Bringing cryptocurrency to the front line: Who, what & why?
Bringing cryptocurrency to the front line: Who, what & why?
When we hear the word ‘cryptocurrencies', three fixations tend to pop up; price volatility, anonymity and of course, its enduring association with the darker corners of the internet.

With more than 1,500 unique coins and tokens out there (amounting to £309 billion total capitalisation), it's not hard to see why the regulators are looking to shine a brighter light on this market.
 
This blog looks at the bodies seeking to regulate cryptocurrency, including the proposed methods and market sentiment.

Why regulate?

The stand-out arguments for regulatory intervention are greater consumer protection and more effective financial crime prevention.

In respect of consumer protection, with Bitcoin's meteoric rise in price last year and subsequent monumental crash, this is more relevant than ever.
 
Banks and card issuers such as Lloyds, Bank America and JPMorgan have banned the purchase of cryptocurrencies on their credit cards, ostensibly to protect their customers from volatility and risk. 

In the UK, Parliament recently-launched a digital currencies inquiry, therefore providing an education (as well as a sense of regulatory direction).
 
Equally important is the potential for far more efficient financial crime prevention. Bitcoin and cryptocurrency in general, has long been tarred with the brush of facilitating financial crime; despite a litany of benign uses, this reputation is not undeserved.
 
Indeed, a recent European Commission report affirms that decentralised virtual currencies are a potential new criminal tool for terrorist financiers and money launderers to move and store criminal funds for the following reasons:
 
●        A lack of EU regulation and monitoring in the area;
●        An inability to report suspicious activities to financial intelligence units;
●        The ‘dark pool' effect; and
●        The inherent features of anonymity and cross border reach, as well as structural complexities.
 
Who might regulate?
 
In the United Kingdom, the Financial Conduct Authority (FCA), as the regulatory body for firms providing financial services, seems the best fit.
 
The FCA does not regulate cryptocurrencies at present, although it has published consumer warnings branding both cryptocurrency contracts for difference (CFDs) and Initial Coin Offerings (where investors exchange legal tender or an established cryptocurrency for tokens in a new cryptocurrency) as high-risk, speculative investments.
 
However, the FCA does not appear to be beating the drum for greater regulation. Indeed, FCA chief executive Andrew Bailey, rejects Bitcoin's description as a currency, describing it instead as a ‘very volatile commodity' which, as a commodity, would not come under the purview of the FCA.
 
However, HM Revenue and Customs (HMRC) takes the inverse view, treating cryptocurrencies as if they are a foreign currency (thereby exempting it from value-added tax) and designating it as an intangible asset (for capital-gains purposes).
 
Fortunately, the EU's proposed amendments to 4MLD may provide the regulatory direction needed to resolve this dilemma. Referred to as the ‘Fifth Anti-Money Laundering Directive', this draft proposal sets out a clearer legal definition of virtual currencies (which all member states must implement), and expands the category of obliged entities to include providers of exchange services between virtual currencies and fiat currencies, as well as custodian wallet providers.

What's the market sentiment?
 
With supranational bodies looming, market sentiment seems to have shifted towards embracing regulation and self-regulation, as a necessary step towards widespread adoption. Some UK firms are already taking steps to collectively promote a sound benchmark in terms of best practice for the crypto market.
 
CryptoUK was officially announced as the first self-regulatory trade association for the UK cryptocurrency industry. Comprising of seven UK-based companies, this body is intended to promote best practice by having its members subscribe to a ‘Code of Conduct'. This includes best practice guidelines on due diligence, segregation of customer funds and the promotion of formal engagement with regulatory and legal bodies, including law enforcement.
 
Conclusion
 
The subject of cryptocurrency is a complex and evolving one, presenting an ever-changing risk exposure to those firms brave enough to get involved.

2018 is already shaping up to be a breakthrough year vis-a-vis cryptocurrency regulation. As Mark Carney, governor of the Bank of England and chairman of the G20's Financial Stability Board, said: “The time has come to hold the crypto-asset ecosystem to the same standards as the rest of the financial system. Being part of the financial system brings enormous privileges, but with them great responsibilities.”

Contributed by Karen Vickers; head of financial crime at fscom.  

*Note: The views expressed in this blog are those of the author and do not necessarily reflect the views of SC Media UK or Haymarket Media.