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As terms like social distancing and the second wave have permeated our lives throughout the 2020 Covid-19 pandemic, people have been forced to adapt to the new normal. It hasn’t been all bad, and an unanticipated quirk of lockdown has been the huge uptake in hobbies and personal interests as people adopt new methods of entertainment. With podcasts growing in popularity before the pandemic, they have now entered a golden age, as demand soared throughout lockdown for new content.
One podcast that has kept us engrossed in recent months, produced by Jamie Bartlett through BBC Sounds, is “The Missing Cryptoqueen” which documents the creation of OneCoin. Marketed as a Bitcoin-style cryptocurrency with an almost cult-like devotion, its creator Dr Ruja Ignatova seemingly successfully executed a multi-billion dollar scam, marketing her fictional OneCoin as a legitimate cryptocurrency, all before disappearing from view and leaving a trail of chaos in her wake. “The Missing Cryptoqueen” highlights the borderless nature of cryptoassets, and the decentralised system upon which they are built. Which prompts an important question, how are cryptocurrencies regulated?
The risk of cryptoassets are well established, with the volatility of cryptocurrencies often their biggest draw to investors. The decentralised digital foundations of cryptocurrencies makes them vulnerable to crypto crime, with often insufficient recourse in the law for victims of offences. This risk has generated a gradual, yet somewhat reactive response from governments when approaching regulation. To regulate is, after all to lend legitimacy and integrity to an asset class, signalling to the market that this investment is safe, and protected by law. Until recently, this argument has dictated a cautious approach from the UK government, generating reluctance to regulate and legitimise these financial instruments.
Despite this, cryptoassets have increasingly entered mainstream markets, no longer reserved for individuals with an interest in finance and technology, and are increasingly seen as the future of finance. Large organisations have lent legitimacy in this process; Facebook announced their own cryptocurrency, Libra, last year, and in October 2020 online payment giant PayPal joined the cryptocurrency market, permitting cryptocurrency buying, selling and shopping on the network renowned the world over as one of the safest ways to pay online. These market movements have eroded government resistance generating a surge of cryptoassets regulation.
2018 saw the UK government pledge support for cryptoassets in the form of the FCA’s cryptoassets task force, and a consultation of cryptoassets soon followed. The resulting legal statement has formed the foundation for regulation, classifying cryptoassets as property under English law despite their decentralised, intangible nature.
This classification imposes English common law and regulation upon cryptoassets and their activity. Fraud, insolvency and company legislation now monitor and control the marketing, trading and holding of cryptoassets for the first time. This process was seen in practice in the case of AA v Persons Unknown in February 2020 where the court made a direct ruling on the status of cryptocurrencies as property, granting an interim injunction over Bitcoin. Demonstrating the importance of this classification for the future of cryptoassets, as their new property status means cryptocurrencies can now form the basis of claims relating to fraud, theft, insolvency and vesting of property.
In early 2020, the UK government built upon these foundations mandating companies who conduct crypto-related activities to register with the FCA. This requirement followed a recent amendment to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs), which appointed the FCA as cryptoassets’ official regulatory body. This development is designed to reduce money-laundering relating to cryptoassets through registration and ongoing reporting obligations.
In addition to this ongoing monitoring, more definitive action has been taken in relation to derivative instruments that reference cryptoassets. Regulated by virtue of the derivative to which they relate, effective from 6 January 2020 the FCA is imposing a ban, prohibiting the marketing and trade to retail clients, of derivatives, which reference cryptoassets within the UK. This action reflects the risks associated with cryptoassets, demonstrating that regulatory bodies are not entirely comfortable with the wide scale adoption of cryptocurrencies within the UK market. In the accompanying FCA policy statement, lack of understanding and transparency of cryptoassets were cited as justification behind this prohibition.
Ideas surrounding cryptocurrency regulation have been mooted for many years, however it seems that regulation of these innovative, fast moving instruments is finally materialising but not at the pace most would hope. ‘’The Missing Cryptoqueen’’ showed us the extent to which cryptoassets can be used as a front for Ponzi schemes, exploiting financially vulnerable people in the UK, and abroad. Regulators have found themselves having to catch up with sophisticated and marketing savvy cryptocurrency efforts – and making rogue market participants harder to task. Clearly, regulations introduced have gone a significant way to help prevent another financial crime being perpetrated without sufficient recourse in the UK. It is now up to regulators to continue their vigilance against such schemes, all whilst allowing the legitimate cryptocurrency market to thrive.