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FCA approval? Are cryptocurrencies going mainstream?

UK regulators are starting to give cryptocurrencies and associated crypto assets their seal of approval. This is significant, not least because it goes against the prevailing wisdom among policymakers around the world who have pronounced crypto assets to be, at best, a poor store of value, and at worst, downright dangerous.

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FCA approval? Are cryptocurrencies going mainstream?

The UK Financial Conduct Authority, though, granted access this month to its so-called sandbox for the first time to FinTechs experimenting with crypto assets. The sandbox is a way for companies — whether large lenders or FinTech start-ups — to test new products in a live environment with temporary FCA authorisation – according to the FT.

It’s part of the watchdog’s Project Innovate, which aims to disrupt the incumbent financial sector that became tainted by the crisis, ultimately giving consumers more choice at better prices. It’s a model that has since been copied in other jurisdictions, and there are plans afoot for a global sandbox, where companies could get authorised in more than two countries at once.

The FCA’s sandbox has been going for a few years, but this fourth cohort is the largest yet, with 29 firms getting through out of 69 applicants. The latest cohort “has seen a large increase in the number of firms testing wholesale [market] propositions, including firms that are aiming to increase the efficiency of the capital-raising process,” says Christopher Woolard, the FCA’s executive director of competition and strategy.

“Alongside these, we can see significant use of distributed ledger technology, some experimentation with crypto assets, which will help inform our policy work and propositions aimed at helping lower income consumers.”

Of those 29, a full 40% are using distributed ledger technology, which underpins crypto assets like bitcoin. They include household names like Royal Bank of Scotland’s NatWest, which is using blockchain for a new governance model to create a digital mutual.

Meanwhile, the London Stock Exchange is teaming up with 20|30 to build a blockchain-based platform that will allow primary issuance to institutional investors of equity tokens using Ethereum. Unlike many Initial Coin Offerings, equity tokens are regulated and give holders stock in a company.

But perhaps the most interesting news out of the FCA — and evidence of the regulator’s real imprimatur on the sector — was a nugget revealed during testimony at a Treasury select committee on digital currencies, attended by officials from the Treasury, Bank of England and FCA.

The FCA official, David Geale, revealed that the watchdog is itself testing DLT for its own FinTech proposals around regulatory reporting. This was subsequently revealed as Project Maison, which allows real-time reporting of mortgage-lending data using DLT.

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