UK GOVERNMENT POLICY RESPONSES TO THE EMERGENCE OF CRYPTOCURRENCIES
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UK Government Policy Responses to the Emergence of Cryptocurrencies
Introduction
Technology continues to change how people perform in various areas, including determining how they make and receive payments as well as how they invest. An example of technology that is set to have a significant impact in the financial sector is cryptocurrency that relies on blockchain technology, thereby making it a secure and reliable form of engaging in financial transactions. The study pays considerable attention to how the UK government responds to the emergence of cryptocurrencieswhile emphasising on specific policies that guide how operating firms and users interact with the virtual currency. Whereas the UK appears to be on the right path in its implementation of policies to guide use of cryptocurrencies, it has an opportunity to learn from others that have made significant strides in this area. The UK should not relent in its development and implementation of effective cryptocurrency policies to avoid potential depreciations and faults that could occur due to using the technology. Even though the country is yet to achieve more developed forms such as it appears in other countries where the use of the virtual currency relying on the guidelines of the Cryptoassets Taskforce Report presents a better chance to excel in this area. The study provides recommendations that may help the UK improve its use of cryptoassets, including emphasising the need for borrowing ideas from nations that have made significant strides in this area and acknowledging that the technology presents a better chance for economic growth, especially in the area of financial transactions. Cryptocurrencies policies in the UK are elaborate and give valuable guidance on how to use virtual currency but the paper elaborates the need to explore more potential techniques for making the innovation more successful and impactful on the economy.
Overview on Cryptocurrencies
A new form of assets has changed capital generation, redefining old perceptions of the terms tokens and coins, and gaining a growing impact in financial markets. Hailed by cryptoenthusiasts, blockchain-related coin provisions widen opportunities for entrepreneurs to generate capital. Issuers offered more than 2000 initial coin offerings (ICOs) generating at least $11.4 billion. According to predictions by analysts, about two hundred million institutions and individuals around the globe will hold tokens or coins in their digital wallets come 2024.[1] Investors’ increased focus on ICO markets has fostered significant growth in the contemporary context of secondary market trading. Approximately 200 virtual currency exchange avenues now develop liquidity and facilitate the discovery of price in cryptocurrency markets. Johnson identifies Bitcoin as one of the most dominant forms and commonly traded cryptocurrency that has captivated speculators, academicians, regulators, and investors alike around the globe. Lee and L’Heureux assert that one form of crypto-finance is cryptocurrency – a form for non-cash and token payment.[2] It is a payment method in which a person must not be revealed for its utilisation as a payment technique. In other words, cryptocurrency is a kind of payment technique and cryptoasset working based on the concept of blockchain. Lee and L’Heureux define blockchain as an algorithimic technology and a form of Distributed Ledger Technology (DLT), popularly known for being a basic technology for developing cryptoassets. Miners create cryptocurrency electronically while using specially created using mining software to deal with tough mathematical forms, which then give specific numbers (coins) in return. Cryptocurrency is now used as an alternative approach of payment that does not adhere to conventional debit and credit/cash systems. It has the capacity to transform commerce and industry. Hence, it is imperative to pay considerable attention to this area and find ways of dealing with emerging issues.
Nonetheless, the crypto-finance ideology has generated much regulatory concern. It is because the new approach directly deters the supervisory intervention of the central banks and that regulatory measures that are presently in place. Lee and L’Heureux inform that because cryptocurrency is an encrypted decentralised form of payment, law enforcement agencies and other state bodies do not have direct reach to the information and data needed for regulation.[3] Moreover, studies by various scholars identify areas in which regulatory intervention is needed, thus calling for more evaluation by various states, including the UK.
Policies in the UK
The UK government acknowledges the need for developing proper regulations and governance structures as a possible approach for dealing with the issues emanating from cryptocurrency. Evidence by Lee and L’Heureux suggest that cryptoassets suffer from absence of trust. The UK government appears to understand that it is possible to regain the trust by effective regulation. However, it is vital to acknowledge that the approaches adopted by regulators to present are diverse and sometimes even clashing, which is anticipated in the sensitive matter of the categorisation and use of cryptocurrency and cryptoassets.
