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Regulation of cryptocurrencies inches ever closer

21 November 2018. Published by Ashley Daniells, Associate

The long awaited regulation of cryptocurrencies has moved one step closer, with the Financial Conduct Authority (FCA) announcing plans to consult on regulation before the clock strikes twelve on 31 December 2018. The news comes after pressure for regulation has grown following a $15 billion crash.

The FCA has confirmed that it intends to consult on cryptocurrencies before the end of the year, in an attempt to help firms better understand the current regulation.

 

Speaking at the Regulation of Cryptocurrencies event in London, Christopher Wollard, Executor Director of Strategy and Competition at the FCA stated: "The FCA will consult on perimeter guidance by the end of 2018. This will help clarify which cryptoassets fall within the FCA’s existing regulatory perimeter, and those cryptoassets that fall outside. HM Treasury is to then consult on whether the regulatory perimeter requires an extension to capture cryptoassets that have comparable features to specified investments, but currently fall outside the perimeter."

 

As part of the same speech, Mr Wollard has confirmed where the FCA's taskforce have identified the main problems and areas of concern. Broadly, they have announced that cryptoassets are currently used in three ways:

 

  • As a means of exchange, enabling the buying and selling of good and services, or to facilitate regulated payment services;

  • For investment, with firms and consumers gaining direct exposure by trading cryptoassets, or indirect exposure by trading financial instruments that reference cryptoassets; and

  • To support capital raising and/or the creation of decentralised networks.

The taskforce have noted that whilst cryptoassets are not currently used in the UK as a major exchange tool, there are potential advantages and disadvantages to the UK market. The main concerns the task force have are:

 

  1. Harm to consumers. The risk is to those who invest in unsuitable products, and as a result may face large losses and be exposed to fraudulent activity. They may also be exposed to the failings of service providers and struggle to access market services;

  2. Harm to market integrity. Should market crashes and misconduct continue, this poses a real risk to consumer confidence being damaged in the wider market; and

  3. Risk of financial crime. This is partly as a result of the ease of which cryptoassets can be used to aid illegal activities such as money laundering and fraud.

Other points from Mr Wollard's speech include the announcement that HM Treasury will conduct a comprehensive global response to the use of crypto assets for illegal activities such as money laundering, with the aim being the creation of legislation to counter this growing problem. The FCA has also confirmed it intends to work collaboratively with international counterparts, especially given the prevalence of crypto assets in jurisdictions such as the US and Hong Kong.

 

The announcement came after cryptocurrencies suffered another setback on Tuesday 20 November, when bitcoin (the most well-known and actively traded digital currency) fell by more than 10%, its lowest since October 2017. Those with an interest in cryptocurrencies have long warned that the continued growth experienced over the last 12 months would not last and the decline seems to have started. Indeed bitcoin remains 66% down from the beginning of 2018.

 

Whilst some may suggest that such falls in value have prompted the FCA to act quicker, and indeed has provided them with more pressure, others are arguing that this indeed takes the pressure of the regulator. Gillian Dorner, deputy director at HM Treasury has stated: "We want to take the time to look at that in a bit more depth and make sure we take a proportionate approach".

 

The consultation will begin by the end of the year with the outcome expected to follow in early 2019.