Consideration of crypto funds

With respect to retail investors as Sir Jon (Deputy Governor of the Bank of England) highlighted in his speech of 13th October 2021, crypto technologies continue to evolve with some practical rather than speculative uses being found for some types of crypto technology.  Sir Jon also noted the opaque nature of some of the new DeFi – Decentralised Finance and the risks embedded in such systems. 

Fund Applications

The Commission has a policy of encouraging innovation and we are willing to help new financial services businesses understand the regulatory framework.

When considering applications for funds investing in virtual assets or crypto technologies, the Commission reviews each application on its individual merits taking a cautious and considered approach. We will assess applications using the same criteria we use for other asset types or structures, which means we will look to ensure that key controls are appropriate - for example around custody, liquidity, valuation of assets and investor information, as well as, the promoter or sponsor having integrity and a demonstrable and relevant track record.

Since crypto technologies and virtual assets involve particular risks, the Commission will apply specific measures to safeguard investors. For instance, the investments must be made through regulated counterparties and an applicant needs to demonstrate how it will comply with the Bailiwick’s anti-money laundering and counter terrorist financing framework, especially around the provenance of the virtual assets held by the fund. It is expected that only established crypto technologies with significant track record and trading volumes will be utilised as fund assets.

The Commission will pay close attention to the controls in place to limit access to a crypto fund to investors that meet professional criteria given the speculative and volatile nature of many investments in crypto technology. Applicants will be required to demonstrate to the Commission that the fund board and associated service providers have appropriate experience and expertise in respect of crypto technologies.

We continue to encourage firms or individuals to use our Innovation Soundbox to discuss potential applications and to meet with our Authorisations and Innovation Division at an early stage so we can help them understand what our key questions are likely to be if they make a formal application.

Warning to retail investors

The Commission (alongside other international regulators with a consumer protection mandate) continues to remind retail investors that, in purchasing unbacked crypto “assets”, they are buying into something which does not have a physical underlying reality and that such assets remain intensively speculative.  There is a material chance of severe (possibly complete) loss of any money spent on purchasing such assets.  We are, of course, aware that a number of individuals have made money from speculating on crypto.  That this is so does not make crypto, in any sense, a safe investment for mainstream investors who are ill equipped to lose the money they spend buying crypto.