The UK’s House of Commons Treasury Committee recently published a report regarding the current and future regulation of crypto-assets in the UK.
The report flags risks such as high price volatility; hacking of crypto-asset exchanges; poor market liquidity; market manipulation and a lack of investor protections. The report discusses these areas and indicates the Government’s regulatory response.
What is the difference between ‘Crypto-currencies’ and ‘Crypto-assets’?
Cryptocurrency is the digital monetary system that uses a distributed ledger (blockchain) for storing and recording transactions using cryptographic algorithms. This includes Bitcoin, Ethereum and Ripple.
Crypto-currencies currently do not perform all of the functions that are generally understood to be implicit in the term ‘currency’. This includes, for example, acting as a unit of account and a medium of exchange.
Crypto-assets is a term applicable more widely to include any digital assets using cryptography for securing transactions. This includes, for example, currency, crowd funding platforms, storage platforms, asset management.
What is the current regulatory position in the UK?
Crypto-assets, designed as a means of payment/exchange, are not generally within the scope of the UK’s Financial Conduct Authority (FCA) regulatory regime. However, certain regulated activities do require FCA authorisation, if they fall under the criteria for being considered a ‘specified investment’ under the Regulated Activities Order or classify as ‘funds’ or ‘e-money’ for the Payment Services Directive 2 and E-money Regulation 2009.
In respect of Initial Coin Offerings (ICO’s), the regulatory regime will depend on the structure and nature of tokens. If the tokens are transferable securities, like bonds or shares, they will most likely be regulated. Once regulated, ICO investors are ‘consumers’ and are better protected. Most ICO’s are however based overseas and not regulated by the FCA.
What does the future hold?
Greater regulation of crypto-assets is on the horizon. Self-regulating bodies have already been established, such as Crypto UK, which has set out voluntary codes of conduct and best practice for the industry, so official standards will be required to allow the Government to formally regulate the industry.
Insurance is also an area for growth. Insurance companies will also need to work with exchanges to provide compensation for hacking events.
Ultimately greater regulation would result in the growth and competitiveness of the UK’s financial services industry, given that many consumers are currently resorting to foreign jurisdictions with greater regulation in place (such as Malta and Gibraltar). Regulations will also be required to ensure better consumer protection measures and to prevent money laundering. The impact of this is that more investors will be attracted to the UK market, resulting in greater liquidity and higher standards.
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