Developments in UK law on the regulation of virtual currency

Chapter 1 Abstract

Chapter 2 Introduction
2.1 Introduction
2.2 Aim, purpose and goal

Chapter 3 Virtual Currency and digital currency
3.1 What is virtual currency
3.2 What is Digital currency
3.3 Cryptocurrencies
3.4 The difference between digital, virtual and cryptocurrencies
3.5 Focus of this paper

Chapter 4 Legislation Development on Virtual Currency in the United Kingdom
4.1 Statute
Supernational Level
Domestic level
4.2 Rules and regulations
Domestic level
4.3 Regulatory bodies
Supernational Level
Domestic level
4.4 Current status and recent development
Legal status in statutes
Legal status in recent case law and opinion from the UK Jurisdiction Taskforce
4.5 The issue met by the regulators
Lack of direct regulatory regimes applicable to virtual currencies
Insufficient regulations on virtual currencies service providers
Brexit

Chapter 5 Report from UK Crypto Assets Taskforce
5.1 The TaskForce
5.2 The Final Report: brief
5.3 Recommendations
5.4 Development

Chapter 6 Report from UK Jurisdiction Taskforce
6.1 TaskForce
6.2 The Final Report: brief
6.3 Recommendations
6.4 Development

Chapter 7 Recommendation
7.1 Framework of the recommendation
7.2 Offering Crypto Assets
‘appropriate disclosure requirements on public offerings of crypto assets’.
7.3 Trading Crypto Assets
Governance requirements of platform operators, including prudential requirements
Requirements for accessing the platform
Requirements for the robustness, flexibility and integrity of the operating systems
Market integrity requirements
Transparency requirements
AML / CFT requirements
Tradable products in the platform
Storage
Impact of liquidation and settlement.
7.4 Custody of Crypto Assets
Private key protection and key lifecycle management control
Reporting and prudential regulatory requirements
7.5 Exposure to Crypto Assets
Minimum requirement recommended by Basel Committee on Banking Supervision

Chapter 8 Conclusion
8.1 Difficulties faced by the regulators
8.2 Ahead
8.3 Some further suggestions to overcome other possible obstacles
8.4 Conclusion

Appendix

Recent Key milestones for virtual currencies in the UK

Bibliography
- E-Books
- Journal Articles
- Statutes
- Regulations
- Cases
- Guidelines
- Reports and statements
- Internet Resources and Websites
- Press release
- Newspaper

Chapter 1 Abstract

Virtual currency is digital currency, that exists in electronic form. Virtual currency can only be stored and processed through designated software, mobile devices, computer applications or a dedicated digital wallet, and transactions are made over a secure, private network via the Internet. Virtual currencies are not authorized by the central bank.

Technology has been driving the financial world, and a successful example is the increasing acceptance of electronic payments, which is also form of digital currency. Virtual currencies, such as Bitcoin, are becoming increasingly popular. PricewaterhouseCoopers estimated that about 150 active crypto hedge funds that invest in virtual currencies and currently manage approximately $ 1 billion in assets and this number does not include crypto index funds and crypto venture capital funds (making equity type investments).¹ According to the report, crypto hedge funds were able to double their AUM in 2018, and the AUM of crypto hedge funds increased from $ 2.1 million in January 2018 to $ 4.3 million at the end of the first quarter of 2019. As commented by Henri Arslanian, the PwC FinTech and RegTech Leader, China & Hong Kong, ‘ The crypto hedge fund industry today is probably where the traditional hedge fund industry was in the early 1990s ’, ‘ We expect the industry to go through a rapid period of institutionalization with the implementation of sound practices over the coming years. ’ Virtual currencies will inevitably constitute an important asset class in the financial world.

Contrast to virtual currencies, electronic payment is widely accepted and now plays an important role in the daily transactions of individuals, companies and society. This is an example how the financial innovation has been developing and benefit the society. Financial innovation has the potential to create jobs and economic activities, improve efficiency and reduce settlement costs. With the healthy development of the industry, together with the development of virtual currencies, proper evaluation on the legitimacy of virtual currencies through careful research and supervision is a more constructive measure for virtual currencies.

This work will study the legitimacy of virtual currencies through UK and Hong Kong regulations. UK and Hong Kong regulatory authorities have been claiming they have already covered virtual currencies and already regulating this part of the financial world. The study examines issues to assess if there is actual protection over the use of virtual currency and the possible reforms to existing virtual currency regulations.

Chapter 2 Introduction

2.1 Introduction

Paper or physical money will be replaced by new products and technologies, which is the irreversible trend. Among them comes the anonymous virtual currencies (cryptocurrencies).

The design of cryptocurrencies must take into account the protection of people ’s privacy, but at the same time, it must also pay attention to social security and social order. Maintain a balance between protecting privacy and combating illegal activities is the key for healthy development of virtual currencies.

In addition, the nature of cryptocurrencies may also pose significant risks to consumers. Currently, there is little or no guarantee of investment protection. Cryptocurrency exchanges can be hacked. Customers who lose their password keys will also lose all rights to use their funds. Various scams were also noted taking advantage of the mystery of cryptocurrency.

Therefore, the scrutiny and regulation on the legitimacy of virtual currencies is crucial.

2.2 Aim, purpose and goal

First, the development of cryptocurrencies is producing a new form of credit in financial system. The traditional credit of fiat currencies is with the government issuing the currencies. After receiving the fiat currencies, the residents may deposit the money in the bank and the banks act as borrowers to form a deposit. The deposit counts on the creditability of the banks. While cryptocurrencies keep developing and once they are widely accepted for payment, the cryptocurrency will be another form of ‘deposit’. The reinvestment of the ‘deposit’ is effectively equivalent to a new credit derivative product. Therefore, the law must step in earlier before thing get complicated.

Second, the most important feature of cryptocurrencies is the decentralized transfer function, which is similar to financial intermediaries. A lot of contracts will form on top of cryptocurrencies and the relevant service providers should be caught under the regulatory perimeter.

Chapter 3 Virtual Currency and digital currency

With the rapid development of bitcoin and the widespread spread of the concept of blockchain, the term ‘xx currency’ has been flooding in all kinds of news and media such as "digital currency" and "cryptocurrency" and sometimes "’virtual currency’. The concept of ‘virtual currency’ is unclear to many people. In addition, because these ‘X and X currencies’ are not very clearly and accurately defined in jurisdictions, the below will explain the concept for better understanding.

3.1 What is virtual currency

Virtual currency refers to any currency that is not printed on paper or in other physical form, so it is virtual and only exists in the virtual world.

In 2014, the European Banking Authority (EBA) defined virtual currency ‘ are a digital representation of value that is neither issued by a central bank or a public authority, nor necessarily attached to a FC (Conventional Fiat currency), but is accepted by natural or legal persons as a means of payment and can be transferred, stored or traded electronically. ’²

By this definition, the scope of virtual currency is very wide. Bitcoin can also be regarded as a decentralized virtual currency, it is not controlled by any centralized organization and can be used to buy goods and services and exchange for fiat currency. However, some opinions believe Bitcoin and similar virtual currencies are more accurately be defined as encrypted (digital) currency.

3.2 What is Digital currency

The definition of digital currency is the most divergent, but the agreed part is: the currencies are presented in digital form, rather than physical currency such as banknotes and coins.

The definition of digital currencies varies and may include encrypted (digital) currencies and central bank digital currencies. Some also argue the function assumed in those digital currencies is similar to physical currency, but can support instant transactions and ownership transfer without the geographically restriction. Therefore, to avoid further confusion, this paper will not address the object of this paper as digital currencies.

3.3 Cryptocurrencies

From the technical view, virtual currencies may sometimes be referred as cryptocurrencies. Cryptocurrencies are not issued by any centralized organization. One of the main goals of encryption is to secure data exchange. Cryptography ensure the transmitted information cannot be changed or destroyed by third parties. Cryptography combines various scientific principles, mainly mathematical principles, to provide accuracy and reliability of the algorithms and protocols of the cryptocurrencies.

The ‘encryption’ of cryptocurrencies contrasts to ‘non-encryption’ that non-encrypted digital currencies are still centralized digital currencies.

The issuance size of non-encrypted digital currencies is determined by the issuers and can be changed by the issuers. A central agency and computer network will monitor the network transactions. The wallet address and transaction information were not released. Some companies and jurisdictions are issuing this type of digital currencies. For instance, e-Dinar is a digital currency issued by the government of the Republic of Tunisia using blockchain technology. eCFA is a digital currency issued by the government of the Republic of Senegal. JPM Coin issued by JPMorgan Chase and Libra issued by Facebook are digital currencies issued by companies. Note that they are all centrally monitored and are not the focus of this paper.

On the contrary, all cryptocurrencies use distributed ledger technology to verify transactions. The issuance size of the cryptocurrencies is limited by the protocol and cannot be changed by the participants and therefore entail a nature of high scarcity. The consensus protocol is formulated within users in the community. The technology provides users with good privacy protection, but the transaction information is completely open and transparent, and the transaction record could not be overridden or changed by any authorities or users, i.e. supervised by all participants. The most familiar version of this record is the blockchain used by Bitcoin.

3.4 The difference between digital, virtual and cryptocurrencies

Digital currencies include virtual currencies, and virtual currency includes cryptocurrencies. Compared with virtual currencies, digital currencies are a larger group representing monetary assets in digital form.

Digital currencies can be regulated or unregulated.

- In the former case, the Central Bank of a country can issue the digital form of its legal currency and denominated in its sovereign currency.
- In the latter, digital currencies could also be

a) unregulated in centralized controlled form (this approach is known as a ‘permissioned’ distributed ledger) such as those issued by Facebook, JP Morgan or
b) decentralized (this approach is known as a ‘permissionless’ distributed ledger) as cryptocurrencies such as Bitcoin, Ethereum etc

Cryptocurrencies such as Bitcoin and Ethereum are considered part of the virtual currency group. Cryptocurrencies use encryption technology to ensure the safety and authenticity of transactions. This technology help manage and control the creation of new currency units and these cryptocurrencies exist and trade through a dedicated blockchain-based network that is open to the public. Anyone can join and start cryptocurrency trading.

3.5 Focus of this paper

Therefore, the precise positioning of this paper is encrypted (digital) currencies, which is the digital currencies that the public pays attention to and discusses, in essence the cryptocurrencies.

