UK: Regulation Of Cryptocurrencies In The UK

Last Updated: 30 November 2018
Article by Hannah Raphael and Jonathan Flynn

Introduction

There are currently in the region of 1500 cryptocurrencies in existence across the world and although valuations vary wildly, the cryptocurrency market is estimated to be worth in the hundreds of billions of dollars. With crypto-exchanges now advertising on the London Underground and Mastercard's new patent for a credit card which (if brought to market) will allow customers to instantly pay for items on their credit card using digital currency, it is safe to say that cryptocurrencies are well on their way to becoming mainstream.

They are not there yet though. It still takes around 10 working days to process a payment in cryptocurrency which means they are not regularly used as a means of payment, a fact which has led many, including the UK government to question whether cryptocurrency is even a fitting term. They have opted for the term "crypto-assets" instead to reflect the fact that currently cryptocurrency more closely resembles a store of value than a medium of exchange.

Cryptocurrencies have lost roughly 70% of their value since the heady days of 2017 when, at its peak, the price of one Bitcoin reached around £15,000. Both the fact that they are not widely used as a medium of exchange and the dramatic price drop will no doubt have contributed to the conclusions reached by the Bank of England's Financial Policy Committee in its report, published in March 2018, that "existing crypto-assets [do] not currently pose a material risk to UK financial stability".

Cryptocurrency Crime

Cryptocurrencies may not presently pose a risk to the City of London but they pose a huge risk for investors as they are notoriously popular with criminals. This is due in large part to the anonymous and borderless nature of the transactions, provided via the blockchain technology upon which they are founded. It is also due though to the abundant easy prey available in the form of non-professional investors, dazzled by the possibility of huge returns.

Cryptocurrency related crimes are no longer limited to tales of anonymous purchases of illicit goods from the Dark Web. The Director of Europol estimates that in 2017 criminals in Europe laundered $5.5 billion worth of undeclared cash via cryptocurrencies. Many cryptocurrency exchanges are willing to accept customers without carrying out proper due diligence.

Some currencies offer anonymity as an intrinsic feature and applications such as Bitcoin Blender promise to make transactions 100% anonymous.

The City of London Police received over 200 reports of cryptocurrency fraud over the course of just two months earlier this year. These reports related to scams by fraudsters obtaining credit card details following promotions of fake investments in cryptocurrencies.

There have also been complaints of fraudulent Initial Coin Offerings ('ICOs'). ICOS are a digital means of raising funds from the public. Typically a token is offered in exchange for cryptocurrency. The token is promoted as something that will grow in value. Frequently investors discover down the line that the token does not exist or that it is worthless as the business they invested in at best quickly went bust or at worst never existed.

Cryptocurrency is also highly susceptible to theft. It was reported recently that $1.1 billion in cryptocurrency was stolen (globally) in the first half of 2018. Cryptocurrency is frighteningly easy for hackers to steal from those with inadequate levels of cyber security. This applies to both those who hold their currency in personal cloud wallets as well as with established exchanges. Cryptocurrency is frequently stolen with the assistance of ransomware. Previously a tool associated mostly with organised crime gangs, ransomware is becoming increasingly easy to buy and purchase online.

Finally, there is growing concern surrounding a yet further category of cryptocurrency crime. A recent study demonstrates persuasively that the dramatic volatility in cryptocurrency prices experienced last year was caused by market manipulation.

Notwithstanding this proliferation of criminal activity, to date these crimes have not been actively investigated or prosecuted in the UK.

The current position

The lack of regulation in the UK coupled with under-resourced and under-trained law enforcement officers has (at least in the recent past) contributed to an apparent lack of interest or appetite for pursuing the perpetrators of cryptocurrency related crimes. There are clear signs that the position is beginning to change however.

The UK government and financial regulators have grappled with the question of whether, and if so to what extent, it is necessary to regulate cryptocurrencies. Prior to this year the UK government had opted for take a wait-and-see approach, preferring instead to observe the effects of regulation in other countries, in particular the United States. This strategy has been driven in no small part by the fear that over-regulation would deter potential investors and innovators thereby thwarting the government's desire for the UK to be a global hub for Fintech such as blockchain.

There are several signs that clearly demonstrate that the UK government is starting to take a more active role. To assist with these issues (and others) earlier this year the UK government established a 'Cryptoassets Taskforce' comprising of senior leaders from government and representatives from HM Treasury, the FCA and the Bank of England.

The Taskforce met in May and July of this year and are expected to report on their findings imminently. Meanwhile in September the UK Parliament Treasury Committee reported the findings from their inquiry into digital currencies and distributed ledger technology. They concluded that regulation of cryptocurrencies is required for anti-money laundering purposes and consumer protection.

Cryptocurrencies have been on the agenda at the FCA for some time but they have been reluctant to accept responsibility for their regulation. This position has been defended by reference to the fact that cryptocurrency activities are not currently listed as a regulated activity in the Financial Services and Markets Act 2000 (Regulated Activities) Order ('the RAO'). So far the FCA has accepted that cryptocurrencies are subject to regulation only to the extent that they form part of other regulated services or products, for example cryptocurrency derivatives.

In May it confirmed that it was investigating 24 unauthorised cryptocurrency businesses operating in the UK to determine whether they might be carrying on regulated activities that require FCA authorisation, suggesting that it is confident and content to accept responsibility for the regulation of cryptocurrency but only on this extremely limited basis.

Guidance issued on the FCA website sets out the risks associated with investing in ICOs. As matters stand however the FCA has not accepted that ICOs fall within its purview as it considers itself to have jurisdiction only over those ICOs that offer tokens that could be classed as securities.

Implementation of the 5th Anti-Money Laundering Directive

Further regulation is on its way. In July of this year the UK government announced that the UK will adopt the 5th Anti-Money Laundering Directive (aimed at preventing terrorist financing and money laundering) in time for the EU imposed deadline of January 2020. This means that from January 2020 all cryptocurrency exchanges (which trade fiat currency for cryptocurrency) will be required to register with the FCA. They will also be obliged to perform customer due diligence and submit suspicious activity reports.

Although important and undoubtedly helpful, the success of these measures in the deterrence of money laundering will be dependent upon the implementation of similar measures across the globe, without which criminals will simply seek out exchanges in unregulated jurisdictions.

Moreover further regulation of exchanges will be necessary to prevent cryptocurrency theft. Without the addition of a specific requirement for exchanges who also operate as wallet providers to demonstrate a high level of cyber security adequate to protect against hackers, investors remain at risk of losing their entire investment.

Is further regulation required?

Cryptocurrencies may not present a threat to the financial status quo at this point in time but as stated by the Treasury Committee, "Crypto-assets have been embedded in certain pockets of society and industry, and it is highly likely that they are here to stay".

The Committee concluded that regulation was urgently required and that at a minimum it should be introduced to address consumer protection as well as money laundering. Further, the 5th Anti-Money Laundering Directive should be adopted as quickly as possible and that via an extension of the RAO, the FCA should regulate both the provision of crypto exchange services and the issuance of ICOs.

It remains to be seen when and even whether these recommendations will be acted upon. What is clear is that cryptocurrency related crime is now being treated seriously by the UK government and regulators alike and an increase in the active investigation and prosecution of those crimes will surely follow.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions