1 00118601 Emerging themes 2019 A4 AW v31 combined - Page 47



EMERGING THEMES 2019
In this article, a “virtual currency platform providing fiat
money services” refers to a hypothetical business model
where a user of the platform could (in addition to being
able to trade on it virtual currency such as Bitcoin or
Ether) also make transfers to other users or purchase
goods/services at participating merchants (including
high street retailers). The recipient or merchant would
receive (as an option or otherwise) fiat money rather
than the virtual currency itself, with the platform operator
(P) carrying out the relevant virtual-fiat exchange.
Generally, the current UK regulatory regimes for payment
services and e-money are triggered where one deals
with customers’ “funds” (i.e. fiat money). P may not deal
with users’ fiat money; it may conduct the virtual-fiat
exchanges using its own money. On the other hand,
certain payment services seem capable of being
applicable, including money remittance or merchant
acquiring. In short, there is considerable uncertainty
as regards P’s regulatory status under the existing
regulatory framework.
However, there seem sound policy grounds, including
consumer protection and fraud prevention, that such
businesses should be subject to some level of supervision.
At the same time, any policy proposals should not stifle
innovation given the fast development of the technology.
There are three potential regulatory approaches
1.Use the FCA’s regulatory “sandbox”
The first solution could be to rely on the current
regulatory “sandbox” initiative, which allows firms to
test new products. However, the sandbox provides
only a temporary solution and it presupposes that the
product can be fitted into the relevant existing
framework, as firms need to apply for the appropriate
authorisation both for the testing and after the trial
period expires.
2.Regulate firm’s fiat money services
Another solution could be to distinguish between
a firm’s virtual currency activities and fiat money
services, with the latter brought within existing
regulation. However, this depends on there being
a clear demarcation between the two business lines,
which may not be present for many firms operating
in this space. The absence of such demarcation is
often where the regulatory uncertainty arises in the
first place. Further, conventional payment/e-money
firms that also have unregulated businesses typically
have such unregulated businesses as ancillary to, and
supportive of, their main regulated payment business.
The situation for firms such as P seems fundamentally
different in that either the regulated payment services
are to support the main virtual currency business or
the two are equally significant.
3.Introduce a bespoke regime
A third approach could be to have a bespoke regime
similar to, or as a subset of, the current framework for
regulating certain payment systems where the
relevant payment systems, once designated as such
by HM Treasury, become subject to supervision by the
Payment Systems Regulator (PSR) which however does
not impose any authorisation or licensing
requirements on designated payment systems.
Rather, the PSR simply has powers to issue sectorwide or firm-specific directions, or otherwise intervene
when necessary. Firms such as P are unlikely at this
stage to meet the designation criteria (for example,
systemic importance) under the current framework.
Appropriate parameters may be designed to
categorise them as a separate (or new) type of
payment systems; and the PSR or the FCA be given
similar supervisory powers over them.
In summary
The third approach, of a bespoke regime, seems
preferable. It would enable holistic supervision of such
firms and ensure timely intervention where concerns
arise. This would also dovetail with the new EU Fifth
Anti-Money Laundering Directive, under which virtualfiat currency exchanges and virtual currency custodians
will become subject to the AML framework, and the
recent EU proposal to combat fraud in non-cash
payments including virtual currency transfers. Finally,
it would also facilitate innovation by drawing clear
regulatory boundaries.
KAI ZHANG
Associate Director,
London
/47

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