UK Crypto-task Force findings demonstrate lack of understanding of industry

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A UK Crypto-task Force report has found a deep misunderstanding of the industry.

The UK Crypto-task Force has published a ‘unanimously’ agreed report on crypto-assets for its digital currencies inquiry. Its findings demonstrate a deep misunderstanding of the industry. Kate Rhodes, Director of Regulatory Affairs for Coinweb and Industry expert, discusses below.

The UK Crypto-task Force report, unexpectedly released today, demonstrates a deep misunderstanding of both crypto-assets and their underlying blockchain technology, and is extremely damning of this already evolving financial sphere.

The Crypto-task Force recommendation for industry regulation is welcomed by Coinweb, however, at their current level of understanding we would be hugely concerned about the composition of any future regulatory framework unless an enhanced dialogue is developed between industry and Government.

Conclusions from the report include:

  • Crypto-asset investors are currently afforded very little protection from risks that investment involves.

    Comment: These instruments are not for everyone, and there are many financial services products that are high risk.

  • Self-regulating bodies in the crypto-asset industry, which set out codes of conduct and best practice for the industry, are wholly voluntary. Inevitably, there are firms that will ignore them.

    Comment: The UK Corporate Governance Code was voluntary until recent reforms. Does this infer that all voluntary codes are ineffective, because there are many of them in the UK? Coinweb welcomes well-thought out regulation that understands the nuances of the industry that it regulates — the contents of this report do not reflect this.

  • Government and regulators should evaluate the risks of crypto-assets, and assess whether their growth should be encouraged. If growth is favoured, regulation could lead to positive outcomes for the crypto-asset market, including the move toward a more mature business model and increased liquidity. If the UK develops a proportionate regulatory environment for crypto-assets, the UK could be well placed to become a global centre for this activity.

    Comment: Coinweb encourages an outcomes-based and harmonized approach to industry regulation that encourages growth and leads to the best outcomes for consumers, without stifling innovation in the market. We see many positive developments in the space and feel that ICOs attached to strong tech projects are a great way for investors, tech community advocates and customers alike to support solutions they value and want to see in the market.

  • Currencies act as a medium of exchange, a store of value, or a unit of account. There are currently no cryptocurrencies that perform these functions. As cryptocurrencies are being used widely for speculation, well-functioning cryptocurrencies exist only as a theoretical concept. Accordingly, this Report uses the term ‘crypto-assets’ as it’s more helpful and meaningful in describing Bitcoin and many other ‘altcoins’.

    Comment: Whereas there are merits to this finding, the overall conclusion demonstrates a lack of understanding of crypto-currencies. Many crypto users are running much of their daily lives by means of crypto, paying rents, flights and accommodations in BTC, with both large and small business accepting payments in crypto e.g. Expedia, Bloomberg, Etsy…

  • A prominent feature of crypto-assets is the volatility of their prices. For example, the price of a Bitcoin increased from $6,472 in November 2017 to $17,629 in December 2017, and fell to $7,208 in February 2018. Investors are exposed to large potential gains, but correspondingly a greater risk of loss. Accordingly, investors should be prepared to lose all their money.

    Comment: Most investments carry some degree of risk however depending on the nature of token (e.g. security or utility) value can either fluctuate or be stable. Just like the effects of inflation or deflation and fiat (government currency). Crypto-assets have created a huge amount of value in the past decade and the overall trend continues up, though just like for any other market, prices can vary. As the market grows and scale increases, it will become even more stable and resilient. In fact, this is a key part of the Coinweb mission: Blockchain technology is already secure, Coinweb makes it usable and compatible and will help make it become mainstream.

  • There is no collective deposit insurance scheme to compensate investors in the event of a hack, the risk of hacking associated with crypto-assets may not be something that investors in conventional assets have experience of. Crypto-assets are particularly ill-suited to retail investors.

     Comment: Any system can be hacked — look at the recent BA data breach. Blockchain is harder to hack into than equivalent common systems.The biggest security risk today is user error, and hash addressing makes error even more likely. Coinweb’s CNS addresses make it easy to use crypto, and to use it safely.

  • An additional risk that consumers may not be aware of is that some customers who have lost their passwords to a crypto-asset platform have been told by the firm that runs their account that their password cannot be restored.

    Comment: There are custodial services that handle passwords for users that make security management easier.

  • The advertisements of both ICO issuers and crypto-asset exchanges are not regulated by the FCA.

    Comment: Many industries in their infancy moved from de-regulated to regulated within a short period of time, for instance, the online gaming industry. As such there were elements of these industries that were not initially regulated. Once the essence of the industry is understood, there is no reason why advertising should not be regulated.

  • Crypto-asset exchanges are not currently included in AML regulations.

    Comment: We encourage AML regulation of crypto-assets exchanges so they are used more widely. Nothing is easier to launder than cash — it is anonymous, offline, forgeable, and completely fungible. Crypto-assets provide the highest standard of auditability for literally every transaction in the system.

  • A fundamental drawback of decentralised blockchains is the slow, costly and energy-intensive verification process for transactions. This may ultimately limit the extent to which crypto-assets and blockchain can replace conventional money and payment systems. But the Committee does recognise that blockchain technology may have the potential to be a more efficient method of managing certain types of data in the long-term.

    Comment: This finding shows a fundamental misunderstanding. Currently the energy intensive verification process is constant no matter how many transactions occur. Therefore as the scalability technologies enable a higher number of transactions per seconds this cost will get proportionately lower.

Crypto-assets and Blockchain are undoubtedly a big part of our future. They are an innovation equal to the web itself and have the power to transform and improve many businesses and markets. Coinweb and many other industry players want to help shape that future. As such, we encourage an enhanced dialogue between UK Government and industry in order that the regulation can be put together to improve the best outcomes for all users and operators alike.

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