The final report of Cryptoassets Taskforce has worked out another set of classification, the cryptocurrencies are referred as exchange tokens. Further detail will be gone through in the chapter “Legislation Development on Virtual Currency in the United Kingdom”. Please note exchange tokens referred thereof are actually the cryptocurrencies we are discussing.

To avoid confusion, for the purpose of this work, the object of this paper will be addressed as virtual currencies most of the time or sometimes more technically cryptocurrencies.

Chapter 4 Legislation Development on Virtual Currency in the United Kingdom

4.1 Statute

Supernational Level

Tth Anti-Money Laundering Directive

The European Parliament passed the 5th Anti-Money Laundering Directive (5AMLD) which seeks to

a) establish an effective and transparent ownership register, strengthen the EU's financial intelligence unit to investigate who really owns companies and trusts;
b) Prevent risks related to the use of virtual currencies for terrorist financing and limit the use of prepaid cards;
c) Improve the protection for financial transactions in and out of high-risk third countries;
d) Enhanced access to information by financial intelligence, including centralized bank account registration.
e) Ensure that centralized national bank and payment account registries or central data retrieval systems are established in all Member States.

TAMLD has also introduced definitions of “virtual currencies” and “custodian wallet providers”.

Payments Services Directive 2 (PSD2)

Payments Services Directive 2 is an European Union directive administered by the European Commission (Directorate General Internal Market) and aims to regulate payment services and payment service providers across the EU and the European Economic Area (EEA). The purpose of the directive is to increase competition and participation of non-banking industries in the payment industry across Europe, and to provide a level playing field by harmonizing consumer protection and the rights and obligations of payment providers and users, contribute to the establishment of a more integrated European payment market, making payments safer, more secure and protecting consumers.

Markets in Financial Instruments Directive (MiFID)

The MiFID is a European Union regulation that regulates companies that provide customers with services related to financial instruments (stocks, bonds, collective investment scheme units and derivatives) and transactions of these companies.

Domestic level

Financial Services and Markets Act 2000 (FSMA)

FSMA forms the cornerstone of the UK financial services regulatory system, the act has been substantially revised by the Financial Services Act 2012, set up the regulators for the insurance, investment business and banking, and the Financial Ombudsman Service to resolve disputes as a free alternative to courts. It defines the Regulated and Prohibited Activities in the UK. The ‘General Prohibition’ in the FSMA stipulates that no person may engage in regulated activities in the UK unless authorized or exempted. Authorized financial services companies must comply with the regulatory requirements from FSMA when conducting and organizing activities.

4.2 Rules and regulations

Domestic level

The Electronic Money Regulations 2011 (EMRs)

The Electronic Money Regulations came into effect on April 30, 2011 and aims to establish a clearer regulatory framework for electronic money issuers. The regulations apply to electronic money institutions and, subject to certain derogations from the directive exercised by the government.

The regulation defines electronic money as "the value of money stored electronically (including magnetically), represented by the claims against electronic money issuers: a) is issued on receipt of funds for the purpose of making payment transactions; b) is accepted by a person other than the electronic money regulations; and; c) is not excluded by either of the two exclusions in regulation 3."

Payment Services Regulations 2017 (PSR)

The Payment Services Regulations 2017, incorporated the Payment Services Directive 2 (PSD2), is the UK's main regulation governing payment services.

Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLR2019)

The regulation revised the UK ’s existing anti-money laundering and counter-terrorism financing regulations (AML / CTF), Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR2017) and implemented 5AMLD in the UK. The 2019 regulations also appointed the FCA as the regulator of the UK's crypto asset business for AML / CTF purposes.

Guidance on Cryptoassets

The Guidance was published in 2019 and the FCA states in its guide³ that it recognizes three main crypto asset classes to assess whether a particular virtual currency is covered by UK regulations, i.e. e-money, security and unregulated tokens.

4.3 Regulatory bodies

Supernational Level

International Monetary Fund (IMF)

The International Monetary Fund (IMF), established after the Second World War, is an international organization dedicated to promoting international monetary stability. It does this in three ways: to track the global economy and the economies of its member countries; to provide loans to difficult countries; and to provide practical help to members⁴. The International Monetary Fund has been evaluating virtual currencies and monetary policy.

Financial Stability Board (FSB)

The FSB is the international body responsible for overseeing the global financial system and making recommendations to members of the G-20 and other jurisdictions. The FSB, through its members, works to strengthen the financial system and improve the stability of international financial markets. Policies that implement this agenda are implemented by jurisdictions and national authorities⁵.

Financial Action Task Force (FATF)

The Financial Action Task Force is an intergovernmental body established by the ministers of its member states in 1989. The FATF sets standards and promotes the effective implementation of laws, regulations and business measures to combat money laundering, terrorist financing or other threats to its integrity. The international financial system. The FATF has developed a series of recommendations that are considered international standards for combating money laundering, financing terrorism and the proliferation of weapons of mass destruction. Virtual currency is also an important potential anti-money laundering initiative launched by FATF⁶.

Bank for International Settlements (BIS)

The Bank for International Settlements was established in 1930 and is owned by 60 central banks, accounting for about 95% of world GDP. Its mission is to promote monetary and financial stability, promote international cooperation in these areas, and act as a central bank⁷. It also chairs other committees, including the Basel Committee.

Basel Committee on Banking Supervision (BCBS)

BCBS is the world's leading standard setter for prudential supervision of banks. It provides a forum for regular cooperation on banking supervision issues. Its 45 members come from central banks and banking regulators in 28 jurisdictions⁸

International Organization of Securities Commissions (IOSCO)

The International Organization of Securities Commission (IOSCO) is an international body that brings together global securities regulators and is recognized as a global standard setter for the securities industry. IOSCO develops, implements and promotes compliance with internationally recognized securities regulatory standards. On the global regulatory reform⁹, it works closely with the Group of Twenty (G20) and the Financial Stability Board (FSB).

Domestic level

Financial Conduct Authority (FCA)

FCA is the regulator of all regulated and authorized companies and individuals in the UK. It regulates the conduct of 59,000 financial services companies and financial markets in the UK, and is also the prudent regulator of more than 18,000 of these firms¹⁰.

Prudential Regulation Authority (PRA)

The PRA, under the supervision of the Bank of England (BoE) and the Financial Policy Committee (FPC), is responsible for prudential matters to ensure the safety of approximately 1,500 banks, building associations, credit unions, insurance companies and major investment companies.¹¹

UK Cryptoassets Taskforce

In March 2018, the UK Chancellor of the Exchequer announced the establishment of a crypto asset task force as part of the government's Fintech Sector Strategy¹². UK Cryptoassets Taskforce consists of the HM Treasury, the FCA and the Bank of England.

The objectives of the UK Cryptoassets Taskforce include exploring the impact of crypto assets, the potential benefits and challenges of applying distributed ledger technology in financial services, and what regulations are needed to respond.¹³

UK Jurisdiction Taskforce

The UK Judicial Task Force is one of the six taskforces of the LawTech Delivery Panel. LawTech Delivery Panel was led by the industry and supported by the UK government, the judiciary and the Law Society of England and Wales.

The main goal of the Panel is to promote the use of technology in the UK legal sector. And the objective of UK Judicial Task Force is to establish that English law and the jurisdiction of England and Wales together could provide the foundation for the development of distributed ledger technology, smart contracts and related technologies. Note that distributed ledger technology is the key of cryptocurrencies this paper is assessing.

4.4 Current status and recent development

Legal status in statutes

Virtual currencies are currently not legal tender in the UK.

By reference to the section 22 FSMA, it is specified the regulated activities are those activities carried out through enterprises and are related to specific types of investment. The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (RAO) lists the types of activities and investments designated for this purpose and if certain types of virtual currencies can be designated as investments based on RAO, they shall belong to one or more categories of designated investments.

In October 2018, the UK Crytoassets Taskforce released a special report explaining the policy of UK on crypto assets and distributed ledger technologies. The report assessed the potential risks and benefits of crypto assets, and proposed future regulatory plans and the needs to incorporate the market behavior into the regulatory perimeter of the UK regulators.

In 2019, the FCA released the Guidance on Cryptoassets. The purpose of this document is to explain to market participants the regulated areas in which they can participate, the types of authorization they need to obtain, etc. to help companies who are in this innovative area understand the regulatory boundaries, FCA stated they will provide the necessary support, including but not limited to obtaining legal authorization and soliciting market opinions.

Both documents have provided their definition of virtual currencies. The cryptocurrencies are referred as "exchange tokens" or "unregulated tokens.", detailed as below.

FCA Classification

The FCA suggests the structure and substantive characteristics of a virtual currency will determine whether it is within the scope of UK regulation, and if so, which regulatory framework is applicable.

The FCA states in its guide that it recognizes three main crypto asset classes:

a) Security tokens: for virtual currencies that provide rights and obligations similar to traditional instruments (such as stocks, bonds or units in collective investment schemes), they are within the scope of UK regulation.
b) E-money tokens: virtual currencies that meet the definition of electronic money (or e-money) under the Electronic Money Regulations 2011. They will fall within the UK regulatory perimeter.
c) Unregulated token s: for virtual currencies that are neither security tokens nor e-money tokens, they fall outside the scope of the UK regulator.

Under FCA Statement, unregulated tokens include ‘utility tokens’, which grant holders access to a current or prospective service or product but exhibit features that would make them akin to securities and non-utility tokens that are not issued or backed by any central authority and are intended and designed to be used directly as a means of exchange.

UK Crytoassets Taskforce classification

With reference to the Final Report issued by UK Cryptoassets Taskforce¹⁴, the report identified three subcategories of virtual currencies and provided the following (non-legislative) definitions:

a) Exchange token, commonly referred to as "cryptocurrency" such as Bitcoin, Litecoin, and equivalents. They use the distributed ledger technology platform and are not issued or supported by a central bank or other central agency. Security Or type of rights or access provided by a utility token, but used as a means of exchange or investment.
b) Security Tokens -equivalent to the "designated investment" under the RAO. They provide rights such as ownership, the right to repay a certain amount of money, or the right to share future profits. They may also be securities or financial instruments under MiFID II.
c) Utility Tokens -can be redeemed to access specific products or services typically provided using the [Distributed Ledger Technology] platform.

For the ease of discussion, the below summarize the equivalent types of virtual currencies referred:

Abbildung in dieser Leseprobe nicht enthalten

The focus of this work is on exchange tokens (Cryptoasstest Taskforce Report), equivalent as non-utility tokens of the unregulated tokens in FCA’s policy statement. Those include Bitcoin, Litecoin and equivalents.

