Since their creation, cryptocurrencies have been attracting significant attention from governments around the world. Due to their volatility linked to the fact that no organisation or bank manages them, they are largely unregulated. However, efforts have now started to be made to protect users.
On the 23rd of January 2019, the UK’s Financial Conduct Authority (FCA) released a non-final version of the “Guidance on Cryptoassets”. The final version will be published in the summer of this year following a consultation period.
What is it for?
The purpose of the paper is to help consumers understand the extent to which cryptocurrencies and the crypto market are regulated. This will inform users and protect them from possible risks connected to the world of crypto. It will also allow firms dealing with certain crypto assets to assess whether they act within the UK’s regulatory framework.
According to the report, the crypto market in the UK is fairly small. Only 15 out of 231 cryptocurrency spot exchanges in the world are found in the country. However, the FCA and the crypto asset Taskforce believe it is important to monitor and keep up with the growth of the market. Hence, the need of a paper clarifying what is the regulatory perimeter in which the world of crypto is found and what are the risks that the market brings to consumers.
The regulatory perimeter
It is called ‘perimeter’ because it refers to the boundary dividing regulated and unregulated cryptoassets. Through the guidance it is possible to understand which cryptocurrencies fall under what category: “‘Specified Investments’ under the Regulated Activities Order (RAO)”, “‘Financial Instruments’ under the Markets in Financial Instruments Directive II (MiFID II)”, ‘Payment Services Regulations’ or ‘E-Money Regulations’.
Through these divisions, firms carrying on activities with cryptocurrencies will supposedly be able to know whether or not they are acting within the regulatory perimeter. This may also result in an increased transparency towards users.
Trading with cryptocurrencies may bring “unexpected or large losses”. This is especially true on automated bitcoin robot platforms. While it is clear that bitcoin robots are scam products to most, searches such as “Bitcoin Revolution scam or legit” continue to bring thousands of search results on Google. The FCA states that some cryptocurrency trading platforms are failing to warn users of the risks of capital loss, volatility and poor regulation. Instead, they often “overstate benefits, playing on consumers’ aspirations for easy money and wealth”.
The FCA guidance states that the lack of regulation when trading with cryptocurrencies is a significant source of risk for consumers. Some crypto assets do not provide recourse to the Financial Services Compensation Scheme (FSCS) and the Financial Ombudsman Service (FOS). This becomes a severe issue if firms offer both products that provide recourse and those that don’t. Regulated firms should always be clear as to which are which.
Other severe risks include users trading on fraudulent platforms, cyber thefts, which affect both service providers and users, market manipulation, money laundering and more. Many of these platforms do not even provide basic company information or details about their founder, one of the most popular examples being Bitcoin Code using the alias “Steve McKay” to pose as the founder.
The Final Guidance
Even though the risks are pressing, the crypto market is still small and in a developing phase. The Final version of the guidance will be the first step of the UK’s FCA together with the Taskforce to tackle such risks. The following steps will include expanding the regulatory perimeter and anti-money laundering institutions. The organisations are also planning to increase public awareness, provide more support for businesses interacting with the crypto market and intensify sale restrictions to protect consumers from harm.