The Cryptocurrencies Taskforce Report
It is imperative to acknowledge that UK policy thinking in accordance with cryptocurrencies is still actively emerging. Foundational and vital cryptocurrencies guidelines and polices were first established by the United Kingdom Cryptocurrencies Taskforce created in 2018, and has consequently been formed through further amendments by the Taskforce team members, including the United Kingdom Financial Conduct Authority and the Bank of England.[4] The Report identifies cryptocurrencies as a subdivision of the wider division of cryptoasset and describes the latter as a digital representation that is secured cryptographically as well as rights in contracts using some form of distributed ledger technology that can be moved and stored electronically. Within the overreaching division, the Report recognised three sub-divisions and provided a range of non-legislative elaborations. The first is exchange tokens, which are usually termed as cryptocurrencies such as Litecoin and Bitcoin.[5] Exchange tokens use a distributed ledger technology platform and are not provided or supported by a central bank or other key financial institution. They do not give the forms of access or rights issued by utility tokens or security, but are utilised as a way of exchange or for investment purposes. The second form is security tokens, which is the amount located to a particular investment as defined by the Financial Services and Markets Act of 2000. These may offer rights such as ownership and payment of a given sum of money, or entitlement to a share in future gains. The third form is utility token, which can be converted into access for a particular service or product that is usually offered using a distributed ledger technology avenue.
Although financial regulators in the UK have issued warnings in accordance with investment in cryptocurrencies, they are not susceptible to a complete ban in the region. Nevertheless, as described by the descriptions elaborated in the Taskforce Report, some miners will be subject to financial regulations. Electronic payment and payment services in the UK may also be applicable and the anti-money laundering body in the UK has been strengthened to address issues concerning many cryptoassets, encompassing cryptocurrencies, not considering whether they are subject to financial scrutiny and regulation.[6] However, all forms of cryptoassets are not deemed money or equivalent to currency in the UK. As indicated abouve, the Taskforce Members have continued to perform additional substantive work in accordance with cryptoassets immediately following the creation of the Report. In particular, the Financial Conduct Authority (FCA) consulted and published regulatory guidelines touching on cryptoassets known as the FCA Guidance. It also enacted a ban from January 2021 on any sales, marketing, and distribution of notes.[7] In addition, the FCA Guidance framework divides cryptoassets into two parts; unregulated and regulated cryptoassets. Moreover, the FCA Guidance informs that cryptoassets that comprise electronic money are divided from the Report by the Taskforce sub-division of tokens and are otherwise called e-cash tokens and these two sub-groups of cryptocurrencies form regulated tokens in the FCA Guidance structure.
Adverts and Promotions
Furthermore, the UK government has plans to legislate to deal with misleading promotions targeting cryptoassets. All advertisements will be relayed in accordance with other financial advertising initiatives making sure they are clear and fair. The adverts are necessary because whereas about 2.3 million people in the UK are not perceived to own a cryptoasset with their popularity growing, research reveals that knowing of what crypto really entails is depreciating showing that some users may not entirely know what they are purchasing, a misinformation that presents significant risk that the products could be sold without clear information and directives.[8] However, the consultation initiative, published recently, outlines the government’s intention to hasten the advertisement of cryptoassets within the realm of financial advert legislation. This implies that the promotion of qualifying cryptocurrencies will be in compliance with FCA guidelines with the same high measures that other financial adverts such as insurance, shares, and stocks are confined to. The initiative will balance the urge to foster innovation with the need to make sure that such adverts are clear and fair and nor misguiding.
Benefits of Proper Legislation
The UK government strives to enact policies that would foster effective and proper use of cryptocurrency and cryptoassets because this is the only way to enjoy the perceived gains of using these forms and to adequately fit into the context where use of cryptocurrencies is increasingly growing. Developing and implementing effective regulations in this area helps to achieve adequate asset security and privacy protection, which are vital in the modern corporate and non-corporate entities.[9][10] It is possible to achieve security because cryptoassets store in an offline wallet where it is difficult to reach compared to traditional wallets that people carry in their pockets. It is difficult and nearly impossible for the sender to counterfeit or reverse the transaction as it sometimes happens with payment forms such as cryptocurrency. Moreover, existence of such polices helps to foster security because the payment method does utilises a distributed public ledger to capture transactions so that there is no private information-based manipulated by an unauthorised party, instead a public transaction database exists where the personal identity of each participant is held.
