On 20 September 2018, the UK’s Treasury Select Committee (Committee) published its report into crypto-assets as part of its Digital Currencies inquiry, an initiative launched in February 2018 in response to price volatility in the Bitcoin market. The report is seen as a significant step in the move from self-regulation towards a formal regulatory framework in the cryptocurrency space and its conclusions were broadly welcomed by policymakers and industry insiders.
In the view of the Committee, the “current ambiguity” surrounding the government and regulatory positions on cryptocurrencies is not sustainable. In particular, the scale and variety of consumer detriment, potential role of crypto-assets in money laundering and the inadequacies of self-regulation have led the Committee to conclude that regulation should be introduced, which, at a minimum, addresses consumer protection and anti-money laundering.
Notably, the Committee declined to give a view on whether the growth of the cryptocurrency market should be encouraged, but stated that the introduction of “appropriate and proportionate” regulation may allow the UK to develop as a global centre for this market.
Of particular note was the breadth of the report and the strong conclusions of the Committee in respect of the future regulation of the sector, with the Committee stating that the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 should be updated “as a matter of urgency” to bring initial coin offerings (ICOs) within the FCA’s perimeter. ICO in this context refers to a way of raising funds from the public using a crypto-asset, with ICO issuers accepting a crypto-asset in exchange for a proprietary coin or token which is related to a specific firm or project.
The Committee gave its opinion on a number of areas, summarised below:
- Cryptocurrencies do not exhibit the essential characteristics of fiat currency (store of value, medium of exchange and unit of account) and are predominantly used for speculative purposes. Accordingly it is more accurate to describe these instruments as “crypto-assets”, rather than currencies.
- While blockchain may have the potential to solve problems caused by lack of trust in data integrity, it is unlikely to be feasible as an alternative mass-market payments system given its energy consumption and constraints on transaction volumes.
- Arguments that crypto-assets could further financial inclusion are unconvincing. Policymakers are better placed focusing on access to bank accounts.
- The general volatility of crypto as an asset class, as well as the risk of exchange hacking, the lack of a collective deposit insurance scheme and the difficulty of retrieving crypto-assets where customers lose passwords, makes these products particularly risky for retail investors.
- While ICOs present “significant risks“, there is little the FCA can do at present to protect investors. The Committee noted that growth of ICOs had “exposed a regulatory loophole that is being exploited to the detriment of ordinary investors“.
- Anonymity and the absence of regulation creates a risk that crypto-assets are used to facilitate money laundering and terrorist financing. The Committee has urged the government to treat its transposition of the Fifth Anti-Money Laundering Directive as a priority and to expedite its consultation process, which is currently not expected to finish until the end of 2019.
- The FCA should outline the approach it would take in respect to market manipulation were crypto-assets to fall within its remit.
- Advertisements for crypto-assets are widely visible and “clearly misleading” to customers. The FCA should be given more power to control how crypto-exchanges and ICO assets market their services.
The report was broadly welcomed in the industry. Crypto UK (a self-regulatory body in the sector) noted that self-regulation was a “starting point“, which must “now be matched by government action“. BlockEx, the digital asset exchange provider, supported and welcomed the Committee’s “sound” recommendations, highlighting the role the FCA Sandbox has played to date. NCC Group, a global expert in cyber security and risk mitigation, also welcomed the report, stating that regulation should include security controls, as well as consumer protection mechanisms. While the CEO of blockchain investment platform Investx said that regulation would “remove the bad actors in the industry and ensure investors are protected.”
The Committee’s report demonstrates that there is an impetus towards the development of a formal regulatory framework in the cryptocurrency space. Further publications from the Bank of England and the FCA’s cryptocurrency “Task Force” are expected before the end of 2018.