Crypto assets regulation in the UK: an assessment of the regulatory effectiveness and consistency
| DOI | https://doi.org/10.1108/JFRC-06-2020-0062 |
| Published date | 23 June 2021 |
| Date | 23 June 2021 |
| Pages | 336-351 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Sherena Sheng Huang |
Crypto assets regulation in the
UK: an assessment of the
regulatory effectiveness
and consistency
Sherena Sheng Huang
School of Law, Bangor University, Bangor, UK
Abstract
Purpose –The UK authority published its first regulatory guidance on crypto-assets in July 2019. This
paper aims to criticallyevaluate the effectiveness of the crypto-asset regulationin the UK and the consistency
of the existing regulatoryscheme.
Design/methodology/approach –This paper adopts comparative methods to carry out the analysis.
The paper begins by elaboratingthe development of crypto-assets alongside the financial innovation in the
world and pinpointing the core Acts and Regulations applied to crypto-assets in the UK. The paper also
discusses a court casein the EU to highlight an argument among legal professionsconcerning crypto-assets
classification.
Findings –Through carefullyanalysing relevant primary and secondary legislation of the UK and EU, this
paper identifies some unclarified issues in the regulatory framework and discovers three flaws in the
regulatory system. The paper concludesthat the effectiveness of the current regulatory scheme is poor and
room for improvementexists.
Originality/value –The paper provides the first review and a thorough analysis of the Laws and Acts
applied to the crypto-assetregulation in the UK. It also calls on a simpler and clearer regulatoryscheme from
the perspectives of market participantsand consumers. The discovered issues in the crypto-asset regulation
in the UK may urge authoritiesto improve the existing regulatory frameworks and legal provisions.
Keywords Bitcoin, Cryptocurrency, FinTech, Crypto-assets regulation
Paper type Research paper
Introduction
The Financial Conduct Authority (FCA) finalised a framework in July 2019 to regulate
business activities of crypto-assets (FCA, 2019b). Crypto-assets were created as “a purely
peer-to-peer version of electroniccash”by Nakamoto in 2008 (Nakamoto, 2008, p. 1). Crypto-
assets use Blockchain –“a shared, immutable record of peer-to-peer transactions built from
linked transaction blocks andstored in a digital ledger”(Holloway, 2017, pp. 3–4), which is
one application of the Distributed Ledger Technology (DLT) –distributed network
technology (Reyes,2017,p.8).
Crypto-assets carry multifaceted characteristics consisting of virtual property and
financial products and have been adopted in payment transactions, financial instruments,
investments and corporate coupons(The World Bank, 2017;HM Treasury et al.,2018;FCA,
2019b). Although the technology comes with enhanced efficiency and security (Holloway,
2017), it offers an anonymous network for value transactions without financial
The author would like to thank Dr Wei Shi and Dr Mark Hyland for their comments on early drafts of
this paper.
JFRC
29,3
336
Received30 June 2020
Revised29 October 2020
13January 2021
21February 2021
Accepted22 February 2021
Journalof Financial Regulation
andCompliance
Vol.29 No. 3, 2021
pp. 336-351
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-06-2020-0062
The current issue and full text archive of this journal is available on Emerald Insight at:
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intermediaries, which has caused concernsover financial crimes, such as money laundering
(Albrecht et al., 2019;Blundell-Wignall, 2014;Brown, 2016;Turnerand Irwin, 2018). A trade-
off exists in policymaking between regulation and financial inclusion: strict regulation of
crypto-assets will impede technology innovation and investments; non-intervention may
expose investors and consumers to risks.Is the existing regulatory framework effective and
consistent and what is its impacton market participants? This paper intends to examine the
consistency and effectiveness of existing regulatory regimes in the UK and identifies
potential issues,accordingly.
Crypto-assets have been involved in financial misconduct in some countries. The
knockdown of a dark web –Silk Road in the USA in 2013 (US vMatthew Jones,2014) and
the arrest of two former Federal agents in 2015 (US vCarl Mark Force IV, 2015) markedthe
first combat of crypto-assets crime in the world. More than $1.5m worth of money was
involved and the illicit earnings were launderedon an international crypto-assets platform–
BTC-e (Magnuson, 2020, p. 95). The BTC-e was ordered shut down and the owner,
Alexander Vinnik (Russian), was arrested in Greece in July 2017 (NDC-Department of
Justice, 2017) and was remanded in custody in Greece (BBC News, 2019) at the time of
writing. Also in 2017, a cross-border and large-scale money laundering group was shut
down by the European Union Agency for Law Enforcement Cooperation (Europol), 23
people were arrested. The involved amountwas around e2.5m, and the criminals were from
Spain, Colombia and Venezuela (Europol, 2019a). In earlier 2019, Europol, Canada and the
US Joined Forces targeted the users of controlled products on dark web marketplaces, 61
people were arrested, and 50 illicitdark web accounts were closed, the involved amount was
over e6.2m (Europol, 2019b). The soaring popularity and cross-border use of crypto-assets
used for internationally organisedcrimes or potential illegal purposes stress why competent
authorities aroundthe world must deliberate on the establishment of regulatory schemes.
As of June 2020, there were over 5,537 crypto-assets[1] and more than 265 crypto-assets
exchanges[2] available online. The number of crypto-assets doubled from July 2019[3].
Bitcoins, the original and by far the most popular crypto-assets launched in January 2008
(Nakamoto, 2008) hold the majority of the global marketshares (CoinMarketCap, 2020) and
have been used as intermediaries for valuetransactions worldwide. Walch (2015, pp. 40–41)
believes that the DLT makes value transactions more efficient, economical, secure and
transparent and explainsthat:
[...] open-source software is less vulnerable and more resilient than proprietary software, because
the development of the software is transparent, and since more eyes are looking for bugs, more
bugs will be noticed and fixed.
Authorities are also followingup with the technology development (Arner et al., 2017), such
as Regulatory Technology (FCA, 2017) that aims to enhance the efficiency of market
oversight, reportingand compliance.
The FCA set forth a relevant regulatory framework of crypto-assets in 2019 under the
Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 SI 2001/544
(RAO 2001) and the Perimeter Guidance Manual 2019 (PERG 2019) and categorises crypto-
assets into four types: securitytokens, e-money tokens, exchange tokens and utility tokens.
Of which, the security token and e-money token fall within the regulatoryperimeters of the
FCA corresponding to specified investment/financial instruments and e-money,
respectively. However, regulatoryflaws exist. Article 76 of the RAO 2001 regarding shares
of specified investments contains convoluted phrases, which may perplex market
participants; the PERG 2019 allows exemptions for the European Economic Area (EEA)
Crypto assets
regulation in
the UK
337
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