Another reason why the UK government should pay considerable attention to developing, reviewing, and implementing cryptocurrency policies is foster privacy in the many transactions that happen every day in different capacities. For example, in credit card activity, the merchant commences the payment and gets access to a consumer’s entire credit line, even in cases of small transactions. The is known as the pull mechanism, which implies funds are sourced from a third party, such as a credit card firm or bank. To utilise a credit card online, one only requires the card number, the expiry date, name of cardholder, and the card verification value (CCV) number. The collected personal data is continuously shared with online retailers who are susceptible to hacks. On the other hand, being clearer on cryptocurrency works via formation of robust policies presents a better chance to achieve and foster privacy in many dealings because the cryptocurrency holder precisely sends the amount to the recipient or merchant without providing any additional personal information. Bitcoin payment, for instance, are the same as cash transactions or wire transfers, where payment is transferred directly from one side to another without switching financial institutions, hence the term “push mechanism”. Nonetheless, with Bitcoin, one can enjoy the same measure of privacy as offering cash while being able to follow-up on the blockchain. Hence, the UK should not relent in developing effective policies to guide the emergence and use of cryptocurrency in the country and the region.
Being able to develop, implement, and review cryptocurrency use in the UK presents a better chance to cut out the middlemen, which usually take a huge chunk in many big transactions. Lee and L’Heureux argue that cryptocurrency blockchain quickens and shortens the settlement process in purchasing real property. Because the settlement process is an extensive property rights database, digital currency can be utilised to execute and conduct two-party deals on real property.[11] In this manner, settlement processes utilising cryptocurrency as a form of payment can eliminate the middlemen and thus make it possible to eliminate costly legal fees and brokerage while enhancing the completion of a contract at a time in future. Because cryptocurrencies are reachable to anyone with reach to a mobile phone or Internet, nearly 1.7 billion people in the developing nations who are presently cut away from conventional exchange systems could gain from such a system. Besides, cryptocurrencies are designed for no-fee and low-cost transactions, even if most subscribers engage a third-party service provider, such as Combase that levies charges for forming and preserving their own Bitcoin wallets.
Need for Further Policy Development and Implementation
The UK government should pay more attention to the development and implementation of policies guiding cryptocurrency use to overcome the notion that lack of effective governance are behind some of the tribulations associated with using the virtual currency. For instance, it is believed that lack of proper polices to guide use of the digital currency in many countries resulted in the unanticipated crushing of cryptocurrencies in December 2017 when Bitcoin hit its highest price of more than $19,500. While some forecasters had projected that the bubble could burst, the price of Bitcoin did not depreciate to zero. Examining the way in which interest in Bitcoin has dropped prompts the need to pay attention to those factors that may have generated a mounting mistrust or disinterest by investors. To begin with, as media openly covering crypotocurrency operations widened, they started to become a target for frauds and other forms of violations such as hackings, which contradict the purported gains of cryptocurrency-asset security and privacy.[12] Pilling pressure became a source of price vitality and present a treat to the development of blockchain, while the application of cryptocurrencies for unlawful and criminal operations adversely tarnished its reputation and countered the perception that the blockchain mechanism is les faulty and more transparent. Lack of proper policies and regulations was a major factor in leading Bitcoin to problems, which subjected it to cryptocurrencies and uncertainty and ultimately blemished the credibility of the blockchain process.[13] The UK would not want to encounter such incidences in future that is why it seeks to uphold its implementation of current policies.
Operators within UK using cryptocurrency may become target for hacks and frauds unless the government becomes more careful in the way it implements formulated policies. It is necessary to facilitate implementation of the law because evidence affirm that crypoassets are appealing targets for hackers because they are not as difficult to access and tamper with as with blockchain protocols and are not as distributed as wallets. Policy developers should take into account that any blunders in design implies that the cryptocurrency platform is susceptible and which may offer an avenue for failure. Since the start of 2017, renowned hackers such as Lazarus from North Korea have generated millions of dollars from their hacking activities by taking advantage of such loopholes. Nevertheless, even if there is no such major concern for the failure in the designing of cryptoassets, it does not imply that their consensus cannot be utilised by an ill-intentioned team of miners standing for the most of the network’s computing capability.[14] Hence, policy developers should emphasise the formation of regulations that advocate for cryptocurrency exchanges that provide secure management of cryptocurrency exchanges of a significant portion of their users and that encourage the creation of a private key that permits users to unblock certain addresses and get control of the customer’s digital assets. It is important to champion for policies that call for such provisions because in case of hacking in this instance, it is possible for the hacker to copy the database of private components, reach all specific data and immediately retrieve all funds. Nonetheless, it is possible for the hacker to get away with the funds if they are not stored in a hot wallet that is not licked to the Internet.
