Bank of England Bitcoin crackdown regulation
Cryptocurrencies are still in a massive growth phase and this is unlikely to slow down soon, though they are facing regulatory headwinds.
Despite Bitcoin being largely unregulated in the UK today, there is ‘backdoor’ legislation helping to regulate the market – such as anti-money laundering (AML) laws. Further regulation is required to protect those who have invested in the cryptocurrency against theft or loss.
If a clearing bank, for example, goes bankrupt, consumers’ deposits up to £75k are protected. But, because the cryptocurrency market is not regulated there is no protection. As a Bitcoin investor, should your account be hacked, you’d hope the institution that holds your currency would have a back-up service provider in place to recreate the record. However, as this does not exist, there are no such protections in place – unlike having cash in a current account or ISA, which would be protected.
Unlike IPOs, ICOs are not heavily regulated and need to be approved by many parties. The Ethereum network’s ICOs alone have apparently resulted in considerable phishing, Ponzi schemes, and other scams, accounting for about 10% of ICOs. This is a result of there being very little information provided (such as track records), and no real proof of concept. The lack of regulation of ICOs means that this information isn’t provided which leaves investors in the dark. China and South Korea have already banned ICOs due to a high proportion of them being seen as untrustworthy or likely to mislead investors or potential investors.
What form might regulation take in this area? Traditional so-called ‘fiat’ currencies aren’t regulated currently as financial products as such. They are regulated only indirectly in the sense that institutions holding them (deposit takers or banks) or transferring them (payment service providers) must be licensed. So it would seem imbalanced if crypto currencies were regulated as a product type. What’s more likely is the regulation of ICOs- it might be possible to bring these within the scope of laws governing securities offers and trading, which in a sense demonstrates a line of thinking that crypto currencies are more of an investment product to be held with the hope of achieving gains, rather than a means of exchange.