Cryptocurrency's short history not only as an asset but as a market has grown and evolved on its own without any government or regulatory oversight. This uninhibited growth has allowed crypto and blockchain to grow in many ways and in many different markets, some legal, some illicit.  

Cryptocurrency's short history isn't a swan song and lacks any real appeal for investors, other than an asset that has historically appreciated over long periods, can be held in self custody, or traded 24/7 365 days a year. The question remains, what will it take for blockchain, bitcoin, and crypto to be taken seriously? Regulation is the answer.

What does regulation need to achieve?

Market Regulatory oversight is created to ensure safe and fair access to a market for all participants. Regulation is also there to ensure illicit funds remain foreign from mixing with legitimate funds in a marketplace. Bitcoin and cryptocurrencies are inherently decentralized, global, and largely anonymous. These key aspects make cryptos and blockchains impossible to regulate or adhere to even the most basic privacy laws.

Regulating cryptocurrencies is impossible from a technological and global standpoint. It will be up to the exchanges, fiat on-ramps, and custody providers in each region to work with regulators to ensure market participants are properly protected. Threats exist both inside the existing market and outside the cryptocurrency market trying to obfuscate the true source of funds. The Financial Conduct Authority (FCA) in the United Kingdom states that the regulation of crypto assets is aimed at the prevention of anti-money laundering (AML) and financial crime prevention (CTF). Regulation, in a clear and concise format, is what Blockchain and virtual currencies need to grow and thrive in the modern financial world.

World Class Regulation Needed for Crypto  

Currently, a race is going on in the finance and regulation world. The race is on to see who will survive and thrive and who will have to pivot or close the business. Cryptocurrency businesses are divided between two battlefields. There are those building decentralized blockchain solutions, and those connecting traditional financial services to the new Blockchain ecosystem.  

Regulation needs to exist and work effectively to help secure and contain the trafficking of unauthorized funds between existing financial services and crypto-asset eco-systems. Regulation in the crypto-asset space doesn't need to be a sentry or watchmen over user activity, but a warm blanket to protect the good from the bad. A pro-regulation environment will help to further blur the lines between banking and crypto into a single digital-finance layer.  

In the US, Financial Crimes Enforcement Network (FinCEN) does not consider cryptocurrencies to be legal tender meanwhile the Internal Revenue Service (IRS) considers crypto and digital assets to be property and taxed accordingly. This mismatch of classifying crypto by two government bodies made it harder for crypto and blockchain businesses to get the type of oversight needed to grow. Each state in the United States has its financial laws and as such, companies must register in each state they wish to do business. As of 2019, 32 US states have specific crypto-regulation and guidance and bitcoin specifically granted the same financial safeguards as traditional financial assets.  

In Europe, the overall crypto-asset approach is positive and progressive towards innovation and regulation. In January 2020 the 5th Anti-Money Laundering Directive AML5D came into law requiring crypto-asset firms to register with their local regulator to continue to do business. Some of these businesses and registered entities in the EU see the legislation as a step forward to greater adoption and widespread use of cryptocurrencies and digital assets, while some have chosen to move to other jurisdictions with no regulatory oversight.  

This European regulation directive states that digital asset and cryptocurrency service providers transmitting, storing, or holding crypto and digital assets are treated the same as banks and financial institutions, which can be both a blessing for some and a hindrance to others. These actions are all focused on a common goal, to help regulators and central banks keep pace with the innovation in the virtual currency and digital asset markets. There is an opportunity for central bank digital currencies (CBDCs) to be issued in place of traditional fiat currency in the coming year.

How does the Financial Conduct Authority in the UK regulate crypto?

Regulation for All

In the UK, the FCA has become the anti-money laundering and counter-terrorism finance watchdog for crypto-assets taking over from the HMRC. The FCA states that all businesses relating to crypto-assets such as Exchanges, ATMs, Peer-to-Peer platforms, custodian wallet providers, and token issuers must register with the FCA and comply with all issued guidelines and rules.  

The Financial Conduct Authorities' interpretation of crypto assets has also improved in recent years to include different recognition of different assets.  

Exchange Tokens - "These are not issued or backed by any central authority and are intended and designed to be used as a means of exchange. They tend to be a decentralized tool for buying and selling goods and services without traditional intermediaries.”

These tokens are usually outside the perimeter "The tokens can include cryptocurrencies such as Bitcoin, Litecoin, and Ripple."

Utility Tokens - "These tokens grant holders' access to a current or prospective product or service but do not grant holders rights that are the same as those granted by specified investments. Although utility tokens are not specified investments, they might meet the definition of e-money in some circumstances. In this case, activities involving them may be regulated.”

The tokens in this category are tokens such as Ethereum, Cardano, and other smart contracts or platform decentralized eco-systems.

Security Tokens - "These are tokens with specific characteristics that mean they provide rights and obligations akin to specified investments, like a share or a debt instrument. These tokens are within the perimeter."

Tokens in this category would be digital token offerings acting as shares or liquidity pools of a business or property asset.  The writing is on the wall already. For cryptocurrencies to be taken seriously and adopted by a large market of people, regulation and guidance are needed to ensure safe access for all market participants.  

Once this is achieved, the flood gates will fly open with not only increased capital being introduced into trading markets but the ability to utilize blockchain technology as they were intended in the first place. Blockchain and crypto have the potential to add value, reduce waste, increase collaboration, and increase the security and scalability of nearly every private and commercial sector on the planet. The regulation actions transpiring now will unlock these barriers for everyone soon.  

The world is ready for the next technological advancement to progress humanity, but are you ready to be a part of that or live in the past?  

Jeff Hancock
CEO and Co-Founder| coinpass