How do you regulate the most hyped, chaotic asset class ever seen? An asset class described as an “infectious disease” (Barclays), a funding Trojan horse for terrorists (Meir Amit Intelligence and Terrorism Information Centre) as well as a mirage (billionaire investor Warren Buffett)?
That’s the question global regulators – from Washington to London to Buenos Aires, many barely aware of this class of security till last year – are now under pressure to answer.
Crypto respect has been slow. But it’s inching up. On 17 April IMF boss Christine Lagarde blogged that some cryptocurrencies were “fast”, “inexpensive” and their underlying efficiency could help markets function “more efficiently”.
“An important initial step,” she added, “will be to reach a consensus within the global regulatory community on the role crypto-assets should play.”
Tax and protection money
So, roll on the policy makers: in early April the UK’s Financial Conduct Authority said it wanted more regulatory grip on cryptoassets – cryptoassets being a more accurate term given no crypto is a real medium of exchange – and will join forces with the Bank of England and the Treasury in the third quarter of 2018 to plough forward.
If cryptoassets can be regulated they can be taxed – a huge Treasury incentive. For consumers, regulation may offer a measure of protection. Pricing discrepancies might also fall as cryptos become more accepted (if so the City of London might want a digital asset exchange up and running fast.)
However Karen Vickers, head of financial crime at financial advisory Fscom, worries UK regulations could end up being a retrofit cobbling of existing policies and procedures. “They won’t provide,” she told Capital, “the same degree of benefit as those which are fit-for-purpose and designed to factor in the differences between cryptocurrencies, crypto-assets and utility tokens.”
Regulation and resource worry
How regs are applied is just as important. Vickers says regulators seem to be flying blind at the moment. “The regulators seem unsure about what or how to regulate and, until something changes here, it’s hard to make a clearer prediction.”
Stephen Bennett is head of the crime team at Gardner Leader solicitors. He recently defended a Bitcoin trader who was targeted by thieves in his own home. The trader was quickly embroiled in a money laundering and drug trafficking scam – on behalf of what he thought was a legitimate client.
Bennett says while regulation is inevitable, how will the police handle it? There is a massive education gap, plus on-going resources pressure.
“My client was doing a lot more to KYC [know your customer] the people he was dealing with. Thank goodness he did because he did enough to persuade the police he was not involved with the money laundering process. But the simple steps of identifying who you’re dealing with is not yet part of regulation in this sector.”
Daniel Wolfe, CEO of Tradingene, wants the FCA to show a deft touch. Too heavy a hand “may shift the industry to jurisdictions already at work on a settled framework – Gibraltar, Zug in Switzerland, Japan and the Cayman Islands”, Wolfe told Capital.
Any UK rule-making will likely to be followed by other jurisdictions says Dr David Ramm, corporate partner at Morgan Lewis, “although people will also be looking closely to regulation put out in the US by the SEC”.
Somewhere between sensible consumer protection and sufficient innovation is a middle ground. Many crypto players themselves want regulation. And industry acceptance, seemingly, continues: the FCA recently approved an e-money licence to Coinbase. Even the Royal Mint has its own token.
“We’re at that time,” Ryan Zagone, director of regulatory relations at Ripple Labs told the Telegraph recently, “where we need more clarity and rules and we need more certainty. It’s a good time to start revisiting that ‘wait and see’ approach taken by regulators."
UK lead not evident
UK financial regulation is often slow, sometimes favouring private censure over action. The recent tougher tone from the Bank of England still lags other developed nations like Japan: last year Japan introduced tighter money laundering rules that included cryptos (Japan is Bitcoin’s biggest market).
Yet the UK is a global fintech leader – in principle you’d think it has the potential to hack its way across the crypto scrub without breaking too much of a sweat.
To date, one unimpressed industry watcher told Capital, “the extent of the FCA’s involvement has been to release a handful of public warnings on the risks of investing, as well as a reminder that firms offering cryptocurrency derivatives need to be authorized”.
Clearly, the real spade work has yet to start.