Definition of virtual currencies could also be found in MLR2019, the scope of MLR2017 was expanded to include cryptoasset exchange providers, custodian wallet providers and crypto asset automated teller machines. The definition of ‘crypto-asset’ is broader than the equivalent definition of "virtual currency" defined by TAMLD.

Legal status in recent case law and opinion from the UK Jurisdiction Taskforce

As discussed above, virtual currencies have been having no legal status in the UK legal system. As far as traditional English law is concerned, it does not fit into any property; the intangible nature of virtual currencies means that there can be no "tangible" possession. In addition, it cannot be claimed or enforced by action given the decentralization structure.

However, there were development in the case law. Following a statement made by UK Jurisdiction Taskforce in November 2019 and the recent cases, it is more clear that UK has already recognized virtual currencies as a kind of asset.

UK Jurisdiction Taskforce statement

In the UK Jurisdiction Taskforce statement in 2019¹⁵, it is commented ‘ cryptoassets have all of the indicia of property ’, ‘ cryptoassets are therefore to be treated in principle as property. ’.

Cases law

The recent cases have confirmed the view of the UK Jurisdiction Taskforce, in AA v Persons Unknown & Ors, Re Bitcoin 2019, the UK insurer hired professional blockchain experts to track Bitcoin after paying Bitcoin as ransom to a hacker. The Bitcoins can be traced back to accounts held on the Bitfinex exchange. Bitfinex is expected to have KYC anti-money laundering program to keep track about the identity of the hacker. The High Court of the UK has approved an injunction on bitcoin upon the application by the applicant insurance company. A private hearing was held to avoid reporting to hackers and prevent the risk of Bitcoin being transferred or further retaliation. The ground was based on the fact that cryptocurrencies constitute property under English law and can therefore be subject of an injunction order.

The view is consistent with the other two cases which have held that crypto currencies should be deemed "property", Vorotyntseva v Money-4 Ltd (T/A Nebus.com) & Ors 2018 and Liam David Robertson v Persons Unknown (unreported 15th July 2019). The common view are virtual currencies are capable of having ownership; able to be defined and determine its owner; as permanent as other financial assets, exists before cancelled, redeemed, repaid or exercised; stable because ordinary assets are prone to deterioration, corruption and loss.

The AA v Persons Unknown case held that cryptocurrencies are property under English law, which will have a significant impact on the implementation of certain English laws, such as the bankruptcy, estate, theft / fraud, corporate bankruptcy liquidators or management of human rights.

4.5 The issue met by the regulators

Lack of direct regulatory regimes applicable to virtual currencies

Except for the security tokens and e-money tokens, virtual currencies are largely not covered by the FCA. The FCA has issued various statements indicating that it does not consider the exchange tokens to fall inside the scope of UK financial services regulations, only if it falls into regulated products or services.¹⁶.

As stated in the FCA guidelines, the exchange token generally does not grant holders any rights related to the designated investment. Accordingly, exchange tokens are currently not regulated under FCA. This means that the transfer, purchase and sale of these exchange tokens, including the commercial operation of crypto asset exchanges used to trade tokens, is not currently an activity carried out by the FCA.

As such, only some (but not all) virtual currencies are currently defined in the United Kingdom (UK) regulatory regime and the exchange tokens which this paper try to assess is largely out of the scope of the current regulatory perimeter.

FCA statements suggest they only regulated cryptocurrencies derivatives

The FCA states that, even in the UK, cryptocurrencies (virtual currencies) are not regulated financial instruments (FCA also stated they do not consider cryptocurrencies as regulated financial instruments under MiFID II), but cryptocurrencies derivatives may be regulated financial instruments within the scope of MiFID II¹⁷. Cryptocurrencies derivatives include futures, options, and contracts for difference referencing to cryptocurrencies or tokens issued through an ICO. If so suggested, companies trading or arranging for cryptocurrencies derivatives transactions may be required to be authorized by the FSMA in the UK.

FCA statements are not binding

Though FCA has made various statements and guidance on the issue of virtual currencies. The guide issued by the FCA is not binding on the courts but may be persuasive in any decision of the court.

By the fact that the virtual currencies are only regulated by the FCA unless their features meet the definition as security tokens or E-money tokens and cryptocurrencies assets and most initial coin offerings are currently not subject to these rules, the House of Commons Treasury Committee has commented this area as the "Wild West."¹⁸

Insufficient regulations on virtual currencies service providers

MLR2019 has largely improved the regulatory perimeter over virtual currencies service providers. According to MLR2019, new crypto-asset companies must be registered with the FCA before they can conduct crypto-asset activities. The crypto-asset business already operating in the UK before January 10, 2020 will be granted a transition period until January 10, 2021. To register, crypto-asset companies must prove that they and their owners, senior managers or officials are "fit and proper". The FCA has confirmed that regardless of registration, they will start to supervise the crypto-asset business since January 10, 2020. There are not clear regulations on various aspects other than AML issue related to virtual currencies, including issuance (mining), custodian, payment and even the exchanges.

Issuance (mining)

Could the issuance of virtual currencies be treated as the creation of CIS and which is regulated by the FCA?

Firstly, mining will create (issue) virtual currencies. There is no specific UK law covering the mining of virtual currencies.

Is mining creating a fund, Collective Investment Schemes (CIS)? By reference to the section 235(1) FSMA, ' any arrangements with respect to property of any description, including money, the purpose or effect of which is to enable persons taking part in the arrangements (whether by becoming owners of the property or any part of it or otherwise) to participate in or receive profits or income arising from the acquisition, holding, management or disposal of the property or sums paid out of such profits or income ' may be caught under the definition of Collective Investment Schemes. Virtual currencies do not involve investment in underlying assets and participants are not participate in to receive revenue or income from a pool. It is not likely be treated as CIS.

Can the virtual currencies issuers be treated as accepting deposits?

Referencing to the Article 5 RAO, accepting deposits in the UK is a regulated activity for the purposes of FSMA if ‘(a)money received by way of deposit is lent to others; or (b)any other activity of the person accepting the deposit is financed wholly, or to a material extent, out of the capital of or interest on money received by way of deposit’. However, issuing virtual currencies usually does not involve depositing a sum of money with the issuer (assuming there is an issuer). In addition, they are rarely issued on terms repayable to holders. It is unlikely be caught as deposit taking.

Can the virtual currencies issuers be treated as issuing electronic money?

Referencing to the Article 63 EMRs, only the designated person in the article are allowed to issue electronic money in the UK. By EMRs, electronic monies are ‘electronically (including magnetically) stored monetary value as represented by a claim on the electronic money issuer which (a)is issued on receipt of funds for the purpose of making payment transactions; (b)is accepted by a person other than the electronic money issuer’ and is not excluded by EMRs.

First of all, issuing of virtual currencies do not grant contractual rights/claim to holder against the issuer of the relevant virtual currencies. In addition, most cryptocurrencies are not issued upon receipt of funds (for example mining of virtual currencies do not require input of funds). Further, it is arguable if virtual currencies are issued for payment transactions purpose. From the generic set up of virtual currencies, the EMRs may not be applicable.

FCA has tried to interpret in its Guidance on Crytoassets there may be attempts to stabilize the volatility of crypto assets, in which case the generated token is often referred to as a ‘stable coin’. A stablecoin can be viewed as a unit in a collective investment plan, debt securities, electronic money, or other specific types of investments. It may also be outside the scope of the FCA. In the end, this can only be determined on a case-by-case basis. However, it is arguably this uncertain statement has not resolved the difficulties to apply EMRs on virtual currencies.

Custodian

Are virtual currencies client asset?

Written evidence submitted by the FCA to the House of Commons Treasury Committee indicates that crypto assets primarily designed as payment / exchange instruments (which are the virtual currencies this paper try to assess) are outside the scope of the FCA, as the cryptocurrencies generally do not meet the specific investment standards set by RAO, nor do they meet the interpretation by FCA's on Payments Services Directive 2 or e-money eligibility in the E-Money Regulation 2009. Therefore, the above suggest that under FSMA, the virtual currencies are generally not considered a specific investment in the act.

Complying with FCA's client asset rules, it is suggested cryptocurrencies are not designated investments under RAO, so even cryptocurrencies exchanges that administer and safeguard cryptocurrencies need not be subject to FCA supervision nor need to follow the FCA client asset rules.

Crypto-asset exchange providers and custodian/wallet providers must comply with certain reporting requirements set out by the FCA. However, virtual currencies custodians are only caught under MLR2019, the obligation is only on AML, where custodians should also be held accountable for the safety of asset. The attitude and scope of oversee of FCA is waited to be seen.

Payment by virtual currencies

Are virtual currencies caught under provision of payment services in the UK?

Referencing to the Regulation 138 PSR, the provision of payment services in the UK is regulated. It is a criminal offence to provide payment services without proper authorization or registration. The FCA stated in their consultation paper on the Guidance On Cryptoasset that it does not believe that the use of virtual currencies as vehicle for remittance fall within the scope of UK financial services regulations in general sense.¹⁹

Virtual currencies exchange

Virtual currencies exchanges are now caught under MLR2019, all cryptocurrencies exchanges must register with the FCA and comply with anti-money laundering regulations. However, the regulation is focusing on the AML matter. However, Exchanges also play a very major role in other matter, such as the liquidity of virtual currencies in addition to its AML role, for other securities which fall within the regulation under MiFID II as transferable securities or other MiFID financial instruments. With refence to Articles 25D and 25DA of RAO, the related trading service providers and exchanges are hence necessary to be authorized under FSMA as operators for multilateral trading instruments (MTF) or organized trading instruments (OTF).

However, as reference to FCA’s statement²⁰, it is suggested they only regulate virtual currencies derivative, virtual currencies derivative is not the target of this paper. Concerning directly to the virtual currencies, it is unclear how exchanges for virtual currencies are regulated.

Under the current statues, virtual currencies exchanges are only seen accountable for AML issue.

While MLR2019 is making some progress in the regulations on virtual currencies, though arguably limited in AML aspects, considering MLR2019 was transformed largest from TAMLD, would Brexit bring changes to the AML laws of the UK and affect the progress on the regulations on virtual currencies.

Having considered various factors surrounding the Brexit arrangement, it is unlikely that will have much impact to hinder the development of regulatory perimeter on virtual currencies.

