143.Given that the crypto-assets can be created and traded anywhere in the world, the regulatory response to certain risks will only have limited success if other jurisdictions adopt a different approach.
144.David Raw, Deputy Director of Banking and Credit at HM Treasury, explained that international bodies are currently undertaking work to assess the risks associated with crypto-assets as well:
[T]here is an international element to this. […] Some of the international bodies in this space, like the FSB [Financial Stability Board] and the Financial Action Taskforce, have been tasked with doing some work […] on what the risks are and internationally what action can be taken, because the risk of regulatory arbitrage here is quite high.
145.David Geale, Director of Policy at the FCA, outlined the extent of the work between regulators in the international regulatory sphere, but indicated that that work is still at the early stages:
In th[e] […] case [of crypto-assets], there is a lot of interest among bodies like IOSCO [International Organisation of Securities Commissions], the international securities agency, and at the level of the Financial Stability Board. There is quite a lot of work going on to ensure proper information sharing so that we know the approaches we are all taking and why. We also need to think about things like the taxonomy so we are talking about the same things at the same time, and to think about the risks that are emerging and the most appropriate ways to deal with those. Everybody is feeling their way into this regulation a bit at the moment. Various jurisdictions are taking various steps. We have not yet seen which is going to be the most effective.
146.The global regulatory response to crypto-assets is in its infancy. Nonetheless, given the UK has yet to introduce any crypto-asset regulation, it is in a position to learn from those experience of countries that have done so.
147.In the US, the regulation of crypto-asset activity differs from state to state. In its written evidence to the Committee, Crypto UK argued that the approach of the New York State Department of Financial Services (NYSDFS) was “not as successful [as other regulators].” The regulator introduced the “BitLicense” and regulations which required different types of crypto-asset market participants to be registered with the NYSDFS. Crypto UK argued that “regulatory arbitrage opportunities within the US [and] a strong anti-regulatory sentiment […] meant that a huge proportion of New York’s crypto business moved out of New York State […].” This was corroborated by the findings of Reuters that “the slow licensing process and strict requirements are driving some companies away.” These companies instead looked to “other US states [that] are developing rules and awarding licenses at a faster clip, [for example] Washington State and North Carolina.” Crypto UK stated that “the effects of the BitLicense continue today, with New York State lagging behind in terms of volume of crypto[asset] businesses compared to other comparable US states.”
148.As mentioned earlier in the report, the Securities and Exchange Commission (SEC) has already issued guidance on the regulation of initial coin offerings (ICOs). In February 2018, Reuters reported that US lawmakers are “moving to consider new rules that could impose stricter federal oversight on the emerging asset class […].” However, “digital assets currently fall into a jurisdictional grey area between the SEC, the Commodity Futures Trading Commission (CFTC), the Treasury Department, the Federal Reserve and individual states.”
149.Ryan Zagone, Director of Regulatory Relations at Ripple, outlined the different interpretations and approaches of authorities within the US:
There are many different categories that we see coming to the market, depending on how that technology is used. In the US, the IRS [Internal Revenue Service], our tax authority, has deemed them assets, just like property. The CFTC is saying some uses of these and some designs of these look like commodities. The Securities and Exchange Commission say some look like securities, looking at the ICOs. We are seeing, depending on how they are constructed and used, different categories. We expect that conversation to continue as technology evolves.
150.Mr Raw told the Committee that some regulators in Asia appear to have progressed further in their thinking, as “there is a lot more activity taking place in relation to crypto-assets in the Far East than there is here.”
151.Japan’s Financial Services Agency (FSA) approved eleven companies as operators of crypto-asset exchanges on 29 September 2017 after it recognised Bitcoin as a legal tender in April 2017 and required crypto-asset exchange operators to register with the FSA. The Japanese FSA has “laid out various requirements, such as building a strong computer system, segregation of customer accounts and checking the identity of customers.”
152.The Committee received written evidence from Crypto UK commending the approach of the Japanese FSA which it argued “has led to the development of a group of mature crypto-[asset] exchanges within Japan.” The written evidence submitted by Coinfloor also argued that Japan’s approach “crafted a framework which protects consumers, enables innovation and enables customers to adopt innovative products and services quickly.”
