We’ve all heard of Bitcoin, but for a long time the concept of a “cryptocurrency” seemed to belong to another world, the online world, and was something far removed from day-to-day life. In recent years, cryptocurrencies have crept further and further into the real world with Mastercard announcing plans to support cryptocurrency payments on its network this year, and a number of traditional banks planning to welcome Bitcoin and other cryptocurrencies, eventually treating them like any other asset.
With news of Bitcoin tripling in value since last November, more and more people are interested in investing in cryptocurrencies but just how safe are those investments? What regulations apply to cryptocurrencies? How can you spot a cryptocurrency fraud from a genuine investment?
In September 2018, the UK Treasury Committee published a report on “cryptoassets” which followed an inquiry into digital currencies and distributed ledger technology. In its report the Committee advocated for the introduction of an appropriate and proportionate regulatory regime envisaging that the UK could become a global centre for cryptocurrency activity.
In October 2018, a Crypto-assets Taskforce made up of HM Treasury, the Financial Conduct Authority and the Bank of England published a report warning of “considerable risks” to consumers and market integrity posed by crypto-assets.
The Taskforce committed to a number of actions including consulting on which cryptoassets could be dealt with under existing financial regulation.
In November 2019 (a decade since Bitcoin first emerged), the UK Jurisdiction Taskforce (Chaired by Sir Geoffrey Vos, Chancellor of the High Court) published a “Legal statement on cryptoassets and smart contracts”. Although not a judicial endorsement, the legal statement sought to provide “…much needed market confidence, legal certainty and predictability…” with regard to cryptoassets. It was felt that the perceived legal uncertainty surrounding cryptoassets was resulting in a lack of confidence amongst market participants and investors.
The conclusion was that cryptoassets are to be treated in principle as property. This conclusion was subsequently endorsed by the High Court in AA v Persons Unknown  EWHC 3556 (Comm). Of course, although this was the first time the courts had made a specific determination regarding the nature of a cryptoasset, there had been two previous decisions where the courts had ultimately treated cryptoassets as property, namely:
With the big question about the nature of a cryptoasset now settled, is it safe to invest in cryptoassets?
In January 2020, new regulatory powers were introduced to allow the FCA to supervise how cryptoasset businesses manage the risk of money laundering and counter-terrorist financing. UK cryptoasset businesses are now required to comply with the Money Laundering Regulations (MLRs) and register with the FCA. However, the FCA still issues the following warnings:
The FCA explains that its regulatory powers do not cover how cryptoasset businesses treat consumers. Even if a firm is registered with the FCA, it is not responsible under the MLRs for ensuring cryptoasset businesses protect client assets, among other things. As a consumer, this means you will not have the same protections in relation to cryptoasset activities carried on by that business, as you may have with other activities supervised by the FCA.
Cryptocurrencies have certainly faced some bad press and in the early days of Bitcoin there was a perception that it was used solely for making illegal purchases on the dark web and money laundering. Happily, cryptocurrencies have moved on and are now much more mainstream. However, for many, there is still a mystery surrounding cryptocurrencies. In reality, investment in cryptocurrencies is still considered by many to be a high-risk investment strategy as a result of the volatility of its value. However, with increased regulation and greater recognition and support for cryptocurrencies from mainstream financial services providers, the future of cryptocurrencies looks bright.
Like most things in life, where there is an opportunity to make money, somebody will try and take advantage of that. Historically, cryptocurrencies have been particularly susceptible to fraud, from fraudulent misrepresentations about this form of currency as an investment option and notably as cryptocurrencies are normally the payment of choice for most cyber-criminals. For example, most ransomware attacks involve a request for payment in Bitcoin or some other cryptocurrency. But why is this? To answer this question requires an understanding of the blockchain technology which supports cryptocurrency transactions.
A blockchain is a public, distributed ledger, in which every transaction is recorded. A distributed ledger is a type of database that is shared, replicated, and synchronised to allow for many people to essentially check the authenticity of transactions.
Unlike traditional payment systems in which the ledger is maintained by a single third party, a blockchain ledger is distributed across a network of computers, each with its own copy of the blockchain transactions. Each block in the chain contains certain data depending on what the blockchain is being used for. For example, in the case of Bitcoin transactions the data comprises who the Bitcoin is coming from, who it is being sent to, the amount and time of the transaction. However, the blockchain will only show that a transaction has occurred between two “public keys”. The anonymity provided by the encryption of transactions in the blockchain with public key cryptography is highly attractive to those wanting to avoid detection.
Public key – a public key is a collection of 34 alphanumeric characters which identifies the user without giving away their personal information.
Should you suspect that you are a victim of fraud or other wrongdoing, please do not hesitate to get in touch at firstname.lastname@example.org