Cryptocurrency is no longer an obscure, little-known commodity. It has seen a stratospheric rise globally since the early days of Bitcoin; though that rise has not been smooth sailing in every aspect. The currencies involved have been released quickly and en masse. Generally, offerings have been very volatile in price, with the new currencies’ trading value changing rapidly. Sometimes this change has been driven by innovation within the currency; sometimes it has been the result of celebrity endorsements and social media exposure. These Initial Coin Offerings (ICOs) are a way the currencies monetise themselves and are offered for sale to the public. Known as tokens or coins, they have been offered in different forms; some have been backed by shares issued in a company or a system of prepayment in the form of a voucher for future use. Some have offered no backing or intrinsic value inbuilt. With coins or tokens being offered very early in the development process of a currency the risks have been extremely high and resulted in a widely unstable crypto market. The industry has been affected by fraud and scam companies over the years. Time Magazine recently published that crypto scams in 2021 had a global value of 14 Billion US Dollars, having almost doubled from the previous year. This clearly indicates a need for legislation within the industry to ensure it survives and becomes a trustworthy area of investment, one able to forward the type of security offered by traditional fiat currencies.
Initial Regulation In The UK
Though hardly early on in the Cryptocurrency story, the situation for British firms offering crypto-assets changed in January 2020 when the UK government gave the Financial Conduct Authority (FCA) increased regulatory strength leading to the introduction of legislation requiring UK crypto-asset firms to take due diligence in managing the risks of money laundering and other illegal financial activities like fundraising for terrorism. This required businesses involved in the trade of Cryptocurrencies and their coins and tokens to register with the FCA by the end of 2020 on a Temporary Registration Regime that was introduced at the time.
The powers given to the FCA did not go as far as to protect an individual’s assets, or even to ensure that a registered firm does so. This is far removed from the protections offered by the FCA in other areas of finance. Registration does not for example give customers automatic access to services offered by the financial ombudsman in other areas.
This leaves Cryptocurrencies only regulations in the UK that relate to money laundering as the vast majority of crypto assets lack any form of underpinning by assets or alternative fiat currencies. They are not considered to qualify to be a currency or money.
Some Cryptocurrencies do fall under the regulations enforced by the FCA, these tend to be ones offering secured tokens that give ownership or rights to the holder, this could be a future share in profits or a specific sum payable in the future.
The Government’s Stance
The UK Government recently set in motion a consultation on stable tokens and their use as a means of payment. Stable tokens, or alternatively stablecoins, are a form of crypto asset that can be used for payment transactions. These Cryptocurrencies are designed to remain stable by having reference to other assets like trading commodities or just straight fiat currency. . This does not mean Stablecoins are stable; they still fluctuate in value, sometimes very significantly. This translates to a user having either less money or more money than they thought they had to spend.
This acceptance of Stablecoins would be a big shift for the government that up to now has distanced itself from formal regulation in this area. With the government’s consultation reaching the “call for evidence” stage there is a high probability of this leading to an acceptance of the government’s proposals.
The FCA’s Future Role
When the results of the consultation are known the FCA will determine the legislation that will be applied to UK businesses in the future. How this will affect crypto-asset firms’ registration requirements is still unclear though clues can be seen from other sectors like gambling where the online casino industry has seen increased legislation and registration requirements that are designed to protect customers’ assets and prevent harm to vulnerable groups. This legislation has been supported by the gambling industry and though businesses like at a fast withdrawal casino have seen more rigorous legislation introduced, it has solidified the industry and given rise to an increase in the level of service offered and the customer’s ability to trust the gambling industry. If the same were to be seen within the crypto-asset industry the results would not only benefit the industry itself, but also its customers who can look forward to a safer regulated marketplace. With tighter controls on trading and the businesses involved, this should lead to greater stability for the coins and crypto-asset industry.
Invest Carefully
If you are considering a speculative investment in a crypto asset or currency, remember that it is still a volatile marketplace and losses can be significant. Especially if the future does not go the way you felt it would at the time of buying. You should also ensure that any firm you have financial transactions involving Cryptocurrencies is registered with the FCA under their temporary registrations scheme. The future for Cryptocurrencies and assets looks very promising within the UK, with helpful legislation and regulation that will ensure the UK has a top spot in the future of the crypto asset marketplace.
One of the reasons many people like Cryptocurrency is because of its unregulated and untraceable nature. Bringing in strict regulations around the buying and selling of the currency may affect this and that is certainly something for investors to keep in mind. For most, the regulation of digital currency will result in a smoother and safer experience, but it may well affect how some people view Cryptocurrency so certainly something to keep an eye on.