Regulating cryptocurrency in the UK

However in the UK, cryptocurrency, which is rapidly growing in popularity, is not heavily governed. With more than 1,500 available and more being created every week, coupled with stories of people winning and losing fortunes by investing in them, some commentators believe the UK should start to devise regulations.

Why is cryptocurrency unregulated and why is it so dangerous?

The reason most activities related to cryptocurrency are unregulated is because it does not fall under the jurisdiction of the Financial Conduct Authority (FCA). Put simply, this means there is no protection for investors because gains made trading cryptocurrency are not subject to Capital Gains Tax.

In that respect, it is treated more like gambling than investing. What’s more, high levels of media coverage means ordinary members of the public are becoming increasingly prone to invest while being potentially unaware of the risks they are taking.

Cryptocurrency is exceptionally volatile. Volatile and unregulated, providing the opportunity for cybercriminals to use cryptocurrency for scams, or as a front to fund illegal activity.

Although it receives a lot of media coverage, the market is small compared to that of other financial products. As a result, regulation has not yet been a top priority. The only rules enforced in the UK are by the Treasury, that cryptocurrency traders must reveal their identities and report any suspicious activity they encounter.

However, to meet the increasing demand for cryptocurrency, the FCA and Bank of England are currently working with the Treasury on an inquiry with a view to devising a policy for digital currencies.

Some form of government regulation would bring the cryptocurrency world into the mainstream financial sector. Experts believe it would boost innovation and help establish the UK as a world centre for cryptocurrency, where investors can speculate safely, and cryptocurrency companies can flourish.

How could cryptocurrency be regulated?

Here are some ideas on regulations that could be introduced to govern cryptocurrency in the UK.

Cryptocurrency could be taxed under Capital Gains Tax (CGT)

• Guidelines could be published to help the public navigate cryptocurrency, including ways to discern if an Initial Coin Offering (ICO) was legitimate or fraudulent
• Advertising campaign regulation to ensure adequate risk warnings are included for cryptocurrency investors
• Sharing of information related to cryptocurrency and crimes such as money laundering and terrorism being shared amongst government agencies and financial institutions

On the other hand, the UK needs to be careful not to be too heavy-handed. Over-regulation could stifle innovation and cost the UK its future place as a world centre for digital currency. It’s a balancing act, especially at a time when the country needs to keep unnecessary business regulation to a minimum.

What are other countries doing?

Perhaps we should take a leaf out of the rest of the world’s book. Other countries around the world seem to be taking a lead on regulating cryptocurrency. In the US, the Securities Exchange Commission (SEC) is increasing its involvement in ICOs and suspending traders who make false claims.

However, China has taken a different approach. In 2017, it banned cryptocurrency exchanges and sales of cryptocurrency via ICOs. Many would welcome an international approach to cryptocurrency regulation, although this looks unlikely at this time.

Facebook and Google have numbers of users and revenues to rival most countries. These tech giants are also backing away from cryptocurrency. In early 2018, both banned cryptocurrency advertising from their platforms, maintaining that the ads proved too misleading. However, they have now lifted this ban for reputable, pre-approved cryptocurrency firms.

To conclude, if cryptocurrency is to gain mainstream acceptance, there must be some degree of regulation. What this regulation will look like is the real question. Can the Government and its regulatory bodies strike a balance that sets up the UK as a global cryptocurrency centre, where investors and the public can play the markets with peace of mind? The Digital Currencies Inquiry reported in September and is awaiting response from the UK Government.

In the future, cryptocurrencies could become a bedrock of the UK’s financial sector, ultimately capable of replacing traditional means of payment. Or more likely, become one part of a complex framework of systems that interact and are regulated to ensure the financial safety of us all.

About the author: Jo Goodson is MD of Hampleton Partners and a tech entrepreneur