Regulating Cryptos – Watching and Waiting
Cryptos needs regulation and fast, according to a report on crypto-assets recently published by the UK Parliament’s Treasury Committee (the “Report”). In contrast, the Irish Government and the Central Bank of Ireland are adopting a wait and see approach while they, and the EU, watch the rapidly evolving crypto markets.
The Report follows on from a consultation on crypto-currencies commenced by the Treasury Committee in February 2018, in order to examine the role of digital currencies in the UK, consider the potential impact of distributed ledger technology and to evaluate the regulatory response.
According to the Report, at a minimum, regulation should be introduced to address consumer protection and anti-money laundering issues associated with crypto-assets. The Report also states that the implementation of crypto-asset regulation in the UK may enable the market place to move to a more mature business model that improves consumer outcomes and enables it to grow sustainably. Moreover, the entry of institutional investors into the market would increase liquidity which in itself could reduce some of the inherent risks that exist at present.
A number of other jurisdictions are also taking a pro-active approach to the regulation of crypto-assets, including Malta, Switzerland, Lithuania, Gibraltar, Jersey, Isle of Man and France.
In contrast, the Irish Government and the Central Bank have so far adopted a wait and see approach to the regulation of crypto-assets. In March 2018, the Department of Finance issued a discussion paper, Virtual Currencies and Blockchain Technology, with the general aim of describing the current environment, raising awareness and proposing the creation of an intra-departmental working group. The Department of Finance’s work in this area is on-going.
For its part, other than issue a number of consumer warnings regarding virtual currencies and Initial Coin Offerings, the Central Bank has not come out in favour of domestic regulation at this stage, while recognising that it is likely to be necessary in time.
Notwithstanding the Report’s conclusions, the watch and wait approach favoured by the Irish authorities has much to recommend it. First and foremost, the crypto-asset world is not entirely unregulated in that the existing regulatory framework applies to some crypto-assets, such as an ICO that falls within the definition of a “transferable security”. Moreover, Irish authorities must transpose the Fifth Anti-Money Laundering Directive into Irish law by January 2020, which will bring virtual currency providers and custodian wallet providers into the scope of anti-money laundering requirements.
Moreover, to a large extent the regulation of crypto-assets needs a cross-border solution rather than bespoke national frameworks. There is much work being done on this issue at EU level, and for the Irish authorities to pre-empt possible EU measures in the area could cause real difficulties for crypto-asset providers as they would potentially be faced with having to comply with two different regulatory frameworks in a very short space of time. In this respect, it is worth noting the EU Commission is currently working with the European Supervisory Authorities on a regulatory mapping exercise on crypto-assets, which should conclude by the end of 2018. According to remarks made by Commission Vice President Dombrovskis, on 7 September 2018 in Vienna, he expects this mapping exercise to provide a solid ground on which to decide on further steps in this area.