First of all, though on January 31, 2020, the UK has withdrawn from the EU, the UK has also entered into a transition period which will expire on December 31, 2020. Therefore, Brexit does not necessarily affect the regulatory impact of EU law in UK in the short term and before the transition period expires.

Further, the UK government has promised to keep most of the current EU-derived regulations as they will take place before the UK leaves the EU. UK has passed the European Union (Withdrawal) Act 2018 for such promise. Related to this is also the Financial Services and Markets Act 2000 (Amendment) (EU Exit) Regulations 2019, which target to fill the remaining regulatory loopholes by giving transitional powers to FCA, PRA and the Bank of England, allowing them to delay or gradually implement the regulatory requirements that were first changed or applied due to Brexit. These shall be statutory protection for the existing progress of virtual currencies regulations.

In addition, most EU directives and UK laws are actually based on the recommendations of special international organizations such FATF and OECD. For instance, MLR29 transferred the requirements of 5AMLD into local legislations such as the Money Laundering Regulations 2017, Terrorism Act 2000 and 2002 Criminal Proceeds Law. Instead of just amending the UK AML regulations by referencing the 5AMLD, the definition of cryptoassets activities have followed the suggestion from FATF, which is wider than 5AMLD. Leaving EU does not mean the UK will leave those international standards. Therefore, it is suggested the regulatory environment of the virtual currency in the UK should not be affected by Brexit, at least not in the near future.

Chapter 5 Report from UK Crypto Assets Taskforce

5.1 The TaskForce

The UK Crypto Assets Taskforce was established in March 2018 and was composed of the HM Treasury, the Financial Conduct Authority and the Bank of England. The purpose of this working group is to investigate the potential harm cryptoassets may cause, while also encouraging innovation.

5.2 The Final Report: brief

The Taskforce released their Final Report in October 2018. The report studied the policy and regulations on crypto assets and distributed ledger technology and have listed out the risks and opportunities that they may bring. The report concluded that although DLT is in the early stages of development, it has the potential to bring tremendous benefits in financial services and other areas, and the working group will continue to support its development but at the same time proposed tighter UK regulation of cryptos to mitigate the risks to consumers and market integrity.

5.3 Recommendations

The Task Force report accepted three types of tokens:

a) Security tokens—they fall under the FSMA
b) Exchange tokens (for example, Bitcoin, Litecoin); and
c) Utility token.

Abbildung in dieser Leseprobe nicht enthalten

The final report suggested the primary task of the regulatory authorities is to mitigate the risks to the consumers and market integrity and prevent the use of cyptoassets for illegal activities²¹.

The report set out a table of actions that the authorities should take, below table is extracted from page 48-49 listing the main responsibilities and timing excluding those related to the innovation with distributed ledger technology.

Abbildung in dieser Leseprobe nicht enthalten

5.4 Development

Following this report, the most obvious improvement is the transposal of the EU 5AMLD into MLR2019. The scope of the AML law is extended to capture all relevant activity involving exchange, security and utility tokens and the categorization is in line with the one set out in this report. According to the updated law, all new cryptoassets companies that intend to conduct cryptoasset activities after January 10, 2020 must register with the FCA before they can conduct any activities.

According to the MLR2019, existing cryptoassets companies that are already engaged in crypto asset activities can continue to do so, but they must register before January 10, 2021, or cease all crypto asset activities. However, note that this updated law only give FCA powers on issue related to AML/CFT matter.

Chapter 6 Report from UK Jurisdiction Taskforce

6.1 TaskForce

Lawtech Delivery Panel (LTDP) is a industry-led government-support initiative designed to support the transformation of the UK legal industry through the use of technology. The UK Judicial Task Force is one of the six taskforces under the LTDP. The purpose of The Taskforce is to ensure that English law and the jurisdiction of England and Wales together provide a solid foundation for the development of distributed ledger technology, smart contracts and related technologies.

Referred to the statement made in November 2019, the then members of the UK Jurisdiction Taskforce (UKJT) consists of Sir Geoffrey Vos (Chancellor of the High Court and Chair of the UKJT), Lawrence Akka QC (Twenty Essex), Sir Nicholas Green (Chair of the Law Commission of England and Wales, as an observer), Richard Hay (Linklaters LLP), Peter Hunn (Accord Project), Mary Kyle (City of London Corporation), Christopher Woolard (Financial Conduct Authority) and Sir Antony Zacaroli (Justice of the High Court).

6.2 The Final Report: brief

The Taskforce commenced a consultation on ‘ the status of cryptoassets, DLT and smart contracts under English private law ’ in May 2019, sought advice from professional advisers from the FCA, Bank of England, HM Treasury, Euroclear, London Stock Exchange, ISDA, the Law Commission and the Law Society²² and more than 130 responses from public responses²³.

The Legal statement on cryptoassets and smart contracts was issued by The Taskforce in November 2019. There are two main questions asked: are cryptoassets ‘property’ (if any) under English law; are smart contracts considered legally binding in English law. It has explicitly excluded regulatory considerations, as well as taxation, criminal law, partnership law, data protection, intellectual property rights, consumer protection, settlement agreements, regulatory capital, AML, anti-terrorist financing, and monetary policy.

6.3 Recommendations

Specific to the question on the cryptoassets issue, the statement agreed with the particularly broad definition of cryptoassets: (a) intangible; (b) cryptographic authentication; (c) use of distributed ledger technology; (d) decentralization; (e) rule by consensus.

The statement explores the difference between things in possession and things in action and concludes that although cryptoassets are of course not in the former category due to their intangibility, in principle It could be: things in action (by specific interpretation of case law) or a separate third kind of property as being ‘ another, third, kind of property, as the court was prepared to do with the EU carbon emission allowances in Armstrong v Winnington ’.

Therefore, the statement has concluded that ‘ cryptoassets possess all the characteristics of property set out in the authorities ’ ’ be treated in principle as property ’.

6.4 Development

Although the Taskforce suggested the statement is ‘not a treatise or an academic paper’ and ‘not intended to be legal advice’, in AA v Persons Unknown & Ors, Re Bitcoin 2019, the court has approved the analysis by this statement that the cryptoassets could be treated as property.

In the AA case, the court reviewed the statement and has included very detailed discussions on the case law about the definitions of ‘property’, the discussion traced back the evolution over time. Although not binding on the court, the statement was referred as a ‘ detailed and careful consideration ’ of the issue, and the court found the analysis ‘ compelling’. It was held that the common law actually recognized other types of property, which were neither in possession or in action. Cryptoassets are capable of being property, hence entail the relevant legal protection.

Chapter 7 Recommendation

7.1 Framework of the recommendation

The purpose of this paper is to assess whether there is actual protection for the use of virtual currency, and possible reforms to existing virtual currency regulations. As an international authority, IMF has been evaluating virtual currencies and monetary policy. IMF has issued its Fintech note 19/03²⁴ aiming to determine the regulatory and regulatory elements that authorities should consider when determining the regulatory framework for cryptoassets.

As UK is one of the major players in the international financial market, it would be appropriate to develop its regulations in line with the international expectations.

The below will adopt the consideration suggested by the IMF Fintech note 19/03 to build regulatory framework on virtual currencies and assess what UK lacks and in what way it may improve. As discussed in previous chapters, this paper will focus on those decentralized cryptoassest, herein referred as virtual currencies.

7.2 Offering Crypto Assets

The way in which virtual currencies are created and distributed involve the process of ‘mining’, newly minted assets will be assigned to those miners) in a manner determined by the algorithm. Once the virtual currencies are created and made available to certain investors or the public, that raise the investors protection issue.

‘appropriate disclosure requirements on public offerings of crypto assets’.

The virtual currencies will be transferable and tradable on secondary market. However, due to the complexity of the asset and the rapidly changing technical setting, there is always lack of clear and reliable information provided to the public investors. The regulators should consider the appropriate disclosure requirements for the ICO of virtual currencies. Disclosure of accurate, comprehensive and timely information about the issuer and the asset itself can build lasting investor confidence and allow a wise assessment of performance and value.

The IMF suggested regulators may consider potential disclosure requirements for the availability of virtual currencies during ICO and continuing issuances to ensure investors and users could make informed decisions about their transactions. Information may include full description of the characteristics and risks of the virtual currencies. A proper disclosure system would undoubtedly enhance investor protection, reduce the risk of related fraud.

From FCA’s guidelines, the ‘exchange token’ generally does not grant holders any rights related to the designated investment. Accordingly, exchange tokens are currently not regulated under FCA. In addition, some issuers intentionally create virtual currencies in a manner that could avoid hitting the specific definition of designated investment.

Enlarging the scope of designated investment in the RAO

UK legislative may consider enlarging the scope of designated investment in the RAO to cover ‘ exchange token ’, then the existing UK regulatory framework will be applicable to those virtual currencies and provide investor protection, including this disclosure requirement suggestion.

Voluntary registration of ICO

The French approach could also be one solution. ICO issuers can (but not obliged) to apply for a regulatory status from the French regulator, Autorité des Marches Financiers (AMF). The Issuers then need to comply with disclosure requirement, and the anti-money laundering (AML) duties. This will allow issuers to use bank accounts. This may encourage registration as many banks refuse to open bank accounts for companies doing virtual currencies business because of AML concerns over their anonymous nature. In such way, more market players may be willing to go under supervision and potential investors are protected.

Aggressive intervention

In Hong Kong, mining activities are generally not considered illegal as long as they do not involve the illegal use of computer systems or electricity. There are not clear regulations in Hong Kong directly on virtual currencies, the SFC²⁵ has also stated that ‘whilst digital tokens offered in typical ICOs are usually characterised as a “virtual commodity”’ in which ‘virtual commodity’ is not securities under SFO²⁶. Though the SFC has went to state they have found some of these products (virtual currencies) may constitute securities regulated by the SFO.

However, that didn’t stop SFC from carrying its regulatory actions against issuers. The SFC disclosed on March 19, 2018 that it has taken regulatory measures against Black Cell Technology Limited for allegedly participating in unauthorized promotional activities and unlicensed regulated activities relating to securities²⁷. After taking such regulatory measures, Black Cell Technology Limited has agreed to stop selling KROPS (name of the virtual currencies) and cancel all transactions with Hong Kong customers, and on its website that displayed the pop up message to exclude US and HK citizens to participate to their programme.

