For almost a decade, there has been a growth in the popularity of cryptocurrencies and virtual currency, such as Bitcoins and Litecoins, as their market capitalisation continues to experience significant growth.
Their popularity comes from their volatility, lack of regulation and the potential to make extraordinary profits rapidly, without restrictions from investments and financial markets. This is a growing topic in dispute resolution and one which is presently unregulated by legislation.
What governments have done so far?
Cryptocurrencies are currently not regulated in the UK and regulators have approached this issue by trying to apply existing legislation and providing guidance to cryptocurrencies and Initial Coin Offerings on a case by case basis. Depending on the particular characteristics of a cryptocurrency, it may come within the scope of securities, funds, payments and other systems currently in force in the UK.
The Financial Conduct Authority (‘FCA’) has explored this issue and currently believes that no new rules are required, as they do not yet view cryptocurrencies as currencies.
In February 2018 seven cryptocurrency companies set up a crypto trade association called CryptoUK to self-regulate by improving industry standards (e.g. making the market more transparent and legitimate) and engaging policymakers.
CryptoUK issued a code of conduct for members which is likely to form the ‘blueprint’ for any future UK regulations. This code of conduct includes guidelines for due diligence, protection of customer funds in insolvency and the provision of providing greater pricing transparency.
In an effort to regulate money laundering risks associated with the cryptocurrency market, the EU passed the Fifth Money Laundering Directive (AMLD5) to oblige cryptocurrency exchanges and wallet providers to comply with anti-money laundering requirements.
This regulation was adopted to help prevent terrorist financing and money laundering. The AMLD5 expands the definition of “obliged entities” which now includes, and places the burden on, cryptocurrency platforms and custodian wallet providers.
An indication of how volatile and precarious the cryptocurrency market can be is level of concern among users of one Canadian cryptocurrency exchange, following the death of its founder; it is not at all clear whether they will ever obtain their funds.
As disputes in this area grow, the need for regulation and overarching legislation is becoming increasingly pressing. This will certainly be an interesting area to observe.