The UK government’s Treasury Committee has called for greater regulation of cryptocurrencies, citing volatile prices, hacking vulnerabilities, minimal consumer protection, and money laundering risks from anonymity on crypto platforms.
Its new report for the government also questions the very premise of cryptocurrencies’ function as a currency, favouring instead the definition ‘crypto-assets’. That assessment echoes Bank of England governor Mark Carney’s comments in February, when he said that cryptocurrencies were “failing” as money.
The report concludes: “Functioning currencies are generally understood to serve as a store of value, a medium of exchange, and a unit of account. As yet, there are no so-called ‘cryptocurrencies’ that serve all these functions,” repeating sentiments expressed by Carney this year.
“Well-functioning cryptocurrencies currently exist only as a theoretical concept, and the term ‘crypto-assets’ is more helpful and meaningful in describing Bitcoin, and the many hundreds of other ‘altcoins’ that have emerged over the past decade.”
The Committee said that while crypto-assets and blockchain were originally conceived as methods for making payments, even Bitcoin is not yet widely accepted. The blockchain technology underpinning Bitcoin transactions is incapable of processing the volume of transactions required for it to become a mass-market system, it added.
Commenting on the report, Nicky Morgan MP, chair of the Treasury Committee, said:
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.
The energy costs involved in proof-of-work verification, and the time taken to process high volumes of payments, negate the benefits of a decentralised system, the report reasons, maintaining that these weaknesses aren’t unique to Bitcoin, but are also a fundamental weakness of all decentralised blockchain systems.
However, that hasn’t stopped banks and technology companies from exploring a variety of blockchain initiatives this year. For example, earlier this month IBM launched the Blockchain World Wire, a blockchain payment and clearing network for banks, and in May Japan’s largest bank, Mitsubishi UFJ, also launched a blockchain payments network.
Also in May, a consortium of Polish banks moved more than 140 million credit records onto the Billon blockchain, while a crypto investment bank opened in Hong Kong. However, other banks have warned that technologies such as blockchain pose a “systemic risk” to the financial services sector.
Protecting cryptocurrency investors
Some proponents of cryptocurrencies claim they advance financial inclusion, but the Committee argues that focusing on reducing the number of people without bank accounts is a better strategy.
The report does highlight that there are numerous examples of successful blockchain innovations – in financial services and elsewhere, such as the supply chain – but the tendency to employ blockchain for its own sake is rife, it suggests.
“It’s unsustainable for the government and regulators to bumble along issuing feeble warnings to potential investors, yet refrain from acting,” said Nicky Morgan MP.
At a minimum, regulation should address consumer protection and anti-money laundering. If the government decides that crypto-asset growth should be encouraged, appropriate and proportionate regulation could see the UK become a global centre for this activity.
When Carney railed against cryptocurrencies’ lack of meaningful value earlier this year, he suggested that this leads to massive price fluctuations, according to market sentiment. This volatility makes market manipulation via social media or other mediums far easier.
The high risk-reward nature of cryptocurrencies is made riskier still by the use of blockchain, as the exchange rate can fluctuate significantly in the time needed to complete a transaction, suggests the report. However, recent blockchain systems, such as IBM’s World Wire platform, are claimed to process transactions almost instantaneously.
A number of crypto exchanges have also been targeted by hackers in recent months. But at present, there is no collective deposit insurance scheme in place to compensate investors who have lost money as a result of hacking.
Investors can also lose out when they forget passwords to their accounts or trading platforms. With a bank you can simply go through the necessary security steps to regain access, but the procedure is generally more difficult, or even impossible, when it comes to crypto-assets.
Plus: New York gets in on the act
A September 2018 report from the office of New York’s Attorney General has slammed cryptocurrency exchanges for a lack of transparency and consumer protection.
The report, based on a detailed survey of 10 crypto trading platforms, says exchanges lack “robust real-time and historical market surveillance capabilities, like those found in traditional trading venues, to identify suspicious trading patterns.” Conflicts of interest are rife, it says, and it raises concerns about an industry-wide lack of transparency on why exchanges list certain coins and not others, whether listings are paid for, and whether an exchange’s employees own any of the listed tokens.
Internet of Business says
Crypto-assets, and most Initial Coin Offerings (ICO), are currently not within the scope of Financial Conduct Authority (FCA) regulations. Meanwhile, crypto-asset investors are afforded little protection from risk, in that there are no formal mechanisms for consumer redress or compensation.
Existing regulators, such as Crypto UK, are voluntary.
While the governor of the Bank of England has warned against cryptocurrencies, the government itself has been non-committal to date. But that ambiguity was always going to be unsustainable, so a Treasury Committee report was bound to emerge.
Its conclusions have landed a punch on an already staggering market, where values have generally seen a steady fall this year. But that’s not to say the government has rejected cryptocurrencies out of hand. It plans to further evaluate the risks and assess whether their growth should be encouraged.
Either way, crypto’s many proponents will doubtless see the report as evidence that the political and financial establishment either doesn’t understand the concept of peer-to-peer finance, or, worse, is actively seeking to suppress it.
Meanwhile, resentment against the traditional banking sector remains high in the wake of the 2008-09 crash, the global credit crunch, years of austerity, and news of banks rigging international markets.
This was a weakness in Carney’s criticism of the lack of trust in the crypto world: after all, the past decade has not only given us a recession, but also the Forex, Libor, and other multibillion-dollar banking scandals. Few major banks have not been involved.
But even crypto’s proponents would accept that the cost per watt of mining for cryptocurrencies is an inherent weakness in any system of digital tokens that isn’t backed by tangible assets. If that weren’t the case, then crypto-jacking attacks to steal companies’ processing power and electricity wouldn’t be so dramatically on the rise.
It’s also worth bearing in mind that the machineries of government exist as checks and balances to prevent shocks to the system – hard though that may be to believe as the UK teeters on the brink of a no-deal Brexit.
The Committee maintains that regulation could lead to a more mature business model for cryptocurrencies – one that improves customer outcomes and leads to sustainable growth. Institutional investors could also introduce liquidity, thereby reducing volatility in crypto markets.
The report’s warning against using blockchain for its own sake is a different matter, however. It seems obvious, but the technology should only be used in response to an identifiable problem – if it’s the best tool for the job. But innovation in the sector is rife and producing exciting results, including in such areas as digital identity verification.
The supply chain and smart contracts are obvious areas of interest.
This year, Internet of Business has reported on numerous other blockchain and digital token innovations, many of which offer demonstrable benefits. Among these are the MOBI consortium in the transport sector, a number of carbon offset trading schemes, and the Aidcoin initiative, which aims to bring trust and transparency to charitable donations.
Once the ‘Wild West’ is a thing of the past, those companies that provide truly valuable blockchain-and digital-token-based solutions will win much greater support. Until then, they may strain to be heard above the noise.
Additional reporting and analysis: Chris Middleton.
Plus: A-Cubed blockchain for non-profits launches
In related news, one blockchain solution that seems to be meeting a genuine need is A-Cubed’s newly announced Heritage platform. The Silicon Valley contingent of Airbus is using the open source project to aid charities that are looking to employ cryptocurrencies and smart contracts.
It is the first application of the Ethereum-based blockchain technology developed by Heritage.