The Prudential Regulation Authority (PRA) outlines expectations on companies’ exposure to crypto-assets

Following the UK Financial Conduct Authority’s (FCA) recent “Dear CEO” letter, the PRA, under the Bank of England, has issued its own letter on crypto-assets to CEOs of banks, insurance companies and designated investment firms.  Here’s a summary of the key points:

Crypto-assets are technically complex, which means that firms should conduct extensive due diligence before exposing themselves to them. The PRA reiterated a firms’ responsibilities under the PRA’s Fundamental Rules, specifically:

  • Rule 3: “A firm must act in a prudent manner”;
  • Rule 5: “A firm must have effective risk strategies and risk management systems”; and
  • Rule 7: “A firm must deal with its regulators in an open and co-operative way and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice”.

 

We would also highlight the following:

  • The PRA recognises that the crypto-market and related products and services represent a fast-growing industry;
  • The PRA cautions that crypto-assets can give rise to concerns related to misconduct and market integrity;
  • The risk strategies and risk-management systems that the PRA considers most appropriate with regard to crypto-assets include:
    • Having an individual who is approved by the PRA to perform an appropriate Senior (Insurance) Management Function (S(I)MF) involved in the risk assessment for any current or planned crypto-asset exposure;
    • Having remuneration policies and practices that do not encourage excessive risk-taking; and
    • Having a commensurate risk-management approach to crypto-assets.

 

Finally, the PRA noted that international discussions on the prudential treatment of crypto-assets are ongoing. More communication and supervisory and policy updates are therefore expected.

The full report is available here.

This is a fast-moving industry and regulators are only now getting to grips with how to oversee the growth and use of crypto-assets as a legitimate alternative to traditional forms of financing. We concur with the PRA’s view that businesses in this field must take the appropriate steps to implement rules to protect themselves and their customers.

Our FinTech Task Force across Rooney Nimmo’s international offices monitors the global FinTech and RegTech developments very closely and is happy to help. Please get in touch here if we can be of any assistance.

 

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