7.3 Trading Crypto Assets

Virtual currencies trading platforms and exchanges have caused many problems similar to securities trading platforms. They usually also allow direct access by retail investors and can also provide custodian services. Therefore, in addition to the risks of traditional securities exchanges and trading platform. the regulators need to consider the nature and the specific risks arising from this retail and custodian nature.

The IMF suggested several considerations to regulate virtual currencies exchanges and trading platforms.

Governance requirements of platform operators, including prudential requirements

Sound governance should be established through fit and proper senior management and control functions and stipulated capital requirements on the operators.

Requirements for accessing the platform

Protecting the orderly operation of transactions usually requires some control over who can access and use the platform. Virtual currencies platforms should have appropriate processes and controls to consider whether the platform allows direct retail access.

Requirements for the robustness, flexibility and integrity of the operating systems

One of the main vulnerabilities of virtual currencies platforms is cyber-attacks. Appropriate processes and controls can help protect the platforms from hacker attacks or theft, and ensure that they are robust and resilient enough to provide transactional integrity.

Market integrity requirements

Due to the high volatility of virtual currencies, potential conflicts of interest / concentration risks and data non-transparency, they are easily manipulated. The regulators should consider adopting market abuse rules and monitoring mechanisms to protect investors.

Transparency requirements

In order to improve the efficiency and integrity of the transaction, it is important to understand the trading information before and after the transaction, to whom to provide information, means of dissemination, and whether possible to have cross platforms information. The regulators should consider these factors to determine whether the transaction information about virtual currencies is reliable, timely, and distorted to the public. In addition, the rules and procedures about transparency of platform should be considered, including order processing, error handling and order cancellation procedures.

AML / CFT requirements

Platform operators should be expected to comply with FATF standards applicable to AML / CFT.

Tradable products in the platform

The platforms can determine what virtual currencies can be accepted for trading. The regulators need to consider what requirements or standards are being applied, for instance, regulations to determine the types of assets available for trading, proper listing rules and the full disclosure of virtual currencies to investors and platform users (including risks disclosure). This should be essential for platforms which are available for retail customer access. T

Compared with traditional securities trading platforms or exchanges, virtual currencies trading platforms usually also custody client assets. Therefore, the regulators should consider what measures need to be taken to protect the client ’s assets to ensure the orderly liquidation and return of client assets when the platform is closed, prevent the use of client assets for proprietary purposes and facilitate the timely transfer of positions.

Impact of liquidation and settlement.

In addition to custodian, virtual currencies trading platforms can also perform clearing and settlement. Understanding how the legal transfer of asset ownership takes effect is the key to ensuring the smooth operation of these services. Regulars should also consider what internal record and accounting system platforms are used and whether they are suitable to ensure that customers allocate funds and assets correctly and in a timely manner.

FCA to go further on virtual currencies exchanges and trading platforms registration

The UK government announced in the Economic crime plan 2019 to 2022²⁸ in July 2019 that from January 10, 2020, FCA will become the AML / CTF regulator of the UK's crypto asset business under MLR2019. From the latest disclosure on FCA website about the registration procedure²⁹, FCA will ask for the below from the virtual currencies exchanges and wallet providers:

- Programme of operations: Set out what crypto asset business the company is involving.
- Business plan: List out the business goals, customers, employees, governance, plans and plans. There should be sufficient details to show that the proposal has been seriously considered and having suffcient financial and non-financial resources. It should also include detailed information about transaction volume, number and type of customers, pricing, and income/expense items.
- Structural organisation:: Describe how the business is organized, outsourcing arrangements(if any).
- Systems and controls: detailed information about key IT systems that will be used to run the business, including detailed information about IT security policies and processes.
- Individuals, beneficial owners and close links: Directors and any other persons responsible for management should have a good reputation and have the appropriate knowledge and experience to act in this capacity. The company must appoint a person responsible for compliance with the MLR to monitor and manage compliance with policies, procedures, and control measures related to money laundering and terrorist financing and serve as the nominating officer under the Proceeds of Crime Act 2002.
- Governance arrangements and internal control mechanisms: detailed information about governance arrangements, established internal control mechanisms to identify and assess risks, and a description of money laundering and counter-terrorism financing control measures.

The FCA registration has largely fulfilled the AML/CFT suggestion of the IMF, however, it only slights touched the governance suggestion, and almost didn’t go further to other suggestions discussed above. One reason maybe it is the MLR2019 giving FCA only the AML powers on virtual currencies exchanges and platforms. As FCA registration is new rule and is ongoing, UK legislative may consider extending the power of FCA. In fact, a lot of supervision work could be accomplished if the registration is done properly, for instance, cover those suggestions discussed above.

Aggressive intervention

Alternative, Hong Kong regulator is taking aggressive approach. In the area of regulating virtual currencies exchanges and platforms, in the recent position paper issued by the SFC in November2019³⁰, the SFC defined virtual assets as ‘ digital representations of value ’, including 'cryptocurrencies', 'crypto-assets' and 'digital tokens'. The position paper is specific about SFC’s attitude towards virtual currencies trading platforms. We can see even some virtual currencies may not constitute ‘securities’ under SFO, SFC is ready to carry out regulatory actions against virtual currency exchanges. The SFC announced on February 9, 2018 that at least seven virtual currency exchanges were investigated. Although name of these exchanges have not been made public, they have confirmed to the SFC that they have stopped trading in virtual currencies or have taken immediate corrective measures according to SFC requirement, such as prohibiting participants from Hong Kong residents. In addition, the position paper issued by the SFC in November 2019 discussed above greatly focused on trading platforms shows SFC’s strong will to regulate virtual currencies exchanges and platforms.

7.4 Custody of Crypto Assets

The storage of encrypted assets takes place through a wallet. A wallet is a file (or managed by the software) in which a unique private key similar to a password.

The virtual currencies are stored into a public key represented by an alphanumeric string, similar to bank account number of the owner.

Ownership of the virtual currencies depends on knowing the private key stored in the wallet. If the wallet file (and private key) is lost, the virtual currencies "stored" in it cannot be recovered.

Regulators need to consider the type of custody, storage and the security of private keys. In terms of custodian, the wallet can be managed by the user himself or delegated to a third-party custodian (ie, "wallet provider"). The third-party custodian usually refer to virtual currencies exchanges, but it can also be a third-party service provider. In terms of storage, wallets can be classified as ‘hot’ (stay online and connected) or ‘cold’ (stay offline). In addition, hot and cold wallet need not necessary to be different media, after disconnecting from the network, the hot wallet will become cold and vice versa.

The cold wallet can be as simple as an encrypted file placed on a paper or thumb drive in a storage box. In this case, the risk of losing or physically damaging the wallet is greater, but the network risk is eliminated until the user needs to use the wallet and change its state from cold to hot.

Most users and encrypted trading platforms use cold wallets to store most of their virtual currencies, and only store needed portion of virtual currencies in hot wallets for short-term transactions purpose.

Private key protection and key lifecycle management control

Wallets, among the whole virtual currencies systems, are most vulnerable to network risks. Attacking wallets to obtain private keys is equivalent to impersonating the owner to steal funds from the corresponding wallet. Therefore, the security of the wallet is a key factor in the overall security of the encrypted asset system. Wallet security requirements should be consistent with cryptography best practices, and should focus on key protection and key lifecycle management control.

In addition, since the boundary between cold wallet technology and hot wallet technology is unclear, the requirement should not focus on the technical details, but should be based on principles.

Reporting and prudential regulatory requirements

Further, it is necessary to carefully monitor third-party wallet service providers to provide a certain level of protection. If the client ’s assets are stored in third-party wallet, the clients are at risk of mixing their assets with other clients’ assets because of legal uncertainty under situations such as bankruptcy, operational failure, private key stolen or lost. Therefore, IMF recommended to consider whether these wallet providers should comply with certain reporting and prudential regulatory requirements, such as risk management (including operational and network risks), customer asset protection, minimum capital and liquidity requirements (especially the third case) encryption assets).

FCA to go further on wallets providers registration

As discussed above, FCA is asking wallets providers to register with FCA pursuant to new powers given by the MLR2019. However, similar to the case of exchanges and trading platforms, the focus is primarily on the AML matter. In fact, investor protection is a key in financial regulations. Therefore, it is suggested UK legislative could give more powers to the FCA, added the private key protection and other prudential regulatory requirement into the registration process, then the registration could be first line of defence on catching virtual currencies wallets into the regulatory parameters.

7.5 Exposure to Crypto Assets

Currently, there is no global standard for prudent handling of the risks of crypto assets in banks or other regulated entities. IMF didn’t set out specific recommendations on this aspect, but is in line with the comment from Basel Committee on Banking Supervision on a discussion paper about designing prudential treatment for cryptoassets.³¹ Regulators are suggested to set prudential rules for cryptoassets exposure in banks or regulated entities.

Minimum requirement recommended by Basel Committee on Banking Supervision

The discussion of Basel Committee is still in progress, but BCBS is considering whether and how to specify new global prudential standards on cyptoassets including virtual currencies based on a series of general principles, including:

- To be cautious, economically, equivalent cryptoassets and ‘traditional’ assets should not be treated differently;
- Some types of cryptoassets may become very important on the banking system, so the design on regulating cryptoassets should be simple and flexible.
- Complex modeling methods should not be used to calculate relevant regulatory requirements;
- Design the prudential standards on the cryptoassets that may be considered “high risk” and then continue to other types of cryptoassets;
- Jurisdictions should be free to adopt stricter methods (including prohibiting banks from having any exposure to cryptoassets).

Bank of England to update its guideline on cryptoassets including virtual currencies

Apart from a 2018 letter from Bank of England (PRA) sent to banks³², there have been no significant development on the regulation on the exposure to cryptoassets. Mr. Sam Woods reminded the banks if they would like to gain exposure to cryptoassets, the banks needed to mind their legal responsibilities on conducting risk assessments, due diligence, and inform the regulators ‘ any planned business direct exposure to crypto-assets and/or entities heavily exposed to crypto-asset ’ and the Bank of England is ‘ concerned’ about the ‘ misconduct and market integrity ’ surrounding cryptocurrencies.

The letter was high level and given there were a lot of update since 2018. The Bank of England (BoE) has published a discussion paper on March 12, 2020 on the central bank's digital currency, however, It is recommended Bank of England could give more up-to-date guideline on this exposure on other cryptoasset as well.

