By Arianne King
Over the last few months, a number of governments and regulatory authorities have become increasingly vocal about their plans to beef up the checks and balances applied to the cryptocurrency markets.
For example, at the back end of 2017, the chairs of the US Security Exchange Commission (SEC) and of the Commodity Futures Trading Commission (CFTC) co-authored a column in the Wall Street Journal in which they did not mince their words. Case in point: ‘SEC will vigorously pursue those who seek to evade the regulation, disclosure and anti-fraud requirements of our securities laws.’ In the same column, they made it clear that crypto-market participants, including broker-dealers, investment advisers and trading platforms, are all being closely monitored.
The sentiment is similar here in the UK, where the Government has begun to discuss the EU’s proposed amendments for the Anti-Money Laundering Directive. These would bring digital currency exchange platforms and wallet providers under the purview of existing legislation. The topic of crypto regulation was even covered by Theresa May in her address to the World Economic Forum in Davos in January.
There’s no doubt that change is afoot.
The current regulatory landscape
Although there is no specific UK legislation covering the cryptocurrency markets, it’s wrong to conclude that they operate outside the law or beyond the FCA’s control. However, until such laws are passed, the FCA won’t have any specialised powers by which to regulate Initial Coin Offerings (ICOs), coin operators or protect investors.
Although most ICOs are not regulated by the FCA, some ICOs feature parallels with Initial Public Offerings, private placement of securities, crowdfunding or even collective investment schemes. Some tokens may also constitute transferable securities and therefore may fall within the scope of the FCA’s regulatory powers.
Accordingly, whether an ICO falls within the FCA’s regulatory boundaries or not can only be decided on a case-by-case basis.
New UK regulations; what will change?
Exactly what new specialist regulations will include is still very much to be determined.
Unsurprisingly, the UK Government seems to be most concerned with expunging the crypto markets of criminal activity such as money-laundering, the funding of terrorism and outright theft. This agenda may signal an impending legal obligation to disclose who controls the wallet; information that is currently anonymised. It is also highly likely that reporting of suspicious activity will become mandatory.
Japanese regulations may provide some clues as to what to expect here. Enforced in April 2017, these include protection against bogus ICOs as well as compliance with existing anti-money laundering rules and know-your-customer regulations.
Whatever their exact form, it’s still reasonable to expect that any new regulations will be favourable to the market, recognising that the asset class is here to stay and is integral to the workings of the global economy.
Onerous rules and outright bans are highly unlikely.
New UK regulations; when will they be introduced?
The Government remains tight-lipped on the exact date that special laws will be introduced, but there is a clear desire to act fast, as – in the crypto markets at least – the lawmakers are very much playing catch-up.
Parliament’s definition of the word fast and the market’s definition are of course very different, but we’d be surprised if a change to the law doesn’t take place at some point during 2018.
New UK regulation; how will it be enforced?
This is an even more difficult question to answer.
Even when specific laws are passed that give the FCA greater regulatory powers, it’s still unclear how these laws will be enforced. The blockchain technology that underpins cryptocurrencies is, of course, encrypted and anonymised, and these chains don’t recognise national borders or individual countries’ specific laws.
It’s hard to police what you can’t even see.
Regulation welcomed from all sides
In my previous blog I talked about how regulation will provide much needed reassurance to mainstream investors who are considering participating in the crypto markets. However, it’s also worth noting that many coin operators will also welcome a more closely defined regulatory regime. In the absence of specific laws, some have even proactively gone out of their way to float on regulated stock exchanges as a way of proving their credibility.
After all, legal firepower brings legitimacy and, with it, a far greater market opportunity.