Deal or no deal, Brexit is happening, and our government is fully aware of its potential impact. The main concern is whether London would remain the hub of innovation post Brexit and what can be done to maintain such status. The Crypto Asset Task Force was put together involving the Financial Conduct Authority, HM Treasury and Bank of England for the purposes of protecting consumers and market integrity to mitigate the risks posed by cryptoassets and distributed ledger technology (DLT), also known as blockchain.
Cryptocurrencies evolved to meet a need
The report was released a day before the 10th birthday of Bitcoin, the very first digital currency that was invented at the back of the 2008 financial crisis. It is worth reminding ourselves that this innovation, like any other innovation, came to life to meet a need. To give people the power back over their money instead of governments and central banks having control over it and messing it up through poor management and bad decision makings.
10 years later, the UK government still own 51.5% shares in RBS, which basically means that public money is still tied up to rescue a bank in crisis. An average consumer had no say over this government decision considering all of the risks involved. Decentralised cryptocurrencies came to life to serve the basic needs that fiat money served but without the oversight of centralised banks. To be used as a means of exchange, to act as a medium to hold value and to facilitate investment returns, very similar to how people make profit due to fluctuations in the foreign exchange currency market. So, what seems to be the issue and all the noise for? The phrase ‘the gene is out of the bottle’ is perhaps the best way to describe the whole innovative space. Like anything else in life, something new gradually works its way through a legacy system and faces many challenges until it becomes common knowledge and merges itself into everyday use.
What’s holding us back?
In the UK there are 500 independent shops, bars and cafes around the country that accept Bitcoin as a means of payment and the numbers are dropping. There are fewer than 15 cryptoasset spot exchanges headquartered in the UK, which put trade volumes above $249 million. This is 2.66% of daily global trading volumes. Thus, for bitcoin and its peers to become mainstream there is still a journey to go through. But the key questions here are – what has stopped the journey from progressing further and where does the hesitation lie? Is it that we don’t know enough about it or that we are too worried, which is a consequence of lack of knowledge as well?
The FCA, HMT and BoE collectively have drawn a conclusion stating that DLT has the potential to deliver significant benefits in both financial services and other sectors, and all three authorities will continue to support its development. They have also agreed to take actions to mitigate the risks that crypto assets pose to consumers and market integrity, which in summary are; to prevent the use of crypto assets for illicit activity; to guard against threats to financial stability that could emerge in the future; and to encourage responsible development of legitimate DLT and cryptoasset-related activity in the UK.
Having spent the last 6 months as Chief Compliance Officer for one of the UK’s leading crypto currency exchanges, London Block Exchange and consequently having had multiple interactions with the FCA as an entity seeking regulations in the custodial space as well as electronic money, I am of the view that whilst the competent authorities are responsible and accountable for market integrity and consumer protection, the firms that are active in this space can still adhere to the principles of existing regulations and best practices to serve the same purpose. Until the law of the land can enforce and prosecute regulatory frame works in this space, the ethical mindset of senior leadership among crypto active businesses can act as if regulations are already in place. The basics have not changed when dealing with a different asset class. The ‘right thing to do’ is to ensure the firm knows its customers, understands the purpose of transactions and has verified source of funds. This is to prevent facilitating money laundering and terrorist financing and many other types of financial crime.
The Crypto Asset Task Force
The task force has promised to produce the most comprehensive response globally for the use of crypto assets for illicit activity. 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. Furthermore, the authorities will continue to warn consumers of the risks of investing in crypto assets and monitor potential implications for financial stability. This is to ensure the UK maintain its international reputation as a safe and transparent place to do business in financial services; to ensure high regulatory standards in financial markets; to protect consumers; to guard against threats to financial stability that could emerge in the future; and to allow those innovators in the financial sector that play by the rules to thrive so that the benefits of new technologies can be fully realised.
My personal contribution to this space is my passion and eagerness for education. Fear of the unknown can be removed once we understand the technology that sits behind digital assets and apply effective risk management. Thus, the entire industry can benefit from it. I will be running an open course through Financial Services Training Partners (FSTP) on 21st February 2019 with the focus on Cryptocurrency and Digital Asset Compliance. I am hoping through such platforms that my peers in the compliance space and the leaders of financial services firms can collectively gain a deeper understanding of the space, which would facilitate the commercial expansion plans and product diversification of such organisations.
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