Chapter 8 Conclusion

8.1 Difficulties faced by the regulators

The report issued by House of Commons Treasury Committee on Crypto-assets states that there were advertisements related to crypto assets highlighting the potential rapid return on investment in crypto assets. Such advertisements are not part of the financial promotion scrutiny system because they have nothing to do with ‘regulated activities’. As such, they are not subject to the FCA rules, and regulators have no right to withdraw misleading advertisements or impose sanctions on their promoters.³³

Investors may also lose their entire investment in virtual for various reasons, including fraud, the cryptocurrency exchange that investors use to retain their crypto assets have been hacked, or because investors cannot access their cryptocurrency accounts.

The definition of "virtual currency" in 5AMLD have paven the way for further regulation. A key change in 5AMLD is that requires all virtual currency exchanges must comply with anti-money laundering laws and must conduct verification on customer identity and carry out appropriate due diligence procedures. This also obliges UK, as EU member states, to develop a register to identify the ultimate beneficial ownership of corporate entities, which are accessible and possibly interrelated among various countries.

In practice, UK government has already included the definitions of “virtual currencies” and “custodian wallet providers” in 5AMLD into MLR2019 to ensure the scope could be in line with the EU. However, it must be noted that the FCA itself is given limited power from MLR2019. The FCA has also stated in its circular their powers under the MLR2019 ‘ will be limited to AML/CTF registration supervision and enforcement only³⁴ ’. For instance, ‘ Registration under the MLRs does not mean that customers will benefit from the protections of the Financial Ombudsman Service or the Financial Services Compensation Scheme (FSCS) ’. FCA cannot regulate the sale or transfer of cryptocurrencies, nor can they intervene on behalf of consumers who have lost their investment in cryptocurrencies, whether the losses are caused of volatility, lost of encryption keys, or hacked transactions.

8.2 Ahead

First of all, financial asset class must be dealt with aspects way more than just AML issue nor only exchanges or custodian wallet providers. UK Regulators are slow to monitor cryptocurrencies. Virtual currencies cannot easily fit into the scope of regulators, which makes the establishment of legal standards for cryptoasset-related activities a difficult task.

More aggressive FCA

FCA is focusing on regulating Cryptocurrencies Derivatives. Other than that, the pre-requisite to enforce the UK regulations is by two limbs:

1. If the virtual currencies need to constitute a ‘transferable securities’ under the FSMA or ‘securities’ in RAO definition, FCA would step in;
2. By the MLR2019, FCA exercise its policing power on the AML issue of virtual currencies service providers.

However, contrary to the UK that, in Hong Kong, there are also no clear regulations on various service providers related to virtual currencies, including issuance (mining), custodian, payment and even the exchanges. Looking into SFC’s statements, SFC is seen more aggressively in putting the service providers into regulatory perimeter, some issuers and virtual currencies exchanges have stopped operations or excluded participation from Hong Kong residents, though its attitude towards virtual currencies futures are very similar to FCA’s statement for cryptocurrencies derivatives. The SFC has been carrying out their policing job by issuing various statements without amending the statutes including the SFO.

More enforcement or cases are waited to be seen if FCA is willing to take more aggressive approach to adopt its ‘Fit and Proper’ test on virtual currencies exchanges even without proper law giving them the powers.

Introducing licensing scheme

However, from the court as opposed to regulatory perspective, there have been significant development as reflected by the recent cases. However, courts are always seen as last resort for a lot of dispute. If the regulators or the statutes could provide more solid rules and regulations, the public will have better legal certainty over virtual currencies.

Considering the potential consumer damage, the potential use of virtual currencies in money laundering, and the lack of self-regulation, direct and relevant regulations are recommended to be introduced, including consumer protection and anti-money laundering.

Virtual currencies have always lacked official recognition and are often treated as commodities. However, the goal of virtual currency should not be just an investment tool, but a type of new transaction and trading medium. Relevant technologies continue to evolve, and the legal framework and infrastructure of virtual currencies must also evolve. Therefore, in the long run, requiring all activities related to virtual currency to fall into licensing scheme is necessary. The powers could be given from various laws, however, a consolidated licensing scheme is necessary for effective management.

One of the most famous licensing systems that could be of reference is the BitLicense in New York formulated in 2015, the New York Department of Financial Services (DFS) has developed a regulatory framework that covers ‘ virtual currency business activities ’ and license is required the virtual currencies are having exposure to New York or its residents. Though there were criticism the BitLicense too strict³⁵, the scope of the license can be adjusted to balance investor protection, financial innovation and financial stability. The centralized licensing program could achieve the below and meet the framework as expected in the considerations discussed in Chapter 7:

- Greater transparency – registration or licensing provides customers with greater transparency, including the location of the exchanges, the owner of the exchanges, and any policies or procedures established to protect customers. Mandatory information pursuant to the registration or licensing provision also improves the transparency among regulatory bodies, especially useful to track down ‘bad’ players and fight crimes.
- Information collection – the regulators could requires reporting of market information and the data of the players. The information collected can be used by the regulators understanding of the industry and the risks; This is particular useful to design guidelines and amendment to the laws, virtual currencies are rapid developing area. The UK is actively participating in FSB’ Global Stablecoin project, the lesson learnt from the market could help avoiding the project from giving birth to a ‘monster’.
- Promote higher standards – this is particularly useful if UK start with lighter measures (such as simple registration). The regulars could use the information obtained from time to time from the licensees to gradually promote better standards on the market and develop towards targeted standards, possible benefits and measures taken over time.

Introducing statutory self-regulatory organization

This is relative mild approach than licensing scheme, Encourage and stipulates a specific virtual currencies exchanges/platform association to become a statutory self-disciplinary organization. After complying with statutory requirement, this self-regulatory organization shall be recognized by the regulator. The organization shall undertake statutory self-disciplinary obligations and obtain corresponding powers including: regular information exchange with market participants, deal with user complaints, provide guidance for practitioners on business improvement, and formulate rules for self-regulation.

Self-regulatory organizations is feasible as only industry can respond to the rapidly changing market environment in a timely manner and list the appropriate regulations for virtual currencies.

8.3 Some further suggestions to overcome other possible obstacles

Regulatory attitude

- The attitude largely depends on how far the UK government want to promote the development of the finTech, especially if the virtual currencies would be seen affecting the fiat currencies.
- The status of the virtual currencies-related service providers is unclear, and as to which regulatory authorities should be supervise virtual currencies industry are to be confirmed.
- AML/CFT are the existing main goals of supervision, but AML/CFT is actually not the only key consideration for virtual currencies

Recommendations

- The UK government is advised to give solid direction which regular shall be the main regulator on virtual currencies, not only AML matter.
- The legislative should invite relevant industry players to co-ordinate and formulate the legislation on virtual currencies.
- FCA or PRA keeps statement or mission paper once a year or two to respond to the rapid development of the virtual currencies.

Legal system

- The regulators do not favor one legal system for one business model.
- Until it is clear who the main regulator on this area, the relevant regulators might rather the responsibility be divided as knowledge on this new area may not be clear enough.
- Until there are clear statutes, market participants (service providers not those pure investors) would prefer no regulations.

Recommendations

- The regulators may want to expedite the review of the sandbox mechanism regulations and see how it could adjust to the virtual currencies issue. That may minimize the statute during pre-mature stage
- Creating Statutory Self-Regulatory Organization, this measure is mild and close to the market. The existing regulators will not have the pressure to set rules for an area which they are not sufficiently familiar with.
- Revise existing regulations and give priority to research on the urgent issue (with enough consultation with market participants) in virtual currencies and formulate relevant regulations. This will effectively solve the previous industry dilemma.

Specific consideration on virtual currencies

- Virtual currencies involve issue across different industries, IT and Finance. At the first glance, it is difficult to revise and improve the laws and regulations through Finance regulators.
- The traditional common law does not cover non-tangible virtual currencies. Once a dispute occurs, it is unclear how the law could step in.

Recommendations

- Legislative should design regulatory measures flexible enough, on principle approach, to cover ever changing virtual currencies development.
- Because of recent case law development, virtual currencies may now be treated as property during dispute and award relevant remedies.
- For those taskforce about virtual currencies and DLT, the composition lacks IT involvement.

Recommendations

- For Taskforce related to this area, it is advised to include IT related regulators.

8.4 Conclusion

The future of virtual currencies depends on the ability to establish a trust mechanism. Having legal certainty with more solid regulations and laws will help the industry to develop healthily and virtual currencies could become a legitimate investment choice for investors.

Being decentralized in nature, it is inevitably sensitive issue for the government. However, regulating virtual currencies is likely an unavoidable subject globally. Virtual currencies are still developing and are moving fast, they may largely change the behavior of the financial. Therefore, despite the impact on the business model of traditional financial industry or difficulties to design suitable regulations, regulators must stay ahead this new technology.

Having unclear legal status and regulatory supervision is not good for the healthy development of the virtual currencies industry in the UK. The issues related to virtual currencies have not yet caused significant impact on the financial. However, this situation will inevitably change in the future. If regulators are having mindset resisting change, it would not be constructive to the development of the virtual currencies and related industries.

There were many exchanges related issues happened in the past, if FCA is only focusing on AML/CFT supervision, it is hardly comfortable

Here are some notable cases:

- In 2011 and 2014³⁶, the virtual currencies of Japanese exchange Mt.Gox were stolen twice, losses aggregated USD 350 million, and the exchange was later forced to declare bankruptcy.
- In August 2016, Hong Kong-based Bitfinex was hacked, about 120,000 BTC was stolen resulted a loss of $65m (£49m)³⁷ ;
- In June 2017, Bithumb, South Korea ’s virtual currencies exchange, billions of won worth of virtual currencies was stolen and 30,000 pieces of user information leaked³⁸ ; and in 2018 Bitthumb was found hacked again³⁹.
- In January 2018, Coincheck, bitcoin exchanges in Japan, was hacked a worth of $534m (£380m) stolen⁴⁰ ;
- A latest real-life example happened in 2018 when a 30-year-old founder of the Canadian cryptocurrency exchange suddenly died on Dec. 12, 2018⁴¹. Since he is the only person with private key to the virtual currencies of the exchange. Approximately 115,000 customers on the platform have stored approximately 180 million Canadian dollars ($135m; £105m) worth of virtual currency, which has been ‘locked’. The platform has since been closed and is currently in bankruptcy proceedings. Among his death, according to Ernst & Young⁴², the founder, Gerald Cotton, was found transferred client funds to his personal account.

