UK Treasury Committee calls for regulation of “Wild West” crypto-asset market

Maria Nikolova

The Regulated Activities Order should be updated to bring ICOs within the FCA’s perimeter as a matter of urgency, and bring investor protections into line with those in the United States.

The UK Treasury Committee has earlier today published a Report on crypto-assets for its Digital Currencies inquiry. The tone of the report is stark and highlights the need for regulating what the Committee calls the “Wild West” crypto-asset market.

The report notes that well-functioning cryptocurrencies currently exist only as a theoretical concept, and the term “crypto-assets” is more helpful and meaningful in describing Bitcoin, and the many hundreds of other ‘altcoins’ that have emerged over the past decade.

Even the most widely-used crypto asset – Bitcoin – is not widely accepted by merchants. On top of that, the blockchain that underpins Bitcoin transactions cannot process anything like the volumes of transactions that would be required for it to become a mass-market payments system. Even at current levels, the energy costs of verifying transactions appear disproportionate to the potential benefits of a decentralised payments system.

The report is also critical of the idea that crypto-assets could further financial inclusion. Efforts to further financial inclusion are best focused on reducing the number of people without access to bank accounts, rather than increasing the numbers with access to crypto-assets, the Committee argues.

Regarding blockchain use, the Committee says it has not been presented with any evidence to suggest that universal applications of the technology are currently reliably operational.

With regard to the risks of crypto-assets, the report stresses that on account of their volatility alone, crypto-assets are especially risky, particularly for inexperienced retail investors. Also, investors typically access and invest in crypto-assets through exchanges. A number of these have been hacked, with customers losing significant amounts of money as a result.

The FCA’s stark consumer warning on ICOs is evidence that they present significant risks to investors. But apart from drawing attention to the risks, there is little the Financial Conduct Authority can do to protect individuals from being defrauded or losing their money. This is because most ICOs do not promise financial returns, but instead offer future access to a service or utility, meaning they fall outside the regulatory perimeter, the report explains.

The development of ICOs has exposed a regulatory loophole that is being exploited to the detriment of ordinary investors, the Treasury Committee says.

“The Regulated Activities Order should be updated to bring ICOs within the FCA’s perimeter as a matter of urgency, and bring investor protections into line with those in the United States”, the Treasury Committee recommends.

The absence of regulation of crypto-asset exchanges – through which individuals convert crypto-assets into conventional currency – is seen as particularly problematic.

The adoption of the Fifth Anti-Money Laundering (AML) Directive represents a step forward in this respect. Under the Fifth AML Directive, crypto-asset exchanges will have to comply with anti-money laundering and counter-terrorist financing rules. The Committee urges the Government to treat the transposition of the Directive as a priority, and to expedite the consultation process, which is currently not planned to finish until the end of 2019.

If the UK leaves the EU without a transition period in March 2019, the Committee would nonetheless expect the Government to seek to replicate the relevant provisions of the AML Directive in UK law as quickly as possible.

The Committee believes that the FCA should be the relevant regulator for supervising anti-money laundering.

The FCA’s consumer warnings are a feeble corrective to advertisements—on social media, billboards, trains and taxis—that only emphasise the upside opportunities of crypto-asset investing.

The advertisements for crypto-asset investing are clearly misleading to consumers and as crypto-asset activities fall outside the FCA’s regulatory perimeter, the FCA is restricted in actions it can take.

The Committee argues that the FCA has to have more power to control how crypto-exchanges and ICO issuers market their services, by bringing the activities they perform into the regulatory perimeter. Such a step would also provide investors with wider protections against mistreatment, including loss of deposits through fraud and hacking, or losing access to funds due to the loss of passwords.

The current ambiguity surrounding the Government’s and the regulators’ positions is clearly not sustainable.

The Committee considers that introducing the regulation of crypto-assets and associated activities by extending the Regulated Activities Order would be the quickest method of providing the FCA with the necessary legal powers to execute its duties of protecting consumers and maintaining market integrity.

The Committee recommends that the Government consider what “activity” related to crypto-assets should be specified in the RAO and the ramifications of this introduction. As discussed earlier, this should include at a minimum the issuance of ICOs and the provision of crypto exchange services.

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