Recommendations
The UK can become more effective in its formation and application of policies aimed at dealing with the emergence of cryptocurrency by considering certain important factors. A possible approach to improve the policy formation process and ensure that adverse effects do not emerge from use of the digital currency is to emulate nations that have made significant strides in this area. Brown gives the findings by Coincub that conducted a research to find out the strength of different nations in using cryptocurrency in terms of their cryptocurrency spending opportunities, Bitcoin automatic teller machines, and crypto ownership.[15] Furthermore ranking method consider constructive government legislation and the commitment of mainstream financial institutions to provide custodial attention. In the ranking of the globe’s highly progressed and dynamic crypto nations for the fourth quarter of 2021, Singapore moves to the leading position, and Australia shifts upwards from position number six to two.[16] Thanks to its expanding crypto-economy, robust legislation, and having the globe’s second-highest rate of the crypto-owning group, Singapore has ascended to the leading position. The country in Southeast Asia off the coast of the Malay Peninsula also adheres to effective and clearly formulated government directives and strategy and measures to offers reassurance to investors who are reluctant in venturing in the country.
At number three in the list is America, which is the only country with its crypto exchange listed on the Coinbase (cryptocurrency stock market). Even though the U.S. ceased from dominating the leading spot due to some concerns surrounding its legislation, the nation still relies on effective policies such as the alternative trading systems (ATS) that was formed in 1998 and still plays fundamental roles in guiding the adoption of alternative payment systems such as cryptocurrency.[17] ATS provides a set of regulations governing occurring alternative trading avenues. The exemption permits the Commission to assess and regulate newly emerging trading platforms. In recent years, for instance, the Commission has made substantial transformation on Regulation ATS to allow private exchange operators to stay away from the burdensome registration needed provided for under Section 5 of the Exchange Act while still enhancing the Commission’s examination of an essential and escalating sizeable volume of market trading activities. Learning valuable tips from nations that have made significant strides in developing their cryptocurrency policies present a better chance for the UK to become more effective in how it performs in this area. Besides following ATS, the U.S. devolves management of cryptocurrency use in the country. Information by Outlook shows that the U.S. has a duel governance structure where diverse states have diverse laws for cryptocurrency.[18] For example, New York encourages use of cryptocurrency and initiated a licence framework known as BitLicense for corporations and crypto transactions. Wyoming also facilitates cryptocurrency operations by exempting firms operating in this sector if they achieve certain standards. Different states of the U.S. may have diverse regulations and policies related to cryptocurrencies, but the overall perception in the nation remains positive concerning the trading population, which encourages policy formation.
In addition to emulating what other nations do, the UK can improve its policies on cryptocurrency by paying considerable attention to how it can benefit from technology. Policy developers and the government should know that cryptocurrencies could give a substantial gain by defeating the absence of social trust and by enhancing the reach to financial services as they can be deemed as a way of fostering the process of growth by improving financial engagement and offering proper traceability. The government should appreciate the fact that there is already a whole sector established around cryptocurrencies and it is supported by institutions committed to overseeing all the virtual coin transactions happening across the world.[19] It is evident the cryptocurrency sector is expanding at alarming rate and this can be supported by initial players that became wealthy overnight and discovered new opportunities to expand financially.[20] The government should also acknowledge that virtual currency offer valuable opportunities for ill-equipped financial institutions in the region. More fundamentally, paying considerable attention to cryptocurrencies and investing substantially in this area presents an opportunity to enjoy low cost transaction fees because the approach does not require a physical brick-and-mortar facility thereby minimising transaction costs.[21] Besides, there is no need for workers’ payments, rent, or utility fees, thus making the transaction technique more affordable. Overall, investing more in cryptocurrencies present better economic chances for growth and development.
