Regulators must bring in a minimum of oversight to provide consumer protection and stem money-laundering, argues an influential Parliamentary committee
Cryptocurrencies such as Bitcoin should be regulated to protect consumers against a “Wild West” industry in which they could lose everything they invest, a parliamentary committee has recommended.
Such digital currencies pose problems including highly volatile prices, the lack of consumer protections and the risk of hacking, while also promoting money-laundering, according to the Treasury Committee.
It urged the Financial Conduct Authority (FCA), the City’s regulatory agency, to oversee what it called “crypto-assets”.
The FCA currently has no power to regulate those issuing digital currencies or the exchanges that trade in them.
“Crypto-asset investors are currently afforded very little protection from the litany of risks,” the committee said. “There are no formal mechanisms for consumer redress, nor compensation.”
The risks from digital currencies are growing apace while the government and regulators “bumble along”, the committee said.
“Bitcoin and other crypto-assets exist in the wild west industry of crypto-assets. This unregulated industry leaves investors facing numerous risks,” said the committee’s chair, Conservative MP Nicky Morgan. “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.”
At a minimum, regulation should be introduced to require consumer protection and counter money laundering, the committee argued.
Price volatility poses a grave risk to consumers buying into the assets as it can mean heavy losses, it said.
“Investors should be prepared to lose all their money,” said the committee.
In addition to risks such as hacking, the committee noted that some retail investors had found themselves locked permanently out of their accounts after losing their passwords.
But it said if regulated properly, the cryptocurrency industry could present an opportunity for the UK.
The FCA said it agrees cryptocurrencies are “ill-suited” to consumer investors.
“The FCA agrees with the committee’s conclusion that Bitcoin and similar crypto-assets are ill-suited to retail investors, and as we have warned in the past, investors in this type of crypto-asset should be prepared to lose all their money.”
The Treasury said it had set up a joint Cryptoassets Taskforce earlier this year in order to “better understand the potential risks and benefits of crypto-assets to people, businesses, and the economy”.
Bitcoin made headlines late last year when it soared in price, rising a total of 900 percent during the course of 2017 to peak at nearly $20,000 (£15,220) per coin in December, only to slump to around $6,290 at present.
The digital currency was established in the wake of the financial crisis and pioneered the use of the distributed ledger system with the blockchain, a technology that has since found its way into industries ranging from finance to the gaming industry.
New coins are produced by an energy-intensive “mining” process, with an estimated 70 percent or more of the world’s mining pools located in China, where server farms often run on cheap power sources such as coal.
Ironically, China has also been cracking down on cryptocurrency trading since early last year that has led to the closure of a number of exchanges.
The assets have also been widely criticised by the heads of leading banks, with Bank of England governor Mark Carney calling them “inherently risky” earlier this year.
In July the Basel, Switzerland-based Financial Stability Board (FSB) published a framework for cryptocurrency regulation, saying the assets require “vigilant monitoring”.
CryptoUK, a self-regualtory trade association representing some cryptocurrency companies that operate in Britain, said it agrees “proportionate” regulation should be introduced.
“As an industry we have been calling for the introduction of proportionate regulation to improve standards and encourage growth,” said CryptoUK chair Iqbal Gandham. “Self-regulation by the industry was always intended to be a starting point – this must now be matched by government action.”