By Vijay Bange and Chris Recker
The developments in the cyber world are moving at a rapid pace, and at times the challenge in keeping up from a regulatory perspective is relentless. Below are the some of the recent topical/discussive issues in this space, particularly focussing on digital assets:
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- What is clear is that as part of the ever increasing reliance on technology there is now a sense of acceptance that crypto assets are here to stay. Cryptocurrency and assets are clearly no longer seen as a short lived fad, and there are genuine use cases and developments that will help organisations and customers all over the world. However, and notwithstanding the opportunities that digital assets bring, there remains a challenge to ensure that appropriate regulation and protection is in place to protect consumers and otherwise prevent cryptoassets from being used to hide criminal gains, perpetuate money laundering activities, or facilitate fraudulent activities and scams. This effects a multitude of sectors be that construction or financial services.
- It’s not perhaps surprising, but never the less still alarming, that in the UK there has been a doubling of the number of reported complaints of alleged cryptocurrency scams from the previous year to the Financial Conduct Authority (FCA). There is of course on the horizon the Online Safety Bill. One aspect of this is to foist greater accountability and responsibility on cyber media sites and search engines to help prevent scams on platforms from rogue or misleading advertisements. It’s inevitable that cryptocurrency advertisements will face greater scrutiny from financial watchdogs, and indeed from the Advertising Standard Authority. There is of course already an overlay with the Financial Promotions regime that exists within the regulatory perimeter insofar as they relate to regulated cryptoassets. In the UK, there has been a push for certain crypto asset firms to be registered with the FCA for money laundering supervision (and, since the extension for cryptoasset businesses within the temporary registration regime has expired, those new cryptoasset businesses are now likely to need to seek registration before they carry out further activities in the UK). On top of this, there are also occasions when a firm will have to seek specific authorisation from the FCA (depending on, amongst other things, the type of tokens that they deal with and the activities that they undertake).
- Recently we have seen HMRC (the UK tax authority) recover cryptoassets. HMRC have a dedicated economic crimes unit, with trained staff with a specialist technology focused investigative team with tools at their disposal. Various defendants were arrested on suspicion of attempting to defraud HMRC of £1.4M. Here, in a first case of its kind in the UK, HMRC obtained a court order to detain crypto assets where it seized three Non-Fungible Tokens (NFTs). NFTs are unique tokens that represent the ownership of a digital file. However, the message is clear, and this development is progressive; those who attempt to exploit the system cannot continue to expect to hide within the cryptoasset space[1].
- Furthermore, HMRC has at least twenty cases it is investigating where crypto currency and/or assets are involved and there are allegations of tax evasion or fraud.[2] The fight is being taken to those who exploit the system, and we expect that other authorities will follow (particularly in relation to cyber criminals)
- The crypt asset market is ever growing at a fast rate. It’s fair to say that the uptake (and the push to regulate) varies according to jurisdiction. However, there have been concerns about the volatility of these assets (as has always been the case), and the possible financial stability effects/risks on global markets by regulatory authorities such as the Financial Stability Board (FSB)[3] (a global authority monitoring financial authorities in numerous jurisdictions) and the FCA in the UK. The banks and other financial institutions have gone to lengths to put in place safeguards to prevent the sort of banking crisis that caused the last financial crash in the markets. Therefore, it is unclear how long it may take for cryptoasset use to become mainstream in those markets. As the mass adoption of cryptoassets continues, we expect that stability and security will be of significant focus for regulators which will require significant co-operation internationally for the reason that cyber transactions are rarely only domestic in nature.
- Turning to the US, the Federal government has been instructed (following an executive order in March from President Biden) to encourage a variety of agencies to commence research/investigations into the potential development of a Central Bank Digital Currency (CBDC), in addition to looking into regulations with regard to the use of cryptocurrencies.[4] China and the Bahamas has already introduced their own CBDC.
- The Ukraine conflict has seen global sanctions against Russia and Russian state owned companies and oligarchs. There is a concern that digital assets may provide a route to circumvent the sanctions in place. Not surprisingly, enforcement has come under scrutiny in various jurisdictions. The US Department of Justice has launched a task force to target banks, including major cryptocurrency exchanges[5]. Similarly, in the UK, the Bank of England and the FCA have reinforced the desire to enforce sanctions compliance by crypto firms. Despite this, the viable practicality of current sanctions being breached remains unclear; given the volume of digital assets (with a value of tens of billions) that would need to be sold or converted into fiat through the financial system.
- The Environmental Social Governance (ESG) agenda is inescapable (rightly so), and wholly relevant to all industry sectors. The EU is proposing draft legislation requiring crypto assets in the EU to be subject to a minimum environmental sustainability standard. Green credentials and policy are now wholly relevant in the financial services sector, deeming it odd if crypto assets were somehow exempt from falling into line with the wider global business community. This is particularly relevant because of the wide publicity around cryptocurrency mining and the sheer amount of electricity that is used in, for example, the Bitcoin network.
- The pace of the development, and take up of various crypto assets, has meant that as much as possible, their relation to longstanding financial services is being governed within the existing rules and standards in place. However, the Bank of England is looking into how this sector needs to be regulated,[6] with a growing acceptance that regulation is required in some capacity to provide greater certainty to the markets, and to eliminate rogue practice and fraud/scams in this space. It is thought that ‘stablecoins’ in particular, may be one of the first targets as these discussions develop.
[1] BBC News, 14 February 2022
[2] The Daily Telegraph, 14 February 2022
[3] The FSB represents central banks from the G20 economies.
[4] NBC News- “Biden takes big step toward government backed digital currency”, 9th March 2022
[5] Financial Times, 14 March 2022.
[6] The Times, 25th March 2022 – article by Ben Martin.