Earlier this week, the Treasury Select Committee released its report on crypto-assets, raising concerns on the lack of regulation surrounding virtual currency. Detailing the long list of risks that investors are exposed to within crypto, it argues that the government needs to decide whether or not it wishes to encourage the asset class to grow, as new regulations would both protect and attract investors to develop their portfolios.
There are two major concerns for the treasury committee regarding cryptocurrencies: initial coin offerings (ICO) and money laundering.
The report highlights the dangers of ICOs which have exposed a regulatory loophole and needs amending promptly. Most investors back ICOs in the hope of some form of return from, even though no financial return is ever promised. There is clearly an issue with marketing techniques which is misleading investors. It is being described as a “wild west situation”.
Currently, there is little the FCA can do to prevent investors from being defrauded or suffering significant losses other than presenting the risks that the individual is exposed to. Due to ICOs falling outside of the regulatory perimeter, the committee encourages the regulated activities order (RAO) to be updated and to include ICOs as “a matter of urgency”. This process would involve recognising ICOs as a regulated activity and that a body such as the FCA monitor such activities. This has previously been done with crowdfunding.
ICOs being a major concern, the committee insists that creating a new regulatory framework specifically for crypto-assets would be far too time-consuming and therefore, should simply be included within the RAO.
Due to the lack of enforced regulations, it has been taken upon by the likes of CryptoUK to act as a self-regulating body and create a code of conduct. As it is only a guideline, a lot of firms ignore the voluntary rules, which has led to exploitation by certain ICOs. Government-enforced regulations will improve security and trust levels when investing in crypto.
The chair of CryptoUK, Iqbal Gandham, commented: “Self-regulation by the industry was always intended to be a starting point – this must now be matched by government action. Regulatory oversight is essential to ensuring consumer safety, guarding against malpractice”.
The term “crypto-asset” is said to be a better fit as most merchants don’t accept cryptocurrency. The price of the assets is mostly dependent on sentiment. When it is used as tender, the circumstances usually involve some form of illegal activities, such as funding terrorism or as a vehicle for money laundering.
Money laundering was another issue that was highlighted throughout the report. The EU is already underway with introducing regulatory initiatives, adopting the fifth anti-money laundering (AML) directive which includes virtual currency. Crypto-asset exchanges are included within the AML directive, but are not included in the AML regulations. Therefore, exchanges can still be exposed to money laundering.
David Raw, Deputy Director of Banking and Credit at HM Treasury, was asked about the role that crypto-assets might play within money laundering and says that “they are seeing cases of it, but it is not widespread.”
An issue the committee brings to attention is that the AML directive won’t be completed until the end of 2019, which could be a problem if the UK leaves the EU in March 2019, given that there is no transitioning period. It would then be expected that the government replicate these supervisions and “that the FCA should be the relevant regulator for supervising anti-money laundering”.
In response to the report, CEO of deVere Group, Nigel Green, said that the committee’s approach is a positive step forward: “Cryptocurrencies are here to stay. In fact, in today’s increasingly digitised, globalised world, demand for these digital, global currencies is only set to soar in the coming years. As such, I welcome the Treasury Select Committee’s proactive and progressive approach, which could be the first step to providing regulations to protect consumers and prevent illicit activity.”
According to Green, the introduction of regulation will “give investors even more protection and, therefore, confidence in the burgeoning market is likely to drive prices higher”.