What has happened?
A UK parliamentary committee has called for regulation of the cryptoasset market in a new report.
What does this mean?
In its report, the Treasury Committee listed some of the risks associated with cryptoassets, including the fact that they "have no inherent value", are subject to volatility and are "especially risky" for inexperienced retail investors.
In addition, exchanges are also vulnerable to hacking, with the result that customers can lose "significant amounts of money", and investor protection is minimal.
Further, customers who have lost their passwords to a cryptoasset platform are often told by the firm running their account that this cannot be restored, so they are locked out permanently.
The report also pointed out that the development of ICOs has exposed "a regulatory loophole", whereby they can escape regulation by the UK Financial Conduct Authority (FCA).
The report said:
"Apart from drawing attention to the risks, there is little the FCA can do to protect individuals from being defrauded or losing their money. This is because most ICOs do not promise financial returns, but instead offer future access to a service or utility, meaning they fall outside the regulatory perimeter."
The report therefore urged "the introduction of regulation [to] be treated as a matter of urgency", and for the FCA's powers to be extended to oversee ICOs.
"Given the scale and variety of consumer detriment, the potential role of cryptoassets in money laundering and the inadequacy of self-regulation, the Committee strongly believes that regulation should be introduced. At a minimum, regulation should address consumer protection and anti-money laundering," the report advised.
Self-regulation within the cryptoasset industry also came in for some criticism, with the committee deeming that is was "clearly insufficient".
Some firms "inevitably" ignore the voluntary standards set out by self-regulating bodies, while others were said to distribute misleading advertisements and being lax on their self-imposed ‘know your customer’ rule.
The report therefore also recommended that the FCA be given more power to control how exchanges and ICOs market their services.
The committee also urged the UK government to treat the transposition of the Fifth Anti-Money Laundering (AML) Directive as a "priority", since under it crypto exchanges will have to comply with AML and counter-terrorist financing rules.
In deciding the regulatory approach for cryptoassets and "whether the current Wild West situation is allowed to continue", the government and regulators should evaluate the risks of cryptoassets, and assess whether their growth in the UK should be encouraged.
"If the government decides that growth is to be encouraged, the Committee believes that the introduction of regulation could lead to positive outcomes for the crypto-asset market. The implementation of crypto-asset regulation in the UK may enable the market place to move to a more mature business model that improves consumer outcomes and enables it to grow sustainably."
The committee also said that since cryptoassets are not being widely used, they pose a a low risk to financial stability.
The report comes as a result of an inquiry into digital currencies and blockchain announced by the committee in February.
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