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Setting the Rules of the Crypto Assets Game

Helen Disney explains the need for regulations to cover the different activities and jurisdictions for crypto assets.  For the industry to develop a set of rules that protect the public from financial risk are vital.

(Unblocked Events Founder, Helen Disney)

When it comes to new technologies, the innovator’s role is to invent and disrupt. Sometimes this means breaking the mould and perhaps – unwittingly or even intentionally – going beyond the parameters for which the current set of societal rules have been formulated. The evolution of bitcoin and other cryptocurrencies over the last decade, combined with innovation in the use of blockchain and distributed ledger technology for enterprise applications, has left regulators and policymakers in a quandary. The technologies are moving so fast and throwing so many traditional ways of doing things up in the air, that it is hard for even people close to the industry to keep up, let alone for those trying to decide how and whether to come up with a new set of rules to protect the public from financial risk.

As a consequence of this uncertainty, jurisdictions around the world are all treating so-called crypto-assets in different ways and the result until now has been a high degree of regulatory arbitrage, with projects looking to settle wherever the business environment and access to capital is most favourable.  Often this is linked to where there is less fear of possible regulatory reprisals for starting up a new venture, but regulators may not know how to handle this behaviour .

A number of locations have fought for the prize of being the home and host to this new wave of technological innovation. Zug in Switzerland has become known as Crypto Valley while other jurisdictions such as Singapore, Gibraltar, Malta, Bermuda, Thailand, the Cayman Islands and the Isle of Man have all created the conditions for start-ups to find access to banking or other services, which may not yet be so readily available in the traditional financial capitals of the world.

London and the UK in general has been supportive of blockchain and cryptocurrency businesses – at least in words and in some cases actions such as the growth of the FCA’s regulatory sandbox. Yet companies in the UK still complain that they struggle with basic issues like being able to open bank accounts. Moreover, the climate of uncertainty surrounding the future implications of Brexit, has also been a challenge.

This week the UK government published the much-awaited second report from its recently formed Crypto Assets Task Force (CTF). Highlights of the report include the announcement that the UK government will issue guidance by the end of 2018 on which types of cryptoassets fall within existing regulations and they will also make proposals for extending this existing regulation to cover other cryptoassets. There will be a further consultation in 2019 on a possible ban on retail sales of crypto based derivatives (CFDs) – most likely these sales will be restricted to accredited investors only, which already happens in the US. Next year will also see a further consultation on regulation of tokens as well as a crackdown on the use of cryptoassets for illegal purposes.

The report has generally been well received with an overall view emerging that the UK is taking a measured approach and consulting intelligently with a wide range of experts – and with a valid concern to protect consumers. But some critics of the findings argue that this type of regulatory approach may be too much of a blunt instrument which does not take into account the variety of types of uses for cryptocurrencies and tokens that now exist beyond our traditional understanding of investing. Industry experts are now trying to classify different types of crypto assets and think about taxonomies for how they should be treated. In operationalising this concept, There may be certain rules that should apply to cryptocurrencies like bitcoin which are being used as a store of value which would not be suitable for other emerging uses of tokenisation.

At around the same time as the UK report came out, in contrast, Japan’s Financial Services Agency (FSA) took a rather different line, giving its cryptocurrency industry a self-regulatory status. Unlike the UK, it will allow the Japan Virtual Currency Exchange Association to police and sanction exchanges for any potential violations. France and Thailand have also gone down a more self-regulatory road asking Initial Coin Offerings (ICOs) to self-register and sign up to some minimum standards, although France is now also considering making its rules and oversight stricter. There have been some further calls for this at the EU level including from the Brussels-based think tank Bruegel, which has argued in recent months that there is the need for the EU to regulate the cryptocurrency market particularly around ICOs and exchanges. Post-Brexit this could present an opportunity for the UK to take a different approach.

While much remains up in the air, the race to capture the value of this new wave of technological innovation is on and it will be interesting to see how 2019 plays out as the cryptocurrency market continues to mature and evolve and in particular with greater interest growing from the institutional space. Ten years on from the publication of the Bitcoin white paper, the debate has moved from a handful of developers to the mainstream of political and policy debate. That, in itself, is a milestone worth celebrating.


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