In a speech given on Friday 2nd March, the governor of the Bank of England, Mark Carney, said that cryptocurrencies are “failing” as a form of money. Mr.Carney also stated that cryptocurrency should fall under the “regulatory tent” and argued that “the time has come to hold the crypto asset ecosystem to the same standards as the rest of the financial system”. The governor of the Bank of England is the latest prominent figure to speak out on the cryptocurrency market – and he has made his views clear.
Mr. Carney noted that market regulators are still grappling with the task of assigning cryptocurrency an appropriate regulatory classification. Such a classification must balance the two forces of market integrity and investor protection. In Mr.Carney’s view, “holding crypto-asset exchanges to the same rigorous standards as those that trade securities would address a major underlap in the regulatory approach”.
In echoing the messages of the FCA, SEC and many other national competent authorities, Mr.Carney also noted that the regulatory classification of tokens will be judged on substance rather than name. The warning that initial coin offerings (ICOs) will “not be allowed to use semantics to avoid securities laws designed to protect retail investors in particular” is perhaps the most direct statement we have seen on this point. The Bank of England has made its opinion clear. If a token looks like a security and behaves like a security, then it should be treated as such, irrespective of the packaging.
DLT is A-OK
In separating concerns about crypto from the utility of its underlying technology, Mr.Carney did however acknowledge that distributed ledger technology (DLT) is “throwing down the gauntlet to the existing payment system”.
The governor recognised several advantages of DLT, including its potential to: (i) increase the efficiency of managing data; (ii) improve resilience by eliminating central points of failure, as multiple parties will share replicated data and functionality; (iii) enhance transparency (and auditability) through the creation of instant, permanent and immutable records of transactions; and (iv) expand the use of straight-through processes, including with smart contracts that on receipt of new information, automatically update and if appropriate, pay.
Country by Country Solution
Over the past eighteen months we have observed a divergence in the attitudes of national regulators to the emergence of cryptocurrency. On one hand, the People’s Bank of China has said that it would block access to all domestic and foreign cryptocurrency exchanges and ICO websites. On the other, Gibraltar’s Parliament is currently considering a draft cryptocurrency bill whilst Switzerland’s FINMA has produced ICO guidelines. The international response has been somewhat of a patchwork quilt rather than a uniform tapestry.
In recognising this, Mr. Carney said that cryptocurrency and token regulation remained “national issues”, and forecast that “they will remain national issues for some time”. Mr. Carney suspects that we will now see “a series of national steps rather than a big coordinated approach”.
Where are we heading?
Mr.Carney’s comments add more fuel to the fire that will likely burn brighter than ever before during the course of the year. Cryptocurrency is firmly on the agenda of the people that matter. However, many of these influential figures have yet to show their cards.
The Bank of England clearly recognise cryptocurrency as some form of asset class, but also note that they “are not securities” and “they aren’t money”. Mr. Carney’s analysis perhaps typifies the difficulty with which cryptocurrency will fit into the regulatory jigsaw. Based on the increasing number of public statements, we appear to be moving closer to further regulation of cryptocurrencies and crypto-assets, beyond anti-money laundering. Whether national regulators lean towards creating a new regime, or attempt to retrofit the existing framework is arguably the most burning question.
Our colleague Claude Brown (Partner, Financial Industry Group) has written a piece for the Times on this subject, which can be accessed here.