UK: Regulation Of Cryptoassets: Imposing Law On The "Wild West"

Last Updated: 31 January 2019
Article by Anna Gaudoin

2018 was a year of international scrutiny for digital currencies. As regulators around the globe wake up to the potential dangers posed by the new technology (now falling under the umbrella term of "cryptoassets"), pressure has been mounting on the UK government and the Financial Conduct Authority ("FCA") to impose some form of regulation on the industry. Last year, we took a look at some of the areas likely to cause most concern and discussed how these risks might best be mitigated.1 Now, almost one year later, we consider what, if any, progress was made in 2018, and what the future may hold for the regulation of this rapidly developing market.

The need for regulation

After the final few months of 2018, there can be no doubt of the urgent need for regulation of cryptoassets. Several damning reports, such as one published in September 2018 by the UK Parliament's Treasury Select Committee, have highlighted the lack of oversight of the markets, with the Committee dubbing industry the "Wild West".2 A similar report from the New York Attorney-General's office criticised "pervasive" conflicts of interest and the lack of sufficient measures to prevent market abuse.3

Hot on the heels of these pronouncements, the UK's Cryptoasset Taskforce – which comprises representatives of the FCA, HM Treasury and the Bank of England – identified three major harms which are associated with cryptoassets.4 Firstly, harm to consumers, who, in purchasing highly volatile and potentially unsuitable digital assets, open themselves up to large losses without traditional safeguards such as compensation. Secondly, the potential harm to market integrity, caused by opacity in market practices and widespread misconduct; and finally, the risk of financial crime, stemming from concerns that anonymously-held cryptoassets are used to launder money, fund illicit activities such as terrorism and human trafficking, and defraud consumers. The Taskforce concluded that decisive action must be taken. But what would such action look like?

How should regulation be approached?

The Treasury Select Committee's report suggested that rather than creating a new framework specifically to regulate digital assets, it would be quicker for them to be brought into the scope of existing regulation. While this is arguably true, quicker is not necessarily better. Trying to shoehorn cryptoassets, with their unique challenges and fast development, into rules designed for more traditional financial instruments could be a recipe for disaster: indeed, the FCA has acknowledged in its most recent consultation that "new business models don't always map neatly into our regulatory framework" and that the complexity of some cryptoassets makes it difficult to determine whether they do in fact fall within its remit.5 It may become abundantly clear, very quickly, that the existing regulatory framework is simply not fit for this purpose. Such a situation may be even more dangerous than no regulation at all; paying lip service to the call for regulation in a half-hearted way has the potential to leave open loopholes prime for exploitation. Attempts to fill these gaps would result in a messy mishmash of old and new rules, while leaving them unplugged is equally as worrying.

However, if the FCA is to develop a new regulatory framework for this evolving asset class, it must not do so in isolation. One theme to be drawn out of the myriad of commentary from 2018 is the need for international consistency. The very nature of cryptoassets and associated blockchain technology means that these assets are decentralised and can be difficult to pin to a particular jurisdiction or regulator. A globally co-ordinated approach would ensure that there are no weak links in the chain – under-regulation in a given jurisdiction could, and likely would, be easily exploited. In responding to the Treasury Committee's report, the Government and the FCA have acknowledged this need for international co-ordination and will hopefully take this forward into 2019.

Steps have already been taken to map out new international standards, with the Financial Action Task Force ("FATF") agreeing amendments to its Standards and Recommendations to help prevent the misuse of what it terms "virtual assets" in money laundering and terrorist financing.6 The FATF plans to update its guidance to help countries implement these changes and, given the speed of innovation in the sector, will revisit the issue later this year to ensure that the Standards remain relevant. Similarly, the European Banking Authority has called for the feasibility of pan-European rules on the regulation of cryptoassets to be considered by the European Commission.7

What might 2019 have in store?

A number of consultations are in the works for the FCA. 2019 has already seen the launch of a consultation on guidance in an attempt provide clarity to firms about which cryptoassets fall within its existing regulatory perimeter.8 The consultation sets out the FCA's assessment of how the current regulations apply to different types of cryptoassets, inviting views from stakeholders by early April. Final guidance is due in summer 2019. A further consultation by the FCA later this year will look at a possible ban on cryptocurrency derivatives, while HM Treasury intends to explore the possibility of expanding the FCA's remit to cover further types of cryptoassets. The Government has previously indicated that it is willing and able to give the FCA more power to oversee cryptoassets9; 2019 may be the year these powers actually materialise.

In the meantime, the FCA is keeping itself busy. A Freedom of Information Act request at the end of 2018 teased out some interesting figures on the FCA's investigative approach10: as of 12 November 2018, the FCA had opened investigations into 67 companies involved in cryptocurrency business. 49 of these investigations have since been discontinued, with 39 resulting in consumer alerts – which warn the public that a company could be operating without proper authorisation and may be a scam – being issued. The fact that so many investigations have been closed in such a short period of time is striking. On one hand, this may be representative of the FCA's decisive approach in closing cases which do not merit further scrutiny. However, it is possible that it is a symptom of a wider problem: that the FCA simply lacks the clarity and the tools needed to police this new landscape. Enforcement action cannot be taken in the absence of a clear regulatory framework. The FCA's hands are tied until a coherent and comprehensive approach to this market is agreed.

Footnotes

1 WilmerHale W.I.R.E. Article, "Digital Currencies: Taming an Unpredictable Market" (6 April 2018) https://www.wilmerhale.com/en/insights/blogs/WilmerHale-W-I-R-E-UK/digital-currencies-taming-an-unpredictable-market

2 House of Commons Treasury Committee Report on Crypto-assets (12 September 2018), accessible at https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/910/910.pdf

3 Office of the New York State Attorney General, Report on Virtual markets Integrity Initiative (18 September 2018), accessible at https://ag.ny.gov/sites/default/files/vmii_report.pdf

4 Cryptoassets Taskforce: final report (October 2018), accessible at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752070/cryptoassets_taskforce_final_report_final_web.pdf

5 Guidance on Cryptoassets, FCA Consultation Paper CP19/3, January 2019 https://www.fca.org.uk/publication/consultation/cp19-03.pdf

6 FATF statement, "Regulation of virtual assets" (19 October 2018) http://www.fatf-gafi.org/publications/fatfrecommendations/documents/regulation-virtual-assets.html

7 Financial Times, "European Banking Authority calls for pan-EU rules on crypto assets" (9 January 2019) https://www.ft.com/content/cb03dd96-1378-11e9-a581-4ff78404524e

8 Guidance on Cryptoassets, FCA Consultation Paper CP19/3, January 2019 https://www.fca.org.uk/publication/consultation/cp19-03.pdf

9 Financial Times, "UK government 'ready' to allow regulator oversight of crypto assets" (20 December 2018) https://www.ft.com/content/21e9c220-043c-11e9-99df-6183d3002ee1

10 Financial Times, "FCA probes 18 businesses involved in cryptocurrency transactions" (30 December 2018) https://www.ft.com/content/04e22444-0c32-11e9-acdc-4d9976f1533b

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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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