UK Digital Currencies Inquiry recommends regulation of “Wild West” crypto-assets

The House of Commons Treasury Committee has published a report on the UK regulatory landscape for crypto-assets. The report recommends regulation of what it calls the “Wild West” crypto-asset market, at the very least to improve consumer protection and anti-money laundering standards. But the report does not specify how this should be achieved.

Remit of the Digital Currencies Inquiry

The Committee was tasked in February with examining:

  • the risks and opportunities presented by digital currencies to UK consumers, business and the Government
  • the potential of distributed ledger technology/blockchain to impact financial institutions and infrastructure
  • how to balance consumer protection and support for innovation through regulation.

The Committee considered evidence from a number of bodies including the FCA and Bank of England. We now examine the key findings of its final report.

Cryptocurrencies not “currency”

In its first finding, the Committee forms the view that no cryptocurrency functions as a true currency because they do not act as a medium of exchange, they are not a good store of value and are not used as a unit of account. The report considers that since cryptocurrencies are being used for speculative purposes, the concept of a well-functioning cryptocurrency is only theoretical. On this basis, the report uses the term crypto-assets to describe cryptocurrencies like Bitcoin and other altcoins.

Limitations of blockchain as a payment system

The Committee notes what they see as fundamental drawback of decentralised blockchains which is that they are a “slow, costly and energy-intensive verification process for transactions”. They consider that this may ultimately limit the extent to which crypto-assets and blockchain can replace conventional money and payment systems.

The report recognises, however, that blockchain technology may have the potential to be a more efficient method of managing certain types of data in the long-term.

Problems with crypto-assets

The Committee identifies a number of problems with crypto-assets including:

  • volatile prices (such that investors should be prepared to lose their whole investment)
  • hacking vulnerabilities in crypto-asset exchanges (which may result in the theft of crypto-assets)
  • lost passwords (which may lock out investors from their accounts)
  • minimal consumer protection
  • anonymity (which may aid money laundering).

Concerns about lack of protection for crypto-asset investors

The Committee points out that there is no deposit insurance scheme to compensate investors in the event of loss of crypto-asset via an exchange hack. It is also concerned that the risk of hacking associated with crypto-assets may not be something that investors in conventional assets have experience of and that they may not therefore be well placed to judge this risk.

An additional risk is that some investors who have lost their passwords to a crypto-asset platform may find that they are locked out of their account permanently.

The Committee heard evidence that crypto-assets are not generally in the scope of UK regulation. Therefore, the Committee concludes that crypto-asset investors are currently afforded very little protection and no recourse to consumer redress or compensation.

The Committee also raises concerns about the promotion of initial coin offerings and crypto-asset exchanges, e.g. one-sided adverts which focus only on the potential windfalls of crypto-asset investments. The Committee considers that the FCA’s consumer warnings against such advertising are insufficient and that the regulator needs more power to control how crypto-asset exchanges and ICOs market their services.

Concerns about money laundering

Crypto-asset exchanges are not currently caught by AML regulation. Because of this, and the inherent anonymity of crypto-assets, the Committee is concerned that crypto-assets are being used for sale and purchase of illicit goods and services and for laundering the proceeds of crime.

Regulatory recommendations and approach

The Committee considers that the UK Government and regulators’ position on crypto-assets is ambiguous and that this ambiguity is unsustainable. The Committee recommends that regulation should be introduced to protect consumers investing in crypto-assets and to target the use of crypto-assets in money laundering operations.

"Bitcoin and other crypto-assets exist in the Wild West industry of crypto-assets. This unregulated industry leaves investors facing numerous risks. Given the high price volatility, the hacking vulnerability of exchanges and the potential role in money laundering, the Treasury Committee strongly believes that regulation should be introduced.”
Nicky Morgan MP, Chair of the Treasury Committee


In their view, regulation could not only reduce risks to consumers but improve consumer outcomes and enable sustainable growth. Proportionate regulation could mean that the UK is “well placed to become a global centre for crypto-assets”.

The Committee did not suggest a specific regulatory approach but rather recommended that Government and regulators should first evaluate the risks of crypto-assets and assess whether their growth should be encouraged. If growth is favoured, the Committee suggests that regulation could benefit the crypto-asset market as a whole by moving towards a more mature business model with increased liquidity.

What next?

The Committee recognises that the EU’s fifth AML Directive – which will require crypto-asset exchanges to apply AML requirements – is a step forward in establishing a regulatory framework. However, that Directive needs to be implemented in UK law and the Government’s consultation on the adoption process is currently only expected to finish at the end 2019. The Committee therefore recommends that the Government prioritise and expedite that process.