153.China has taken a different approach to other regulators in the management of crypto-assets. In 2017, China “banned initial coin offerings, shut down local crypto-currency trading exchanges and limited bitcoin mining […].” On 15 January 2018, Bloomberg reported that China was “escalating its clampdown on cryptocurrency trading, targeting online platforms and mobile apps that offer exchange-like services [as] while authorities banned cryptocurrency exchanges last year, they’ve recently noted an uptick in activity on alternative venues.” In future, “the Government plans to block domestic access to homegrown and offshore platforms that enable centralised trading […] authorities will also target individuals and companies that provide market-making, settlement and clearing services for centralised trading.”
154.The Gibraltar Financial Services Commission (GFSC) has established a Distributed Ledger Technology Regulatory Framework (DLT framework). Since 1 January 2018, a firm carrying out by way of business, in or from Gibraltar, the use of distributed ledger technology (DLT) for storing, transmitting value belonging to others (DLT activities), needs to be authorised by the GFSC as a DLT Provider. The GFSC noted that “a flexible, adaptive approach is required in the case of novel business activities, products and business models.” The GFSC has thus designed regulatory principles rather than concrete rules for DLT businesses. These regulatory principles include:
155.Obi Nwosu, Chief Executive Officer of Coinfloor, explained the reasons why Coinfloor had utilised the regulatory regime in Gibraltar to register a business:
We have set up Coinfloor Exchange Gibraltar. The reason why is that we were incredibly impressed with Gibraltar’s forward-thinking approach to regulation. We have been working with them for over a year. They have taken a policy around AML and CTF (counter- terrorist financing). They have also looked at policies around custodianship of cryptocurrency, treating customers fairly, and they have taken a broader look at the market. This is what I was recommending that the UK should look at as well, as an example.
156.The position of the French regulators is similar to the FCA. The Autorité des Marchés Financiers (AMF, Authority for Financial Markets) and the Autorité de Contrôle Prudentiel et de Résolution (ACPR, Prudential Regulation and Resolution Authority) clarified that “the purchase [and] sale of and investment in Bitcoin currently takes place outside any regulated market” and are therefore unregulated. In a similar position to the FCA, the AMF and ACPR have issued warnings to consumers that the value of Bitcoin can “unexpectedly collapse [and] investors are therefore exposed to very high risks of a [price] correction and do not benefit from any guarantee or protection of invested capital.”
157.Conversely, the financial services regulator in Germany, BaFin (Federal Financial Supervisory Authority), has classified crypto-assets as “units of account from a supervisory point of view and therefore as financial instruments.” Given this classification, in Germany commercial trading in crypto-assets requires authorisation. In March 2018, BaFin also published a document on the regulatory classification of crypto-assets and ICOs in the area of securities supervision which stated that Ba Fin “determines on a case-by-case basis whether a token constitutes a [security] […] or a capital investment […].” In line with other regulators, BaFin has also cautioned potential investors on the range of risks associated with ICOs.
158.The Committee recognises the importance of international cooperation on the regulation of crypto-assets and associated activities. The Committee encourages UK regulators to continue engaging with international bodies to ensure best practice from other regulators is learned and applied to the UK context.
183 Crypto UK () para 5.15
184 Crypto UK () para 5.15
185 Crypto UK () para 5.15
186 Reuters, New York’s bitcoin hub dreams fade with licensing backlog, 31 October 2016
187 Reuters, New York’s bitcoin hub dreams fade with licensing backlog, 31 October 2016
188 Crypto UK () para 5.16
189 Reuters, Congress sets sights on federal cryptocurrency rules, 19 February 2018
190 Reuters, Congress sets sights on federal cryptocurrency rules, 19 February 2018
193 Reuters, Japan’s FSA gives official endorsement to 11 cryptocurrency exchanges,29 September 2017
194 Reuters, Japan’s FSA gives official endorsement to 11 cryptocurrency exchanges, 29 September 2017
195 Crypto UK () para 5.14
196 Coinfloor Limited () para 12.2
197 Reuters, China to block cryptocurrency platforms that allow centralised trading: Bloomberg, 15 January 2018
198 Bloomberg, China escalates crackdown on cryptocurrency trading, 15 January 2018
199 Bloomberg, China escalates crackdown on cryptocurrency trading, 15 January 2018
200 Gibraltar Financial Services Commission,
201 Gibraltar Financial Services Commission,
202 Gibraltar Financial Services Commission,
203 Gibraltar Financial Services Commission,
205 Autorité des Marchés Financiers press release, ,4 December 2017
206 Autorité des Marchés Financiers press release, ,4 December 2017
208 Ba Fin,
209 Ba Fin, , 28 March 2018
210 Ba Fin,
Published: 19 September 2018