One day summit - Regulation of Cryptocurrencies

4th December 2018 Business Crime

I recently spoke at the City and Financial Global one day summit on the Regulation of Cryptocurrencies. The keynote speaker was Christopher Woolard, the FCA’s Executive Director of Strategy and Competition. The day began with conversations on the The Cryptoassets Taskforce Report. Speakers included Deputy Director HM Treasury, Financial Services Domestic Strategy and Head of Division, Note Operations, Bank of England. The opening sessions set out the risks faced by regulators, including harm to consumers and market integrity, the use of cryptoassets for illicit activities and potential future threats to financial stability. In order to mitigate risk, the Taskforce has committed to a number of actions, including consulting on:

  • Perimeter guidance by the end of 2018 to clarify which cryptoassets fall within the existing regulatory perimeter, and those cryptoassets that may fall outside;
  • Whether the regulatory perimeter requires extension to capture cryptoassets that have comparable features to specified investments, but currently fall outside the perimeter;
  • A separate consultation by Q1 2019 on a potential prohibition of the sale to retail consumers of derivatives (including contracts for differences, options, and futures) referencing certain types of cryptoassets;
  • Given the complexity and new challenges presented to traditional forms of financial regulation, more time is needed to consider how regulation can meaningfully address the risks posed by exchange tokens, such as Bitcoin. The government will issue a consultation in early 2019 to further explore whether and how exchange tokens, and related firms such as exchanges and wallet providers, could be regulated effectively; and
  • Implementing one of the most comprehensive responses globally to the use of cryptoassets for illicit activities by applying and going further than the fifth EU Anti-Money Laundering Directive.

A number of industry speakers described the current state of cryptocurriencies development, from a technical and regulatory standpoint. It included lots of input from senior representatives of Fintech companies and stakeholders from around the EU, and the US. Contributors included BCB Group, CryptoUK, Ripple, Tabb Group UK, Luno, Coinfloor, Cointelligence and the World Federation of Exchanges. As a presenter, the main issue from my point of view was the relative anonymity of cryptocurrency transactions. A few companies at the event described how they gather data to make the process more transparent, but the industry is still grappling with how regulators and law enforcement agencies can be provided with cost effective tools to enable the attribution of transactions to individuals. Until this problem is solved and accountability is the norm, it will be difficult to stabilize the numerous currencies currently open to market.

Although the instances of fraud in crypto-currency transactions are far fewer than they were, most financial investigators have a long way to go in understanding the very technical aspects of relevant transactions. The application of block chain actually makes the tracing exercise more straightforward, but one still needs a name at the end of the process if for example officers are trying to attribute assets in confiscation proceedings. It also requires a novel approach in the obtaining of search warrants and the seizure of crypto-assets pursuant to S47 Proceeds of Crime Act 2002 (POCA). Section 84(1) POCA already covers crypto-currencies and restraint orders need to be worded carefully to protect assets. It remains to be seen whether reparation orders pursuant to S41(7) are used more widely to secure the repatriation of crypto-assets and how the courts approach any contempt allegations arising from dissipation or refusal to disclose the contents of a wallet. From a defendant’s perspective, the provisions require them to do something positive, rather than prohibit them from doing something. Defendants will therefore want to know whether directions are reasonable and proportionate, having regard to Article 1 Protocol 1 of the European Convention on Human Rights.

JMW Solicitor’s Business Crime and Regulatory Partners and Solicitors are experienced in advising upon allegations of cryptocurrency investigations and prosecutions. Call us on 0800 652 5559 or complete our online enquiry form and a member of the team will call you back as soon as possible. Remember, we offer an initial free consultation for all the business crime cases brought to us.

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Evan Wright is a Partner located in Manchester in our Business Crime & Regulation department

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