When you think of innovation, what do you picture? Perhaps a team of young men in casual clothes, in a trendy part of a big city. You probably think of words like agility, responsiveness, adaptability.
It’s probably not what you associate with a regulator.
But I think regulators have an important role to play in this space. And as a female manager at a regulator, I think it’s important that we not only change the narrative of the types of organisations that need to engage with this sector, but also the element of diversity. After all, diversity of thought and diverse organisations can create better outcomes.
It’s why we take innovation so seriously at the FCA. Since we launched five years ago, we’ve had requests for support from firms creating innovative propositions from across the world. In fact, over 1600 firms have asked us to provide regulatory feedback on their ideas, or to test in our sandbox.
For those less familiar with the concept of a sandbox, it’s an initiative that allows firms to test innovative ideas in a controlled environment with real consumers – before they go out in the wider world. Think the financial services equivalent of pharmaceutical trials.
Over 300 firms have applied to test in our sandbox, and roughly 100 have been accepted to test (we have eligibility criteria to ensure only those tests that meet certain thresholds are able to test). However, the sandbox, or our broader innovation work, is not a regulatory shortcut. And neither should it be; if firms want to use our sandbox, and they are carrying on a regulated activity, they’ll need to be authorised, just like any other firm.
But that got us thinking: if we can do it in the UK, why can’t we do it across borders? And diversity is much broader than gender; it transcends borders and technologies. Could we bring diversity of thought through cross-border collaboration? So, last year we proposed a so-called Global Sandbox – an opportunity for firms to test their propositions in multiple jurisdictions, at the same time. This idea has since morphed into the Global Financial Innovation Network (or, GFIN).
It’s a jointly led initiative involving over 40 regulators and related entities that aims not only to provide innovators with an opportunity to test their ideas across borders, but also brings regulators together to look at common policy and regulatory concerns. Earlier this year, we opened our pilot cohort – we call it a pilot because this is also new to us, and I’m sure we’ll be learning as much as the firms will!
We had 44 unique applications from 17 different regulatory agencies, and eight of these submissions have been accepted into the next phase of testing.
Many of these applications were related to cryptoassets, and in fact, in our domestic sandbox, over a third of firms have used distributed ledger technology in their tests, with a sizeable proportion using cryptoassets. In fact, these tests showed us some of the potential benefits that can be gained from cryptoassets.
I want to make clear that the UK cryptoasset market is relatively small. We believe that only 2% of the daily global trade in cryptoassets occurs in the UK, and our own consumer research which we published earlier this year suggests only 3% of the UK population has brought or sold cryptoassets.
But just because a market is small, and benefits can be derived from a technology, it doesn’t mean there aren’t problems that need to be considered. Last year we joined forces with the UK Treasury and the Bank of England to form the UK Cryptoasset Taskforce, and published a report on cryptoassets and DLT.
While reiterating the benefits, we identified three clear risks: consumer harm, harm to market integrity, and harm through financial crime. We also highlighted potential for financial stability risks, should the market grow quickly.
We’ve set out to try to mitigate these harms, while trying to ensure that a legitimate market is able to develop. In July of this year we set out our Final Guidance in relation to cryptoassets. This sets out that certain tokens fall within regulation (we call these either security or e-money tokens), and firms using these cryptoassets need to make sure they have the appropriate permissions.
We are strengthened by our diversity, and our innovative agenda is enabled by it. We appreciate that globally diverse thinking is required to create globally relevant solutions.