Cryptocurrencies and blockchains are here to stay, so now more than ever it’s important governments get ahead and regulate it correctly.
Here are six things the UK government can do to protect consumers while not stifling innovation:
1. Clear up the tax situation
Blockchains don’t work without a token, and tokens need to be traded in and out of fiat (government backed currencies like the US dollar). This means there will always be a chance to profit (in fiat terms), so HMRC needs to clarify its stance.
In the US, the 2018 tax law clarified when you should pay capital gains on crypto. One big change: crypto-to-crypto transactions are now taxable events.
Does that apply in the UK as well? CryptoTax.uk, a UK specific guide, thinks “you may be subject to tax” on these types of trades; but at the moment it’s not entirely clear. To be even more forward thinking, with Masternodes in Dash and the introduction of Proof-of-Stake, what happens when you earn a crypto-dividend? Is that taxable?
A line in the sand would be nice. Also, did someone say Crypto ISA?
2. Regulate exchanges
Almost all foreign exchange flows through banks or currency houses: what you do with it afterwards is your choice. It should be no different in the crypto-verse.
Unless you are a professional trader – the sort of person who’d self-declare as option four on a list like this – all your transactions should run through an exchange that is regulated.
Once the flow of fiat to crypto and vice-versa is predominantly through exchanges, it will be easier to combat illicit behaviour and ensure tax is paid. However, for that the happen we first need banks to open accounts for exchanges.
At the moment British banks are turning away cryptocurrency exchanges, and even closing customers’ accounts for wiring to an exchange, so even if they’d prefer to be based in the UK, exchanges have to open accounts in mainland European countries such as Slovenia (Bitstamp) or Estonia (Coinbase).
From the banks point of view, this is understandable. Without tight regulation, they fear the funds could be used by criminals on the dark web or for money laundering. If they are part of that process, they could get fined or shut down. It simply isn’t worth it.
That’s why the solution is to regulate the exchanges. If that happens, then the big banks will open their doors, making life easier for exchanges and investors alike. The banks will win from this too, because they can stop customers drifting away to more daring competitors. (Just don’t mention the fact that cryptocurrencies were invented to do away with banks altogether.)
This arrangement would also be good for the UK economically. The UK’s laggard approach to cryptocurrency has meant the biggest exchanges in the world are in the USA, Japan (and China, before the government banned them). Simply reducing the friction would go a long way to bringing this economic activity into the UK.
3. Create a framework for ICOs
You’ve done your homework and read our guide: “Should You Launch An ICO?” But chances are you still can’t discern if an ICO is legitimate or not. If you’ve even taken one look at a whitepaper, chances are you’ve given up on the first paragraph.
People are investing in ICOs just because of the hype and have no idea where their money is going – this won’t end well.
ICOs have their place in the decentralised universe. Imagine a new, less awful, Twitter was created and funded by pre-selling usernames – thanks to the blockchain, users would be able to vote on how it’s managed. But although an ICO can make sense, it won’t if there’s no product and the team behind it isn’t even real.
A clear set of rules on what is and isn’t acceptable should be set out. In September 2017, the FCA said “an ICO could be considered as deposit-taking, e-money issuance, contract for difference, derivative or a collective investment scheme”. Er, okay. Also, who is responsible for the funds raised? What is the refund mechanism if they fail to deliver? What action can be taken in the event of governance issues?
Challenger Banks have to go through endless hoops to prove they can hold large stakes of customers’ money – how are new blockchains any different?
But it would be very hard for the government to regulate every ICO out there. So…
4. Let exchanges manage ICOs
This has two benefits: it’s a new business model for the exchanges and a central point of control for reducing illicit activity. Exchanges are staking their reputation on the projects so they’ll be incentivised to do their due diligence.
If an exchange wants to offer ICOs, the regulation should require them to ensure the ICO meets certain criteria. At the very least the tech and team should be audited and background checked. Maybe run the whitepaper through some plagiarism software, just in case.
On the customer side, anyone wanting to invest should go through Know-Your-Customer and Anti-Money Laundering processes. (This might sound onerous, but it already happens every time you book an apartment on AirBnb.) Taken together, these two steps should go a long way to reduce fraud on both sides.
Of course you can’t stop people behaving stupidly, but at least you can give them fair warning. So each ICO investment process should start with a quiz to check the person understands what might happen to their money. Equity crowdfunding sites do it – ICOs aren’t that different, so they should do the same.
5. Establish a working group of blockchain experts, economists and policy wonks
Ever heard someone say, “Blockchain is good, but Bitcoin not so good”? That’s a fallacy and shows they don’t understand it. This is a new field and you can only take the correct actions if you actually understand the topic. It’s okay, we don’t even fully get it either.
Either way, rather than leave developers, investors and banks in the dark, it would be good to have a report out by end of Q1 2018 that gives a clear steer on how the UK views cryptocurrencies.
France already has an open consultation on ICOs. A brain drain on the next possible internet will do no one any good.
6. Don’t innovate yourself
Naval Ravikant, CEO and Founder of AngelList and CoinList, believes there are only a few hundred engineers in the world qualified to write next generation internet protocols such as blockchains. Ditto for investing.
It’s hard enough to find security experts and software engineers; finding blockchain protocol designers with proven track records is next to impossible. Blockchains are more than code – they combine engineering, economics/game-theory, philosophy and mathematics.
There is reason it took until 2009 for Satoshi Nakamoto to create Bitcoin – it’s hard to get it perfectly right and arguably they still didn’t. If the government wants to utilise Blockchains, it should look externally to find expertise rather than promoting within.
And above all: do not, on any account, use in Brexit.