What Does the Future Hold for the Use of Cryptocurrencies in the UK? Current and Proposed Regulation

The global cryptocurrency market is booming. At the time of writing, there are over 2,300 cryptocurrencies in existence across the world. While the use of cryptocurrencies was previously viewed with suspicion – mainly due to the lack of central authority – important steps have been taken in this country to regulate the crypto industry and promote the UK as an attractive jurisdiction for investment.

How has the UK Government viewed cryptocurrencies?

For a start, the Government has questioned whether the term 'cryptocurrency' is appropriate. It believes these currencies more closely resemble a store of value rather than a medium of exchange and suggests that 'cryptoassets' is a more accurate descriptor.

In 2018, the Government’s Cryptoasset Taskforce published a report considering the opportunities and risks of cryptoassets. While there was recognition of their potential benefits for markets, businesses and consumers, the report concluded that there remains a considerable risk, including harm to consumers, market integrity and financial stability.

The Financial Conduct Authority (FCA) has been clear about its view on these currencies, stating that they “have no intrinsic value” and warning investors to “be prepared to lose all the value they have put in.”

Are cryptocurrencies regulated in the UK?

Up to now, the UK Government has not made any specific laws restricting the use of cryptocurrencies. This means that the transfer, purchase and sale of Bitcoin and other cryptocurrencies are not subject to any regulations.

Guidance from the FCA, however, explains that cryptoassets that provide rights, such as ownership or profit-share entitlements, do come under its regulatory remit. Further, derivates of cryptoassets, such as products funded by cryptocurrency, are also included in the FCA’s remit. Due to the confusing nature of this approach, it’s unsurprising that there hasn’t been a great deal of FCA enforcement in the cryptocurrency industry.

Much time has been spent on working out how to regulate these volatile currencies and the fast-paced sector they operate in. The challenge is in finding a solution that encourages investment in the UK market while protecting consumers.

Is cryptocurrency regulation on the horizon?

Yes, regulation is imminent. The UK will adopt the 5th Anti-Money Laundering Directive – which aims to strengthen enforcement against the funding of terrorist activities and money laundering – within the timeline imposed by the EU. This means that, from January 2020, all cryptocurrency exchanges will have to register with the FCA, perform checks on customers and report any suspicious activity.

The Government is also considering extending its regulations beyond that required by the EU to cover:

• peer to peer exchange platforms;
• cryptoasset ATMs
• non-custodian wallet providers;
• crypto to crypto exchanges; and
• non-UK based firms providing services to UK customers.

Depending on the outcome, these enhanced regulations could have a significant impact on cryptoasset businesses.

Further, the UK Jurisdiction Taskforce, which was established to support the digital transformation of the UK legal services sector, recently announced two important developments: cryptoassets are recognised as property and smart contracts are enforceable in English law. The legal certainty this provides is likely to help drive innovation in many markets and make England and Wales an attractive jurisdiction for investors.

Conclusion

While these are undoubtedly positive steps when it comes to protecting consumers and preventing the illegal use of cryptocurrencies, more is needed to provide effective regulation of cryptocurrencies. Success will be determined by effective regulation globally – without this, criminals will simply look to use exchanges in unregulated jurisdictions.

Still, it is clear that cryptocurrency regulation, at last, is being treated more seriously by the UK Government and regulators, and they are unafraid of taking a different, and potentially more extensive, approach to the EU and other jurisdictions.

Should anyone require professional advice on cryptocurrency regulation, please do not hesitate to get in touch with Sundeep Oberoi at SNV Law.

Sundeep Oberoi,

Solicitor, 03/12/2019 SNV LAW: www.snvlaw.co.uk

Disclaimer: the contents of this article are for general information purposes only. Nothing in this article constitutes legal advice or give rise to a solicitor/client relationship. The reader should obtain specialist legal advice in relation to their specific circumstances. No warranty, express or implied, is given as to its accuracy and the author does not accept liability for error and/or omission.