It would be not surprised similar will happen to virtual currencies exchanges in the UK if there are no sufficient regulations.

Challenge from ‘stable coins’

Some versions of these virtual currencies, ‘stable coins’, are designed to maintain the value of the asset and are more ambitious to be used as payment systems⁴³. They may for a new ‘currency’ transfers, which is different from the existing bank-to-bank mechanism to hold assets. Sir Jon Cunliffe has also raised the practical questions on regulations, ‘ Under what regulatory conditions should they be allowed to operate – if they are allowed to operate at all? ’.

Unlike other virtual currencies, the purpose of stable coins is to connect or obtain support from stable financial assets (government bonds, etc.) to ensure the stable value of the digital currencies, stable coins. Stablecoin developers suggest that such virtual currency could allow more convenient and cheaper access to financial inclusion, thereby greatly reduce payment costs, especially in cross-border payments. It is also available to people who lack banking services. Sir Jon Cunliffe commented these suggested improvement ‘ shone a light on some of the failures and costs of the current domestic systems ’ and regulators must stay ahead to consider the relevant risks ‘ before a stablecoin achieves a systemic footprint ’.

Facing the rapid development of blockchain technology, the legitimacy and regulation of virtual currencies must speed up and keep pace. In addition to AML/CFT considerations, increasing registration requirement and powers to FCA to securitize the exchanges / wallets / platform on more considerations including their governance, access control, system setup, market integrity, transparency, listing, custodian, liquidity and private key protection and key lifecycle management control maybe a good starting. This would be alike the licensing scheme this paper favor. Enlarging the scope of designated investment in the RAO to cover ‘exchange token’ on statute or using sandbox to put virtual currencies under supervision could follow.

Appendix

Recent Key milestones for virtual currencies in the UK

Abbildung in dieser Leseprobe nicht enthalten

Bibliography

- E-Books

- Michael SALTER & Julie MASON, Modernizing International Trade Law to Support Innovation and Sustainable Development Proceedings of the Congress of the United Nations Commission on International Trade Law, (United Nations, November 2017)
- PwC & Elwood, “2019 Crypto Hedge Fund Report”

- Journal Articles

- 'EBA Opinion On ‘Virtual Currencies’' (Eba.europa.eu, 2014) <http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf> accessed 18 April 2020
- Frew L, 'Legal and regulatory issues relating to virtual currencies' Journal of International Banking and Financial Law (2015) 7 JIBFL 438B
- Robinson S, 'House of Commons Treasury Select Committee report on crypto-assets' Comp. & Risk 2018, 7(6), 10-11

- Statutes

- Exchange Fund Ordinance
- Financial Services and Markets Act 2000
- Legal Tender Notes Issue Ordinance
- Markets in Financial Instruments Directive II
- Payment Systems and Stored Value Facilities Ordinance
- Payments Services Directive 2
- The Securities and Futures Ordinance
- 5th Anti-Money Laundering Directive

- Regulations

- Electronic Money Regulations 2011
- Payment Services Regulations 2017

- Cases

- AA v Persons Unknown 2019 EWHC 3556 (Comm)
- Liam David Robertson v Persons Unknown (unreported 15th July 2019)
- Vorotyntseva v Money-4 Ltd (T/A Nebus.com) & Ors 2018 EWHC 2596 (Ch)

- Guidelines

- 'Guidance On Cryptoassets: Consultation Paper CP19/3*' (Fca.org.uk, 2019) <https://www.fca.org.uk/publication/consultation/cp19-03.pdf> accessed 15 April 2020

- Reports and statements

- 'Cryptoassets Taskforce: Final Report' (Cryptoassets Taskforce 2018) <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752070/cryptoassets_taskforce_final_report_final_web.pdf> accessed 25 April 2020
- 'Cryptoassets: AML / CTF Regime' (FCA, 2019) <https://www.fca.org.uk/firms/financial-crime/cryptoassets-aml-ctf-regime> accessed 25 April 2020
- 'Crypto-Assets: Twenty-Second Report Of Session 2017–19' (Publications.parliament.uk, 2020) <https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/910/910.pdf> accessed 8 March 2020
- 'Cryptocurrencies Derivatives' (FCA, 2020) <https://www.fca.org.uk/news/statements/cryptocurrency-derivatives> accessed 8 March 2020
- 'Discussion Paper: Designing A Prudential Treatment For Cryptoassets' (Basel Committee on Banking Supervision 2020) <https://www.bis.org/bcbs/publ/d490.pdf> accessed 30 April 2020
- 'Economic Crime Plan 2019-22' (HM Government: UK Finance 2019) <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/816215/2019-22_Economic_Crime_Plan.pdf> accessed 30 April 2020
- 'Legal Statement On Cryptoassets And Smart Contracts' (The LawTech Delivery Panel: UK Jurisdiction Taskforce 2019) <https://35z8e83m1ih83drye280o9d1-wpengine.netdna-ssl.com/wp-content/uploads/2019/11/6.6056_JO_Cryptocurrencies_Statement_FINAL_WEB_111119-1.pdf> accessed 25 April 2020
- 'Letter From Sam Woods: Existing Or Planned Exposure To Crypto-Assets' (Bankofengland.co.uk, 2018) <https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2018/existing-or-planned-exposure-to-crypto-assets.pdf?la=en&hash=21DA12EE4697E4BDF0D6D4E9BFF0DDBEE07FFD36> accessed 30 April 2020
- 'Regulation Of Crypto Assets' (International Monetary Fund 2019) <https://www.imf.org/~/media/Files/Publications/FTN063/2019/English/FTNEA2019003.ashx> accessed 29 April 2020
- 'SFC Warns Of Cryptocurrency Risks | Securities & Futures Commission Of Hong Kong' (Sfc.hk, 2018) <https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=18PR13> accessed 18 April 2020
- 'SFC’S Regulatory Action Halts ICO To Hong Kong Public | Securities & Futures Commission Of Hong Kong' (Sfc.hk, 2018) <https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=18PR29> accessed 18 April 2020
- 'Statement On Crypto-Assets' (Bis.org, 2020) <https://www.bis.org/publ/bcbs_nl21.htm> accessed 30 April 2020
- 'Statement On Initial Coin Offerings | Securities & Futures Commission Of Hong Kong' (Sfc.hk, 2017) <https://www.sfc.hk/web/EN/news-and-announcements/policy-statements-and-announcements/statement-on-initial-coin-offerings.html> accessed 18 April 2020
- UK Financial Conduct Authority, “Policy Statement PS19/22: Guidance on Cryptoassets” published on 31 July 2019, available at <https://www.fca.org.uk/publications/policy-statements/ps19-22-guidance-cryptoassets>

- Internet Resources and Websites

- ‘HKICL | Company Profile’ (Hkicl.com.hk, 2019) <https://www.hkicl.com.hk/eng/about_us/company_profile.php> accessed 27 October 2019
- 'About - Financial Action Task Force (FATF)' (Fatf-gafi.org, 2019) <https://www.fatf-gafi.org/about/> accessed 27 October 2019
- 'About BIS - Overview' (Bis.org, 2019) <https://www.bis.org/about/index.htm?m=1%7C1> accessed 27 October 2019
- 'About IOSCO' (Iosco.org, 2019) <https://www.iosco.org/about/?subsection=about_iosco> accessed 27 October 2019
- 'About The FCA' (FCA, 2019) <https://www.fca.org.uk/about/the-fca> accessed 27 October 2019
- 'About The FSB' (Fsb.org, 2019) <https://www.fsb.org/about/> accessed 27 October 2019
- 'About The IMF' (IMF, 2019) <https://www.imf.org/en/About> accessed 27 October 2019
- 'Cryptoassets Taskforce Meets For The First Time' (GOV.UK, 2020) <https://www.gov.uk/government/news/cryptoassets-taskforce-meets-for-the-first-time> accessed 25 April 2020
- 'Cryptoassets: AML / CTF Regime' (FCA, 2020) <https://www.fca.org.uk/firms/financial-crime/cryptoassets-aml-ctf-regime> accessed 30 April 2020
- 'Fintech Sector Strategy' (GOV.UK, 2020) <https://www.gov.uk/government/publications/fintech-sector-strategy> accessed 25 April 2020
- 'Hong Kong Monetary Authority - The HKMA' (Hong Kong Monetary Authority, 2019) <https://www.hkma.gov.hk/eng/about-us/the-hkma/> accessed 27 October 2019
- 'Our Role | Securities & Futures Commission Of Hong Kong' (Sfc.hk, 2019) <https://www.sfc.hk/web/EN/about-the-sfc/our-role/> accessed 27 October 2019
- 'Quadriga Fintech Solutions Corp [CCAA Monitor And Trustee In Bankruptcy]' (Ernst & Young Inc. Restructuring Information, 2020) <https://documentcentre.eycan.com/Pages/Main.aspx?SID=1445> accessed 30 April 2020
- 'Sign The Petition' (Change.org, 2014) <https://www.change.org/p/governor-andrew-m-cuomo-and-the-new-york-state-legislature-stop-bitlicense-from-harming-small-businesses-and-tech-innovation-in-ny> accessed 30 April 2020
- 'The Basel Committee - Overview' (Bis.org, 2019) <https://www.bis.org/bcbs/> accessed 27 October 2019

- Press release

- Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee, 'It’S Time To Talk About Money' (2020) <https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/its-time-to-talk-about-money-speech-by-jon-cunliffe.pdf?la=en&hash=A39E014DBBA2C5E88D1B8339E61598CBD62BCA3E> accessed 2 May 2020

- Newspaper

- BBC News, 'Bitfinex Users To Share 36% Of Bitcoin Losses After Hack' (2016) <https://www.bbc.com/news/technology-37009319> accessed 30 April 2020
- BBC News, 'Bithumb: Hackers 'Rob Crypto-Exchange Of $32M' (2018) <https://www.bbc.com/news/technology-44547250> accessed 30 April 2020
- BBC News, 'Coincheck: World's Biggest Ever Digital Currency 'Theft' (2018) <https://www.bbc.com/news/world-asia-42845505> accessed 30 April 2020
- BBC News, 'Hackers Hit Web Accounts Of Mtgox Boss' (2014) <https://www.bbc.com/news/technology-26387800> accessed 30 April 2020
- BBC News, 'Hackers Steal Bitcoin Funds From Bithumb Exchange Traders' (2017) <https://www.bbc.com/news/technology-40506609> accessed 30 April 2020
- BBC News, Toronto, 'Quadriga: The Cryptocurrency Exchange That Lost $135M' (2019) <https://www.bbc.com/news/world-us-canada-47203706> accessed 30 April 2020

[...]

