New UK Sheriff for “Wild West” Crypto-Assets?
The House of Commons Treasury Committee (the “Committee”) recommended, in a report issued on 19 September 2018 (the “Report”), that the UK Government regulate what the Committee called the “Wild West” crypto-asset markets by regulating activities relating to each crypto-asset, rather than the crypto-asset itself.
The Committee’s Recommendation
The Committee recommended that the UK government regulate the crypto-asset markets in order to address the current ambiguity and continuing issues affecting the market. The Committee’s report highlights what the Committee views as key issues and the ways in which future regulation might address them.
Crypto-assets, including initial coin offerings, are not currently regulated by the UK Financial Conduct Authority (the “FCA”). This means that currently there are no formal FCA mechanisms in place to provide investors in crypto-assets with any regulatory protections or compensation in the event of loss.
The report identifies the following as some of key issues and risks affecting investors in crypto-assets:
- Price Volatility. While substantial swings in value offer investors the potential for large gains, they also subject investors to large risks of loss, with the potential for investors to lose their entire investment.
- Risk of Hacking. Several crypto-asset exchanges offering investors the ability to exchange their crypto-assets into conventional or fiat currency have been subject to a number of successful hacking attempts. This has resulted in instances where investors have had their crypto-assets stolen, with no recourse or compensation.
- Password Protection. Some customers have lost their passwords to a crypto-asset platform and have then been told that their password cannot be restored. This results in customers permanently losing access to their account with the crypto-asset platform and access to the crypto-asset itself.
- Advertising. Advertisements for both initial coin offerings and crypto-asset exchanges are unregulated by the FCA. Without regulatory oversight, these advertisements are often one-sided and imply that the crypto-market will only continue to increase and that large returns are almost guaranteed. Such advertisements may mislead investors, and the current investor warnings issued by the FCA have not had a sufficiently large corrective effect to address this imbalanced impression.
- Market Manipulation. The relative illiquidity and low trading volumes on crypto-asset markets leaves investors vulnerable to a greater risk of coordinated price manipulation, particularly given the lack of regulatory oversight, with the FCA citing these factors in its evidence as leaving ‘greater potential for malicious actors to coordinate price manipulation’.
The Committee recommended regulating activities relating to a crypto-asset by extending the UK’s Regulated Activities Order (rather than regulating the underlying crypto-asset itself) as the most practical approach. Regulating the offering of crypto-assets for example could help ensure that there are sufficient investor protections in place to mitigate the exposure to high price volatility. Similarly, regulating the marketing of crypto-assets may help assure that investors are more informed about the risks of an investment in crypto-assets.
The report also noted the risk that investments in crypto-assets could be used to facilitate money laundering or terrorist financing, in particular at the point where a crypto-asset is exchanged for fiat currency. The UK Government is currently considering how to address this concern, in particular whether this will be included in the UK’s implementation of the Fifth Anti-Money Laundering Directive, due to occur by 10 January 2020.