Conclusion
The study shows how the UK responds to emergence of cryptocurrencies. The country through government initiatives and the directives of Cryptoassets Taskforce gains valuable guidance on how cryptoassets firms conduct their operations and relate with miners. The UK Cryptoassets Taskforce was instrumental in forming policies that guide the emergence of cryptocurrencies in the country. The report outlines the three primary forms of cryptocurrencies and elaborates how the Taskforce Report offers guidelines on how to use cryptocurrencies in the UK. In addition, the government and embarked on marketing cryptocurrency operations as having the potential to revive the economy and facilitate financial activities. The UK needs to emphasise the implementation of existing policies guiding cryptocurrency practices to enjoy the benefits that come with then technology. Relying on effective policies presents a chance to enjoy enhanced privacy and security when engaging in any settlement process. In addition to enjoying more privacy and security, creating proper policies presents a better chance to overturn the belief that lack of adequate legislation are the primary cause for certain failures associated with the virtual currency. Besides, ensuring that the UK relies on proper cryptocurrency policies presents an opportunity to resist cases of hackings that are associated with using the technology. The UK government can make significant strides in the way it develops and implements cryptocurrency policies by emulating countries such as Singapore, Australia, and the U.S. that record significant performance in this area because of their robust legislative structures.
References
‘Blockchain & Cryptocurrency Laws and Regulations 2022 – United Kingdom’ (GLI, 2022) <https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/united-kingdom> accessed 23 January 2020
Chapter 2 ‘The Crypt Ecosystem and Financial Stability Challenges’ (IMF, 2021) <ttps://www.imf.org/-/media/Files/Publications/GFSR/2021/October/English/ch2.ashx>accessed 23 January 2020
Douglas Cumming, Sofia Johan and Anshum Pant ‘Regulation of the Crypto-Economy: Managing Risks, Challenges, and Regulatory Uncertainty’ [2019] 12 JRFM 1
Elleen Brown ‘Singapore is the world’s top crypto country in latest world crypto rankings’ (ZDNet, 10 December, 2021) <https://www.zdnet.com/article/singapore-is-the-worlds-top-crypto-country-in-latest-world-crypto-rankings/#:~:text=Thanks%20to%20its%20booming%20crypto,reassurance%20to%20crypto%2Dshy%20investors.> accessed 23 January 2020
‘Explained: How Cryptocurrencies are Regulated Around the World’ (Outlook, 11 December, 2021) <https://www.outlookindia.com/website/story/business-news-explained-how-cryptocurrencies-are-regulated-around-the-world/404710> accessed 23 January 2020
‘Government to strengthen rules on misleading cryptocurrency adverts’ (Gov.UK, 2021) <https://www.gov.uk/government/news/government-to-strengthen-rules-on-misleading-cryptocurrency-adverts> accessed 23 January 2020
HM Treasury ‘Digital Currencies: Response to the Call for Information’ (Crown Copyright 2015)
Joseph Lee and Florian L’heureux, ‘A Regulatory Framework for Cryptocurrency’ [2020] 31 EBLR 423
Kristin Johnson, ‘Regulating Cryptocurrency Secondary Market Trading Platforms’ [2020] 2 UCLR 26
Omar Alqaryouti, Nur Siyam, Zainab Alkashri and Khaled Shaalan ‘Cryptocurrency Usage Impact on Perceived Benefits and Users’ Behaviour’ in Omar et al. Information Systems, 16th European, Mediterranean, and Middle Eastern Conference, EMCIS 2019, Dubai, United Arab Emirates, December 9–10, 2019, Proceedings
Pelaez-Repiso Sanchez-Nunez and García Calvente ‘Tax Regulation on Blockchain and Cryptocurrency: The Implications for Open Innovation’ [2021] 7 JOITMC 1
