The Treasury select committee is calling for greater regulation of what it describes as the ‘Wild West’ crypto-asset market, to address problems including hacking vulnerabilities, minimal consumer protection, and anonymity in their trading and use, which MPs say aids money laundering
The committee’s report says ‘the ambiguity of the UK government and regulators' position is clearly not sustainable’ and action is need to reduce the risks inherent in investing and using crypto-assets.
The report says crypto-assets, and most initial coin offerings (ICOs), are currently not within the scope of Financial Conduct Authority (FCA) regulation, while self-regulating bodies, which set out codes of conduct and best practice for the industry, are wholly voluntary.
The report cites the volatility of crypto-currencies as a risk for investors, while several crypto-asset exchanges, which are used to convert crypto-assets into conventional currency, have been hacked and customers' crypto-assets have been stolen, with no mechanism for redress.
An additional risk that consumers may not be aware of is that some customers who have lost their passwords to a crypto-asset platform have been told by the firm that runs their account that their password cannot be restored. Thus, there is no recourse for customers who have lost their password, and they are locked out of their account permanently.
The report noted: ‘This often-unexpected outcome for investors is a stark contrast against how customers of banks, and other regulated financial services firms, are treated.’
MPs are also concerned about how crypto-assets are promoted, pointing out that the advertisements of both ICO issuers and crypto-asset exchanges are not regulated by the FCA.
The report said: ‘One-sided adverts imply that the crypto-asset market will only go up, and that anyone can make a lot of money easily. The FCA’s consumer warnings are a feeble corrective to such misleading adverts. The regulator needs more power to control how crypto-asset exchanges and ICOs market their services.’
The committee said it strongly believes that regulation should be introduced. At a minimum, regulation should address consumer protection and Anti-Money Laundering (AML).
Crypto-asset exchanges are not currently included in AML regulations, and the inquiry said its findings suggest this fact, coupled with the inherent anonymity of the assets, meant they can be used to facilitate the sale and purchase of illicit goods and services and launder the proceeds of crime.
To counter this, the committee is urging the government to prioritise and expedite the transposition into UK regulation of the EU's Fifth AML Directive, which will require crypto-asset exchanges to comply with AML regulations. Currently the government’s consultation on this process is not scheduled to finish until the end of 2019.
The report stated: ‘In deciding the regulatory approach, the government and regulators should evaluate the risks of crypto-assets, and assess whether their growth should be encouraged.
‘If growth is favoured, regulation could lead to positive outcomes for the crypto-asset market, including the move toward a more mature business model and increased liquidity. If the UK develops a proportionate regulatory environment for crypto-assets, the UK could be well placed to become a global centre for this activity.’
Nicky Morgan, chair of the Treasury committee, said: ‘It's unsustainable for the government and regulators to bumble along issuing feeble warnings to potential investors, yet refrain from acting.’
Report by Pat Sweet