Cryptocurrencies are digital assets which are used as a medium of exchange. They make use of distributed ledger technology (DLT), such as blockchain, to secure and verify transactions. DLT involves unique identifying information from each transaction being held on a decentralised, anonymous database. This anonymous database can be viewed by everyone but cannot be tampered with, thus providing an accurate record of all transactions which have occurred. The use of DLT allows cryptocurrencies to operate without the backing of a trusted third-party institution, such as a central bank, as with traditional currencies. The most well-known cryptocurrencies are Bitcoin, Ethereum and Litecoin.
Cryptocurrencies have gained considerable public and media prominence in recent years: 78% of UK adults have said that they have heard of cryptocurrencies. This is partly driven by the fact that more and more transactions are occurring online, a trend which has only been accelerated by the coronavirus pandemic. Furthermore, cryptocurrencies such as Bitcoin have registered record increases in value. At the end of 2019, Bitcoin’s price was around $7,000 – this had increased to around $60,000 by March 2021. Cryptocurrencies have also been the focus of government and regulators in recent years. For example, the UK government set up the UK Cryptoassets Taskforce in 2018 which brought together HM Treasury, the Financial Conduct Authority (FCA) and the Bank of England (BoE)
 Michael Karim and Gergana Tomova, “Research Note: Cryptoasset consumer research 2021” (Financial Conduct Authority, 17 Jun 2021) < https://www.fca.org.uk/publications/research/research-note-cryptoasset-consumer-research-2021 > accessed 5 Jul 2021
to consider the impacts of cryptoassets and DLT. The FCA has also conducted numerous qualitative studies into UK consumers’ attitudes towards cryptocurrencies.
FCA research from January 2021 shows that approximately 4.4% of UK adults currently hold cryptocurrency. This has grown from 3.9% in 2020. 82% of all UK adults had heard of Bitcoin, the highest percentage for any cryptocurrency. UK Cryptocurrency users are overwhelmingly male (78%), over 35 (70%) and 47% were within the highest AB social grade. Although 96% of UK adults who were aware of cryptocurrencies were also aware that they would not have financial protection if they did purchase cryptocurrency, there are indications of potential consumer risks. For example, 5% of cryptocurrency users believed they had some protection and borrowed to purchase cryptocurrency. 38% of cryptocurrency users said their main reason for buying cryptocurrency was as a gamble that could make or lose money. Also, sizeable proportions of people hear about cryptocurrencies from social media and online news. This is concerning considering the well-documented issues surrounding accuracy with these sources.
Investing in cryptocurrencies poses a number of legal risks. Cryptocurrencies are increasingly being used to conduct cybercrime, money laundering, tax evasion and terrorist financing. Criminals are attracted by the decentralised, anonymous and efficient nature of payments which enables them to quickly move stolen funds across the globe and into different jurisdictions. In 2017, for example, the UK’s NHS was subject to the WannaCry ransomware cyberattack which demanded payments in Bitcoin. The coronavirus pandemic and associated financial difficulties for many people combined with the huge increase in value of cryptocurrencies has led to criminals increasingly targeting vulnerable consumers using cold calls and ‘get rich quick’ schemes. Cryptocurrency adverts on social media or online may also be misleading, often hiding complex products and charges. Action Fraud reported a 57% rise in cryptocurrency-related scams in the 12 months to December 2020 in the UK.
The use of DLTs and cryptographic platforms also poses risks. Criminals may be able to steal a person’s private cryptographic key used to gain access to assets. Security loopholes within cryptocurrency exchanges and wallets may be exploited by hackers. For example, $460 Million was stolen from Mt Gox, one of the earliest and largest Bitcoin exchanges in the world. Peer-to-peer exchange facilities and the privacy features of some coins also make cryptocurrencies attractive to criminals.
Since cryptocurrencies are not backed by trusted institutions such as banks, they are completely reliant upon how investors and other consumers value them, leading to huge volatility. Still a relatively novel platform of exchange, cryptocurrencies are largely outside the regulatory ambit across the world. Where regulations exist, they evolve separately in different countries; however, cryptocurrencies are very much borderless assets. There being no standard practice means that consumers have much less protection from hacking and cybercrime, and it is therefore very difficult – though not impossible – to recover stolen funds. The onus is very much on individual companies to navigate varying cryptocurrency licensing regimes across jurisdictions.
Businesses are increasingly vulnerable to ‘cryptojacking’ or malicious cryptocurrency mining. This involves an organisation’s computer processing power being used without their permission or knowledge to illegally mine cryptocurrencies. In May 2021 in Sandwell, UK, for example, British police discovered an illegal connection to the electricity supply at an industrial estate. Expecting a cannabis farm, they instead found a network of 100 computers mining Bitcoin, syphoning off huge amounts of electricity.
With regards to regulation, prior to leaving the EU, the UK government implemented the EU’s Fifth Anti-Money Laundering Directive in UK law via the The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (MLR 2019). MLR 2019 expands the scope of money laundering legislation to now cover cryptoasset exchange providers and custodian wallet providers from 10th January 2020. The Financial Conduct Authority (FCA) will supervise the regulations and must maintain a register of such providers. In October 2020, the FCA further announced that it was banning the sale of crypto-derivatives and exchange traded notes (ETNs) that reference cryptoassets to retail consumers. The FCA believed that these were very risky and volatile investments which were ill-suited for the retail market. Despite these measures, the UK regulatory regime for cryptocurrencies such as Bitcoin remains light-touch with firms only being required to comply with the minimum anti-money laundering regulations. Consumers, for example, are not afforded the protection of the Financial Services Compensation Scheme or the Financial Ombudsman Service as they are for other investments. However, the government is consulting on expanding the financial promotions regime to cover unregulated cryptocurrencies, recognising the role played by advertising in financial decisions.
Stablecoins are a type of cryptocurrency which are pegged to a stable asset such as a fiat currency, for example the US dollar or Pound Sterling. This should make them less volatile, in theory. Diem, formerly known as Libra, is a cryptocurrency backed by Facebook which has announced that it plans to offer cryptocurrencies linked to the pound, dollar and euro and a basket of currencies. The UK government therefore considers stablecoins as harbouring potential for use by retail consumers and investors, unlike traditional unpegged cryptocurrencies such as Bitcoin. A consultation is currently taking place into whether the FCA’s regulatory perimeter should be expanded to cover stablecoins, with the development of an authorisation regime.
Author: Rohit Bansal
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 ibid (all data in paragraph)
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