Peter DeVries ‘An Analysis of Cryptocurrency, Bitcoin, and the Future’ [2016] 1 IJBMC Rachael Allsop, Guido Diega, Daria Onitiu and Samantha Rasiah ‘Digital Currencies: An Analysis of Its Present Regulation in the UK: A Collaborative Essay by NINSO, the Northumbria Internet & Society Research Interest Group’ [2019] 3 SSRNRJ 1
Rashmi Sharma and Arabinda Sharma, ‘Using Crypto Currency and Associated Advantages and Disadvantages’ [2018] 2 IJEFRA 17
[1] Kristin Johnson, ‘Regulating Cryptocurrency Secondary Market Trading Platforms’ [2020] 2 UCLR 26
[2] Joseph Lee and Florian L’heureux, ‘A Regulatory Framework for Cryptocurrency’ [2020] 31 EBLR 423
[3] Ibid, 424
[4] ‘Blockchain & Cryptocurrency Laws and Regulations 2022 – United Kingdom’ (GLI, 2022) <https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/united-kingdom> accessed 23 January 2020
[5] ‘Blockchain & Cryptocurrency Laws and Regulations 2022 – United Kingdom’ (GLI, 2022) <https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/united-kingdom> accessed 23 January 2020
[6] HM Treasury ‘Digital Currencies: Response to the Call for Information’ (Crown Copyright 2015) 15
[7] ‘Blockchain & Cryptocurrency Laws and Regulations 2022 – United Kingdom’ (GLI, 2022) <https://www.globallegalinsights.com/practice-areas/blockchain-laws-and-regulations/united-kingdom> accessed 23 January 2020
[8] ‘Government to strengthen rules on misleading cryptocurrency adverts’ (Gov.UK, 2021) <https://www.gov.uk/government/news/government-to-strengthen-rules-on-misleading-cryptocurrency-adverts> accessed 23 January 2020
[9] Peter DeVries ‘An Analysis of Cryptocurrency, Bitcoin, and the Future’ [2016] 1 IJBMC 5
[10] Rachael Allsop, Guido Diega, Daria Onitiu and Samantha Rasiah ‘Digital Currencies: An Analysis of Its Present Regulation in the UK: A Collaborative Essay by NINSO, the Northumbria Internet & Society Research Interest Group’ [2019] 3 SSRNRJ 7
[11] Joseph Lee and Florian L’heureux, ‘A Regulatory Framework for Cryptocurrency’ [2020] 31 EBLR 431
[12] Omar Alqaryouti, Nur Siyam, Zainab Alkashri and Khaled Shaalan ‘Cryptocurrency Usage Impact on Perceived Benefits and Users’ Behaviour’ in Omar et al. Information Systems, 16th European, Mediterranean, and Middle Eastern Conference, EMCIS 2019, Dubai, United Arab Emirates, December 9–10, 2019, Proceedings
[13] Douglas Cumming, Sofia Johan and Anshum Pant ‘Regulation of the Crypto-Economy: Managing Risks, Challenges, and Regulatory Uncertainty’ [2019] 12 JRFM 5
[14] Joseph Lee and Florian L’heureux, ‘A Regulatory Framework for Cryptocurrency’ [2020] 31 EBLR 435
[15] Elleen Brown ‘Singapore is the world’s top crypto country in latest world crypto rankings’ (ZDNet, 10 December, 2021) <https://www.zdnet.com/article/singapore-is-the-worlds-top-crypto-country-in-latest-world-crypto-
[16] Ibid
[17] Kristin Johnson, ‘Regulating Cryptocurrency Secondary Market Trading Platforms’ [2020] 2 UCLR 30
[18] ‘Explained: How Cryptocurrencies are Regulated Around the World’ (Outlook, 11 December, 2021) <https://www.outlookindia.com/website/story/business-news-explained-how-cryptocurrencies-are-regulated-around-the-world/404710> accessed 23 January 2020
[19] Rashmi Sharma and Arabinda Sharma, ‘Using Crypto Currency and Associated Advantages and Disadvantages’ [2018] 2 IJEFRA 19
[20] Pelaez-Repiso Sanchez-Nunez and García Calvente ‘Tax Regulation on Blockchain and Cryptocurrency: The Implications for Open Innovation’ [2021] 7 JOITMC 6
[21] Chapter 2 ‘The Crypt Ecosystem and Financial Stability Challenges’ (IMF, 2021) <https://www.imf.org/-/media/Files/Publications/GFSR/2021/October/English/ch2.ashx> accessed 23 January 2020