any crypto company offering a similar service to traditional firms must be subject to similar regulations. The paper states:

“If cryptotechnology performs an equivalent economic function to that in the traditional financial sector, the Committee believes that regulation should come within the framework of existing regulatory arrangements, and the regulatory framework should be adjusted where necessary to ensure an equivalent regulatory outcome.”

This would mean that companies like BlockFi that offer loans and interest-bearing accounts would be regulated like traditional banks. US regulators have also floated the idea, but crypto enthusiasts have been vocal in opposing it.

BlockFi and its competitors like London-based Celsius offer more than 100 times more interest than regular banks. It remains to be seen whether they can offer the same interest rates when subject to the same strict regulations as banks.

For such an approach to be successful, multiple regulators would need to work together to oversee the sector. This has proved a challenge elsewhere. In the US, for example, the Securities and Exchange Commission, Futures and Options Commission, and IRS can’t even agree on whether cryptocurrencies are securities, commodities, or other property — but they all want to oversee the industry — somehow. In the England, the Financial Conduct Authority is the main regulator of crypto companies.

“This would likely require an expanded role for existing macro and microprudential, behavioral and market integrity regulators, as well as close coordination between them.”

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