In February 2018, the UK Treasury Committee launched an inquiry into digital currencies. In the course of its inquiry the Committee received oral and written evidence from a number of key players in the crypto space, including representatives from Ripple, CryptoUK and Blockchain, together with evidence from the FCA (the UK financial services regulator), the Bank of England and HM Treasury.
As the law currently stands in the UK, crypto-assets fall outside of the FCA’s regulatory remit.
In terms of Initial Coin Offerings (ICOs), whether or not an ICO is regulated in the UK will depend on how it is structured and what the token subsequently represents. If an ICO falls within the FCA’s regulatory perimeter, the FCA would also be required to ensure an appropriate degree of protection for ICO investors. However, when tokens represent a claim on prospective services or products, they do not amount to transferable securities or other regulated products and therefore fall outside the FCA’s regulatory perimeter.
In terms of anti-money laundering requirements, the European Parliament adopted the Fifth Anti-Money Laundering (AML) Directive on 19 April 2018. The Fifth AML Directive will extend AML and Counter-Terrorist Financing rules to crypto-currency exchanges.
The main risks include:
- ICOs – they generally fall outside of regulation and the FCA has issued stark consumer warnings on associated risks. Investors can lose out due to inadequate business proposals, hacks, or fraud. The Committee believes that the development of ICOs has exposed a regulatory loophole that is being exploited to the detriment of ordinary investors. It recommends that the Regulated Activities Order is updated to bring ICOs within the FCA’s perimeter as a matter of urgency.
- Market manipulation – low trading volume and capitalisation creates a greater opportunity for price manipulation such as ‘pump and dump’ schemes.
In conclusion, the Committee believes that crypto-assets are likely to be here to stay. The Committee concludes that it is for the UK Government and financial services regulators to decide whether they will allow the current “wild west” situation to continue, or whether they are going to introduce regulation. It believes that the current ambiguity surrounding the UK Government’s and the regulators’ positions is “clearly not sustainable”. Given the scale and variety of consumer detriment, the potential role of crypto-assets 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 Committee considers that introducing the regulation of crypto-assets and associated activities by extending the Financial Services and Markets Act 2000 (Regulated Activities Order 2001) would be the quickest method of providing the FCA with the necessary legal powers to execute its duties of protecting consumers and maintaining market integrity. Designing a new framework of regulation would inevitably take much longer and given the growing risks surrounding crypto-assets and subsequent consumer detriment, the introduction of regulation should be treated as a matter of urgency.
Via Baker & McKenzie | http://blockchain.bakermckenzie.com/2018/09/24/uk-crypto-task-force-calls-for-regulation/