---

¹ PwC & Elwood, “2019 Crypto Hedge Fund Report”, The report estimated that there are currently 150 active crypto hedge funds, which collectively hold around US$1 billion assets under management

² 'EBA Opinion On ‘Virtual Currencies’' (Eba.europa.eu, 2014) <http://www.eba.europa.eu/documents/10180/657547/EBA-Op-2014-08+Opinion+on+Virtual+Currencies.pdf> accessed 18 April 2020.

³ UK Financial Conduct Authority, “Policy Statement PS19/22: Guidance on Cryptoassets” published on 31 July 2019, available at <https://www.fca.org.uk/publications/policy-statements/ps19-22-guidance-cryptoassets> “…Although we recognise three broad categories of cryptoassets: e-money, security and unregulated tokens…”

⁴ 'About The IMF' (IMF, 2019) <https://www.imf.org/en/About> accessed 27 October 2019.

⁵ 'About The FSB' (Fsb.org, 2019) <https://www.fsb.org/about/> accessed 27 October 2019.

⁶ 'About - Financial Action Task Force (FATF)' (Fatf-gafi.org, 2019) <https://www.fatf-gafi.org/about/> accessed 27 October 2019.

⁷ 'About BIS - Overview' (Bis.org, 2019) <https://www.bis.org/about/index.htm?m=1%7C1> accessed 27 October 2019.

⁸ 'The Basel Committee - Overview' (Bis.org, 2019) <https://www.bis.org/bcbs/> accessed 27 October 2019.

⁹ 'About IOSCO' (Iosco.org, 2019) <https://www.iosco.org/about/?subsection=about_iosco> accessed 27 October 2019.

¹⁰ 'About The FCA' (FCA, 2019) <https://www.fca.org.uk/about/the-fca> accessed 27 October 2019.

¹¹ ibid

¹² 'Fintech Sector Strategy' (GOV.UK, 2020) <https://www.gov.uk/government/publications/fintech-sector-strategy> accessed 25 April 2020.

¹³ 'Cryptoassets Taskforce Meets For The First Time' (GOV.UK, 2020) <https://www.gov.uk/government/news/cryptoassets-taskforce-meets-for-the-first-time> accessed 25 April 2020.

¹⁴ 'Cryptoassets Taskforce: Final Report' (Assets.publishing.service.gov.uk, 2018) <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752070/cryptoassets_taskforce_final_report_final_web.pdf> accessed 25 April 2020.

¹⁵ 'Legal Statement On Cryptoassets And Smart Contracts' (The LawTech Delivery Panel: UK Jurisdiction Taskforce 2019) <https://35z8e83m1ih83drye280o9d1-wpengine.netdna-ssl.com/wp-content/uploads/2019/11/6.6056_JO_Cryptocurrencies_Statement_FINAL_WEB_111119-1.pdf> accessed 25 April 2020.

¹⁶ For example, 'PS19/22: Guidance On Cryptoassets' (FCA, 2020) <https://www.fca.org.uk/publications/policy-statements/ps19-22-guidance-cryptoassets> accessed 8 March 2020. ‘we consider these (exchange) tokens to be outside the regulatory perimeter.’

¹⁷ 'Cryptocurrency Derivatives' (FCA, 2020) <https://www.fca.org.uk/news/statements/cryptocurrency-derivatives> accessed 8 March 2020.

¹⁸ 'Crypto-Assets: Twenty-Second Report Of Session 2017–19' (Publications.parliament.uk, 2020) <https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/910/910.pdf> accessed 8 March 2020.

¹⁹ 'Guidance On Cryptoassets: Consultation Paper CP19/3*' (Fca.org.uk, 2019) <https://www.fca.org.uk/publication/consultation/cp19-03.pdf> accessed 15 April 2020. 'PSRs cover each side of the remittance, but do not cover the use of cryptoassets in between which act as the vehicle for remittance.'

²⁰ 'Cryptocurrency Derivatives' (FCA, 2020) <https://www.fca.org.uk/news/statements/cryptocurrency-derivatives> accessed 8 March 2020.

²¹ 'Cryptoassets Taskforce: Final Report' (Cryptoassets Taskforce 2018) page3 para1 <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/752070/cryptoassets_taskforce_final_report_final_web.pdf> accessed 25 April 2020.

²² 'Legal Statement On Cryptoassets And Smart Contracts' (The LawTech Delivery Panel: UK Jurisdiction Taskforce 2019) <https://35z8e83m1ih83drye280o9d1-wpengine.netdna-ssl.com/wp-content/uploads/2019/11/6.6056_JO_Cryptocurrencies_Statement_FINAL_WEB_111119-1.pdf> accessed 25 April 2020. Appendix 3 - List of specialist consultees

²³ Ibid, Appendix 2 - List of respondents to the consultation

²⁴ 'Regulation Of Crypto Assets' (International Monetary Fund 2019) <https://www.imf.org/~/media/Files/Publications/FTN063/2019/English/FTNEA2019003.ashx> accessed 29 April 2020.

²⁵ Securities and Futures Commission (SFC) The SFC is an independent statutory body established in 1989 to oversee the securities and futures markets in Hong Kong. The SFC is responsible for conducting investigations, remedies and disciplinary actions in accordance with the powers granted by the Securities and Futures Ordinance and subsidiary regulations.

²⁶ The Securities and Futures Ordinance (SFO) The provisions of the SFO (Chapter 571 of the Laws of Hong Kong) are enforced by the SFC. Hong Kong has not yet introduced new regulations specifically for digital tokens or virtual currency. But the SFC has stated that if virtual currencies may constitute securities26, it will be regulated by the SFO. Accordingly, various activities related to it (including transactions as assets, consulting or management as assets) may constitute regulated activities under the Schedule 5 of the SFO and would be required to have a license

²⁷ 'SFC’S Regulatory Action Halts ICO To Hong Kong Public | Securities & Futures Commission Of Hong Kong' (Sfc.hk, 2018) <https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=18PR29> accessed 18 April 2020.

²⁸ 'Economic Crime Plan 2019-22' (HM Government: UK Finance 2019) <https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/816215/2019-22_Economic_Crime_Plan.pdf> accessed 30 April 2020.

²⁹ 'Cryptoassets: AML/CTF Regime: Register With The FCA' (FCA, 2020) <https://www.fca.org.uk/cryptoassets-aml-ctf-regime/register> accessed 30 April 2020.

³⁰ 'Position Paper Regulation Of Virtual Asset Trading Platforms' (Sfc.hk, 2019) <https://www.sfc.hk/web/EN/files/ER/PDF/20191106%20Position%20Paper%20and%20Appendix%201%20to%20Position%20Paper%20(Eng).pdf> accessed 19 April 2020.

³¹ 'Discussion Paper: Designing A Prudential Treatment For Cryptoassets' (Basel Committee on Banking Supervision 2020) <https://www.bis.org/bcbs/publ/d490.pdf> accessed 30 April 2020.

³² 'Letter From Sam Woods: Existing Or Planned Exposure To Crypto-Assets' (Bankofengland.co.uk, 2018) <https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2018/existing-or-planned-exposure-to-crypto-assets.pdf?la=en&hash=21DA12EE4697E4BDF0D6D4E9BFF0DDBEE07FFD36> accessed 30 April 2020.

³³ 'Crypto-Assets: Twenty-Second Report Of Session 2017–19' (Publications.parliament.uk, 2020) <https://publications.parliament.uk/pa/cm201719/cmselect/cmtreasy/910/910.pdf> accessed 8 March 2020.

³⁴ 'Cryptoassets: AML / CTF Regime' (FCA, 2019) <https://www.fca.org.uk/firms/financial-crime/cryptoassets-aml-ctf-regime> accessed 25 April 2020.

³⁵ 'Sign The Petition' (Change.org, 2014) <https://www.change.org/p/governor-andrew-m-cuomo-and-the-new-york-state-legislature-stop-bitlicense-from-harming-small-businesses-and-tech-innovation-in-ny> accessed 30 April 2020. Petition was made claiming the licensing scheme will hurt small business

³⁶ BBC News, 'Hackers Hit Web Accounts Of Mtgox Boss' (2014) <https://www.bbc.com/news/technology-26387800> accessed 30 April 2020.

³⁷ BBC News, 'Bitfinex Users To Share 36% Of Bitcoin Losses After Hack' (2016) <https://www.bbc.com/news/technology-37009319> accessed 30 April 2020.

³⁸ BBC News, 'Hackers Steal Bitcoin Funds From Bithumb Exchange Traders' (2017) <https://www.bbc.com/news/technology-40506609> accessed 30 April 2020.

³⁹ BBC News, 'Bithumb: Hackers 'Rob Crypto-Exchange Of $32M' (2018) <https://www.bbc.com/news/technology-44547250> accessed 30 April 2020.

⁴⁰ BBC News, 'Coincheck: World's Biggest Ever Digital Currency 'Theft' (2018) <https://www.bbc.com/news/world-asia-42845505> accessed 30 April 2020.

⁴¹ BBC News, Toronto, 'Quadriga: The Cryptocurrency Exchange That Lost $135M' (2019) <https://www.bbc.com/news/world-us-canada-47203706> accessed 30 April 2020.

⁴² 'Quadriga Fintech Solutions Corp [CCAA Monitor And Trustee In Bankruptcy]' (Ernst & Young Inc. Restructuring Information, 2020) <https://documentcentre.eycan.com/Pages/Main.aspx?SID=1445> accessed 30 April 2020. Ernst & Young was appointed as Monitor, and all relevant reports could be found in this website

⁴³ Sir Jon Cunliffe, Deputy Governor Financial Stability, Member of the Monetary Policy Committee, Member of the Financial Policy Committee and Member of the Prudential Regulation Committee, 'It’S Time To Talk About Money' (2020) <https://www.bankofengland.co.uk/-/media/boe/files/speech/2020/its-time-to-talk-about-money-speech-by-jon-cunliffe.pdf?la=en&hash=A39E014DBBA2C5E88D1B8339E61598CBD62BCA3E> accessed 2 May 2020.