AN OVERVIEW OF THE 'REGULATION OF CRYPTO-ASSET ACTIVITIES' PUBLIC CONSULTATION

By Kurt Roosen, Head of Innovation at Digital Isle of Man

On 13th February 2024, the Isle of Man Financial Services Authority opened a public consultation into the future of Crypto-Asset Activities, which closes on 9th April 2024. For all people who have an interest in this space, it is critical that you express your views on this important subject to further develop strategy in this area.

Since Crypto came to the Isle of Man in force during Crypto-Island summit of 2014 it is fair to say that the Isle of Man and kept a watching brief on activities involving “Blockchain” with the blockchain office being part of that brief under Digital Isle of Man. From regulatory point of view the FSA have remained agnostic over this period, concentrating on the matching of outcomes to existing regulations as opposed to creating specific Crypto related regulation. This approach depended on the fact that if something looked and acted like a security, then it would be regulated as a security. If it behaved like money then it would be regulated like money and so on. Whilst this actually created a great deal of flexibility in what we were able to support, the practicalities of this are somewhat different. Crypto use cases are often mixes of characteristics based on the ultimate peer to peer transfer capabilities that blockchain environments support. So the same token could be different things depending on how it is used. The world has struggled with this concept, not just the Isle of Man, and that means that is still missing is the definitions that make this clear.

However, these standard definitions are now starting to emerge in pieces of legislation and regulation like MiCA (Markets in Crypto-Asset Regulation) in the EU. Currently our only regulation in this area is the Designated Business (Regulation and Oversight) Act of 2015 which is related to Anti Money Laundering (AML). So, there is an emerging need to more carefully define our position in relation to Crypto-Assets to stay current. The paper presented with the consultation lays out some of these options, particularly in relation to Stablecoins, which are the latest generation of assets with a closer relationship with what we would recognise as money. However, it is worthy of note that the consultation is about Crypto-Assets, which has a wider context than simply Crypto-Currency.

We have choices we have to make at this point. If we simply stay where we are then we will become less globally relevant and conformant and would ultimately run a risk in the future of becoming a participant in a regulatory arbitrage with a race to the bottom, which is not a situation which any of us would wish to happen. Alternatively, we can take this as a resetting opportunity and occupy a well-defined and considered place in the Crypto regulatory world, using an intelligent amalgamation of worldwide thinking. This would not just allow us to specifically define the elements and use cases in this complex field, but also define alongside that which of those elements we can support and which are not appropriate to our jurisdictional risk profiling.

The paper lays all this out very well and also intimates that there would be elements of regulation that would be more difficult to start at this point, as we don’t have the expertise in the “traditional” implementations of these financial services. For example, we don’t have a traditional Stock Exchange and all the systems to monitor for market manipulation etc that comes with this – necessary regulatory elements for some of the securities elements of Crypto-Assets if these are fully defined within new regulations. Whilst this could present an opportunity, in its own right, to use RegTech (Regulatory Technology) and SupTech (Supervisory Technology) help facilitate, this all comes at a cost and hence why your opinion is so important for you to help solidify the opportunity, and hence the associated return on the investment that would be required to do this properly and well.

To access the consultation and express your views, visit: https://consult.gov.im/financial-services-authority/regulation-of-crypto-asset-activities/