Are regulators catching up with cryptocurrencies?
The growth of cryptocurrencies has left regulation trailing in its wake, with the chair of the UK’s Treasury Committee going as far as saying that, “Bitcoin and other crypto-assets exist in the Wild West industry of crypto-assets”.
That comment from Nicky Morgan MP also highlights another problem that regulators have to wrestle with – what exactly is a cryptocurrency? The committee’s remit was to look at digital currencies but by the time it reported, it had decided that it wasn’t accurate to call them currencies at all and that assets was a more appropriate name.
Currencies, the committee concluded, had to be a medium of exchange, a store of a value or a unit of account and no cryptocurrencies performed these functions. It said that “well-functioning cryptocurrencies exist only as a theoretical concept”.
In the UK, as cryptocurrencies are not considered currencies or commodities they fall outside the grasp of the Financial Conduct Authority (FCA). The committee thought it was high time some action was taken, with Morgan adding that: “This unregulated industry leaves investors facing numerous risks. Given the high price volatility, the hacking vulnerability of exchanges and the potential role in money laundering, the Treasury Committee strongly believes that regulation should be introduced.”
She concluded that: “It’s unsustainable for the government and regulators to bumble along issuing feeble warnings to potential investors, yet refrain from acting. At a minimum, regulation should address consumer protection and anti-money laundering.”
In a way it is not surprisingly that governments and regulators are bumbling along. As David Geale, director of policy at the FCA pointed out in his evidence to the Treasury Committee: “Everybody is feeling their way into this regulation a bit at the moment. Various jurisdictions are taking various steps. We have not yet seen which is going to be the most effective.”
At the most proactive end of the various steps scale is China, which has progressively tried to eradicate the presence of cryptocurrencies from the country. In September 2017 it banned initial coin offerings (ICOs). It has also got rid of cryptocurrency exchanges and offshore exchanges that cater to Chinese customers. Beijing has even gone as far as forbidding venues from hosting events that promote cryptocurrencies.
South Korea, which has seen millions of dollars taken in raids on cryptocurrency exchanges, is currently considering legislation that would place similar regulations on crypto exchanges to those faced by commercial banks.
Exchanges would be brought under the control of the country’s main financial watchdog, the Financial Services Commission. The country is also considering lifting the ban on ICOs which was put in place in September 2017.
While in Japan, Toshihide Endo, the new head of the main financial regulator, the Financial Services Agency, has said that he wants to encourage growth in the cryptocurrency sector while at the same time protecting consumers. Japan currently recognises cryptocurrencies as a legal payment method and has a national licensing programme for cryptocurrency exchanges.
In the EU cryptocurrency regulation is dealt with at member level. Like the UK, Germany and France both have few constraints at the moment, although the two countries joined together earlier in the year to raise the subject of cryptocurrency regulation at the G20 summit in Argentina.
The G20 concluded that members would monitor cryptocurrencies vigilantly and has also asked the Financial Action Task Force (FATF) to say how its anti-money laundering standards will apply to cryptocurrencies.
And last month in a report prepared for ministers, the Brussels-based think tank, Bruegel, called for EU-level regulation of cryptocurrencies and clearer rules on ICOs.
Outside the EU, Russia currently has no cryptocurrency regulations. However, a digital financial assets bill that could clarify the country’s approach to cryptocurrencies is currently being considered by the State Duma. President Putin’s special representative on digital and technological development, Dmitry Peskov, has said that he favours a regulatory sandbox to analyse all aspects of the cryptocurrency arena.
In the States confusion reigns as to how to categorise cryptocurrencies. The Financial Crimes Enforcement Network (FinCEN) says they are not legal tender while the IRS regards them as property and taxes accordingly.
The Securities and Exchange Commission considers cryptocurrencies to be securities, while the Commodities Futures Trading Commission has decided that they are commodities.
The US Treasury Department has now set up a Financial Stability Oversight Council working group to look at cryptocurrencies.
Following regulations introduced earlier this year, all Australian-based digital currency exchange providers need to register with the Australian Transaction Reports and Analysis Centre (AUSTRAC). Providers also need to comply with laws on anti-money laundering and counter-terrorism funding.
The Australian Securities and Investments Commission (ASIC) has jurisdiction over digital assets and ICOs that are considered to be financial products. Those that do not fall into this category are regulated under Australian consumer law.
Switzerland and Israel agreed earlier this year to co-operate on cryptocurrency and blockchain regulation. Both sides stand to gain from such an arrangement.
The Swiss are looking for access to the Israeli market for their banks, while Israel produces the majority of Intel processor chips and has recently seen greatly increased investment from Chinese mining company Bitmain.
There seems to be increased international appetite for cryptocurrency regulation but first, it seems, would-be regulators have to be clear what it is they are regulating. The confusion in the US regarding categorisation perfectly illustrates the problem.
But regulators may have a bit of time to consider their options as mainstream adoption of digital currencies seems likely to be slower than originally anticipated as people realise that the violent price swings and exchange raids are as much a part of the story as the chance to make a quick profit.