Global policymakers are struggling to achieve a consistent approach to defining and regulating cryptocurrencies. A new report from the UK government illustrates the problem in microcosm.
On October 29 the UK Treasury (Ministry of Finance), the Bank of England and the Financial Conduct Authority (FCA) issued a joint cryptoassets taskforce final report.
In the report, the taskforce says it aims to lay out “a clear path to establish the UK’s policy and regulatory approach to cryptoassets and distributed ledger technology”.
However, when it comes to the use of cryptoassets as a payments medium, the government’s approach appears inherently self-contradictory.
For example, on the one hand the UK taskforce refuses to award cryptocurrencies like bitcoin the status of money. In the report, the taskforce says it regards bitcoin and similar instruments as ‘exchange tokens’.
“Exchange tokens such as bitcoin or litecoin can be used to enable the buying and selling of goods and services, but are not considered to be currency or money,” the report’s authors say.
This stance reiterates the position of the UK central bank, whose governor spoke out earlier this year against the acceptance of cryptocurrencies as money.
In March, Mark Carney said that cryptocurrencies fail to meet three textbook definitions: in his opinion, they are poor stores of value, inefficient and unreliable media of exchange and virtually non-existent units of account.
Carney’s comments have recently been echoed by the head of the Bank of International Settlements and the former chairwoman of the US Federal Reserve.
But while denying the cryptocurrency the status of an official payments medium, UK government officials say that any exchange of cryptoassets for goods or services may bring them, or the entities involved in arranging or hosting payments, within the scope of regulation.
First, says the taskforce, if used as a means of exchange, cryptoassets are likely to meet the definition of ‘e-money’.
E-money, according to UK law, is electronically stored monetary value used to make payment transactions. E-money must be accepted as a means of payment by a person other than the e-money issuer, and it includes pre-paid cards and electronic pre-paid accounts for online use.
On this definition, cryptocurrencies appear within scope.
And, says the taskforce, if cryptoassets are used to facilitate a ‘regulated payment service’, as defined in the UK’s 2017 Payment Services Regulations, they will also be treated as money.
In UK law, regulated payment services cover an apparently exhaustive range of operations relating to the transfer of value.
For example, such payment services include: enabling cash to be paid into or withdrawn from an account and operating a payment account; executing payment transactions, such as direct debits, credit transfers and card payments; issuing payment instruments, such as credit or debit cards; acquiring payment transactions; remitting money; and providing account information services or payment initiation services.
Policymakers’ refusal to label cryptocurrencies as money also leads to some tortured reasoning.
For example, says the taskforce, if cryptoassets such as bitcoin are used as an intermediary in cross-border transactions (for example, in a trade from sterling via bitcoin to US dollars), the cryptocurrency leg of the transaction may disappear from the regulator’s sights.
“Aspects of such services will be regulated as money remittance under the Payment Services Regulations, although this will not include the cryptoasset part of the transaction,” says the taskforce.
“There is a real policy tension. Governments hype blockchains.”
The UK government’s policy framework for cryptocurrencies appears emblematic of a broader schizophrenia about this new technology.
“There is a real policy tension,” says Ross Anderson, a professor of computer science at Cambridge University. “Governments hype blockchains.”
At the same time, says the UK government, cryptocurrencies’ broader acceptance could trigger a wave of crime.
“Cryptoassets pose risks around criminal activity such as money laundering and terrorist financing because of their accessibility online, their global reach and their pseudo-anonymous nature,” the taskforce says in its report.
According to the report’s authors, since 2017 UK law enforcement authorities have increasingly identified cases of cryptoassets being used to launder illicit proceeds of offline crime.
And, says the taskforce, the risks of cryptoassets being used in money laundering are expected to grow as they become increasingly accessible.
Money in all but name: if the UK taskforce’s new report is anything to go by, those hoping for regulatory clarity regarding bitcoin and other cryptocurrencies face a long wait.