Cryptocurrency Market in the UK
In September 2018, the United Kingdom’s Treasury Select Committee ("TSC") published the result of its months-long examination of the UK’s cryptocurrency sector. It provided regulatory recommendations to protect consumers and to prevent fraud and money laundering in the cryptoasset market (the “TSC Report,” House of Commons Treasury Committee Crypto-assets Report.) Certain industry players, led by the non-profit British Business Federation Authority (BBFA), objected to these recommendations. They argued the TSC’s proposed approach lacks nuance and will lead cryptomarket participants to flee the UK for jurisdictions with fewer regulations (William Suberg, Coin Telegraph.).
The TSC Report recasts cryptocurrency as “cryptoassets” because none of the so-called cryptocurrencies satisfy the three functions used to define currency. These three functions include acting as a medium of exchange, storing value, and being used as a unit of account (House of Commons Treasury Committee Crypto-assets Report.). The TSC Report determined that cryptoassets are primarily being used for speculation and as vehicles for quick profits and losses (Id.). Because most investors are purchasing a future use of a service or value, rather than something with inherent value, cryptoassets are not currently regulated in the UK under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (the “RAO”) (Id.). The TSC Report expressed concern that as cryptoassets proliferate and are more widely advertised, the lack of regulation puts unsophisticated investors at unexpected risk for complete investment loss. (Id.). The TSC Report further expressed concern about the potential for investor losses due to hacking and irreversible loss of access to account information. (Id.)
The TSC Report also recommends that cryptoassets be regulated by the Financial Conduct Authority (the “FCA”) under the RAO, rather than building a new regulatory regime specifically for the cryptomarket (Id.) The TSC Report evaluated different regulatory schemes around the world and found in some places, like New York, the adoption of stricter regimes drove many cryptoasset companies to seek friendlier, less-regulated jurisdictions due in part to administrative burdens. In other places, like Malta, additional government regulation appeared to encourage cryptomarket growth. (Id.)
The TSC Report raises concerns about potential money laundering and fraud in a loosely or un-regulated cryptoasset market, detailing many ways in which cryptocurrency may appeal to money laundering operations, due to both the anonymity inherently associated with ownership of cryptoassets as well as the general lack of regulation in the cryptoasset market in comparison to other, more established forms of holding wealth. (Id.) The TSC Report explains that while there is limited evidence that cryptoassets are currently being used to facilitate criminal activity, there is a great deal of potential for this type of activity and thus it recommends the UK implement the EU’s Fifth Anti Money Laundering Directive (“AML Directive”), even if it completely exits the EU in March 2019, prior to the full implementation of the Directive by EU members. (Id.) Adoption of the AML Directive in the EU would require cryptoasset exchanges to comply with financing rules designed to prevent money laundering and terrorist activity that apply to other areas of the financial industry. (Id.) The TSC report suggests that the AML Directive should be implemented by the FCA, which would achieve the twin goals of preventing criminal activity in the UK cryptoasset market without requiring the creation of a brand new regulatory regime solely for this market. (Id.)
On October 29, 2018, the British Business Federation Authority, a non-profit organization, two attorneys from Baker Botts, and the CEOs of two companies in the cryptoasset market, Novum and TodaQ, produced a “counter-report” in response to the TSC Report (“BBFA Report”) (Neil Foster, Response to The Treasury Select Committee Report on Regulation of Crypto-assets.).The BBFA Report is essentially the cryptoasset industry’s response to the TSC Report. The BBFA Report advocates a nuanced approach to regulation, similar to that implemented in Malta, which is determined by the type of asset behind the cryptocurrency. This would clearly identify the level of risk an investor faces with each type of cryptoasset without unduly burdening the infant British cryptomarket with excessive oversight. (See id.) The BBFA Report acknowledges the need for regulation of the cryptoasset market and that it could be regulated within currently existing market structures. (Id.)
The BBFA Report deviates from the TSC Report in two significant ways. First, the BBFA Report focuses primarily on providing suggestions for how and by whom the cryptoasset market should be regulated. It brushes past concerns raised in the TSC Report regarding fraud and money laundering, instead implying that concerns related to criminal activity would be addressed by any proposed regulatory scheme. (Id.) , Second, the BBFA Report addresses one area of regulation not covered by the TSC Report: taxation. The BBFA Report, coming from the cryptoasset industry, could serve as a helpful roadmap to government regulators as they consider how to structure a taxation regime for the cryptoasset industry. (See id.)
The UK government’s commission of the TSC Report suggests regulation of the cryptoasset sector is a government priority. Furthermore, both government and industry voices agree that regulation of the cryptoasset market is needed for consumer protection and to prevent criminal activity and fraud. But industry and government differ as to what form that regulatory scheme should take. While reporting on the dueling reports has characterized the industry as accusing the government of proposing heavy-handed, reactionary regulation, that is an overstatement of the differences between industry and government. (William Suberg, Coin Telegraph; Natasha Bernal, Telegraph.). Rather, the two reports suggest industry and government have similar broad goals and differ only in the details of how to move forward.