Regulating the "wild west" of digital currencies, crypto-assets, ICOs and smart contracts
The House of Commons Treasury Committee has just published its Report on Digital Currencies – or as it now prefers to call them "crypto-assets" as they are not really currencies at all, at least not at the moment. The Report's conclusions are that the area clearly needs regulating by the FCA – at a minimum the Report recommends that the issuance of Initial Coin Offerings (ICOs) and crypto exchange services are regulated. See here.
Indeed the current lack of regulation on this area raises clear risks for investors who find themselves unprotected if things go wrong – they are risky and highly volatile investments - and it has long been the case that crypto currencies are attractive means of payment for criminals, facilitating cyber crime, terrorist financing and money laundering. ICOs are also highly risky – over 900 ICOs have failed and are currently unregulated yet as the MIT Media Lab argued in their evidence to the Committee "ICOs are essentially a new method of capital raising for a new enterprise [and] they should not be able to avoid relevant securities regulations just by tweaking the form."
The Report also punctures some of the hype around blockchain – although small scale uses for blockchain may exist – "the Committee has not been presented with any evidence to suggest that universal applications of the technology are currently reliably operational."
Those involved in blockchain and crypto-assets ought to welcome the Report. Sensible regulation of this area in the UK will do much to enhance confidence in the opportunities these technologies undoubtedly present. The current legal wild west benefits no one except the crypto cowboys. Looking to the longer term it is clear, despite the Report's reservations, that blockchain is a disruptive technology – it may have most impact in helping facilitate smart contracts where the contract is the code – this will revolutionise commerce. The Report does not address this area. However other countries are looking at ways to ensure that smart contracts are enforceable (with laws already in place in certain jurisdictions e.g. Arizona and Tennessee in the USA) - it is critical that the law helps not hinders their use. In the UK this area is now being looked at by the Law Commission who have started an initiative here recently. As the Law Commission note: "It is important to ensure that English courts and law remain a competitive choice for business. Therefore, there is a compelling case for a Law Commission scoping study to review the current English legal framework as it applies to smart contracts."
Getting a sensible regulatory regime in place for crypto-assets in place first would be a good starting point. For smart contracts to develop both the public and business need to have confidence in blockchain and crypto-assets are currently its most widespread (and riskiest) manifestation.