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.
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). 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.
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.
Table of Contents
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
Research Objectives and Core Themes
This work examines the legitimacy and regulatory landscape of virtual currencies in the United Kingdom. Its primary research goal is to evaluate the adequacy of existing legal protections and to determine whether current regulatory authorities sufficiently cover the diverse risks associated with the use and management of cryptocurrencies.
- Analysis of the current legal status of virtual currencies under UK statutes.
- Evaluation of the regulatory scope of the Financial Conduct Authority (FCA).
- Examination of the impact of the UK Jurisdiction Taskforce on recognizing cryptoassets as property.
- Assessment of regulatory challenges regarding mining, custody, and trading platform oversight.
Excerpt from the Book
4.4 Current status and recent development
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.
Summary of Chapters
Chapter 1 Abstract: Provides an overview of virtual currency as a digital representation of value and notes the rapid institutionalization of the crypto hedge fund industry.
Chapter 2 Introduction: Discusses the irreversible trend toward digital currencies and the crucial need for regulation to balance privacy protection with security.
Chapter 3 Virtual Currency and digital currency: Defines and differentiates between various forms of digital assets, specifically focusing on the decentralized nature of cryptocurrencies.
Chapter 4 Legislation Development on Virtual Currency in the United Kingdom: Reviews the existing statutory landscape and regulatory bodies governing digital assets in the UK.
Chapter 5 Report from UK Crypto Assets Taskforce: Examines the findings of the 2018 taskforce report regarding policy recommendations and risk mitigation for cryptoassets.
Chapter 6 Report from UK Jurisdiction Taskforce: Analyzes the landmark legal stance that cryptoassets possess the characteristics of property under English law.
Chapter 7 Recommendation: Proposes improvements to the regulatory framework, including licensing schemes and transparency requirements for exchanges.
Chapter 8 Conclusion: Synthesizes the need for solid legal certainty and trust mechanisms to foster the healthy development of the industry.
Keywords
Virtual Currency, Cryptocurrency, Financial Conduct Authority, FCA, UK Law, Regulation, Cryptoassets, Blockchain, Distributed Ledger Technology, DLT, Anti-Money Laundering, AML, Property Law, Financial Services, Investor Protection
Frequently Asked Questions
What is the primary focus of this publication?
This work focuses on the regulatory framework governing virtual currencies (specifically cryptocurrencies) in the United Kingdom, assessing current protections and future legislative needs.
What are the central themes discussed in this book?
The central themes include the legal definition of cryptoassets, the regulatory powers of the Financial Conduct Authority (FCA), anti-money laundering (AML) compliance, and the legal status of cryptocurrencies as property.
What is the ultimate goal of the research?
The goal is to determine if current UK regulations provide sufficient protection for users and participants in the virtual currency market and to suggest reforms for better management.
Which methodology is utilized?
The author performs a legal analysis based on primary sources, including UK statutes, FCA guidance documents, reports from UK taskforces, and recent case law to assess the current regulatory perimeter.
What topics are covered in the main body?
The main body covers the definitions of virtual and digital assets, the role of international and domestic regulatory bodies, the impact of recent case law, and specific challenges like custody and exchange regulation.
Which keywords characterize this work?
Key terms include Virtual Currency, FCA, DLT, Cryptoassets, Anti-Money Laundering, Regulation, and Property Law.
How has the UK legal system treated cryptoassets in recent years?
Recent court cases, such as AA v Persons Unknown, have established that cryptoassets can be treated as property under English law, providing a foundation for legal protection.
Why does the author advocate for a licensing scheme?
The author argues that a consolidated licensing scheme is necessary to ensure greater transparency, better information collection, and higher standards of consumer protection across the volatile virtual currency market.
- Quote paper
- Ben Tong (Author), 2020, Developments in UK law on the regulation of virtual currency, Munich, GRIN Verlag, https://www.grin.com/document/912541
