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31 March 2022

Why we need to end the crypto Wild West

Blockchain tech can be harnessed for good but only if we properly regulate the sector, says the shadow economic secretary.

By Tulip Siddiq MP

Cryptocurrency has come a long way since its humble beginnings in the further reaches of the internet. When Bitcoin was first launched in 2009, its appeal was largely limited to online pioneers, tech utopians and libertarians. It has now truly entered the mainstream – an estimated 2.3 million people in the UK own crypto assets, according to research from the Financial Conduct Authority (FCA), and the number of companies trading in crypto is likely to grow further over the coming years.

Has the rise of unregulated cryptocurrencies brought about the new world of finance as foreseen by its early followers? Many wished for the end of central banking, the replacement of the dollar and fiat money by Bitcoin – or “digital gold” – and an upending of regulation in markets and of the potential surveillance of consumers. But the crypto evangelists have so far been disappointed. Like all utopian projects it has collided with the realities of geopolitics, corporate power and
illicit finance.

With reports that Russian oligarchs may rush to convert their assets into cryptocurrencies to avoid sanctions, many are rightly questioning whether crypto has a future at all

However, the UK does not need to choose between a total crackdown on ownership of cryptocurrencies and the Wild West approach advocated by some parts of the Conservative Party.

Properly regulated crypto assets have the potential to transform our economy and the financial services sector. Many innovative companies are embracing different forms of blockchain technology to improve transparency in finance and to create high-skilled, high-productivity jobs across the UK. This has the potential to reduce regional inequalities, with $696m invested in financial technology companies based outside London and the south-east in 2021 alone, driving efficiencies in all sorts of industries.

But the government has risked undermining the reputation of the sector. In the absence of a comprehensive regulatory regime, the UK has become a centre for illicit crypto activity. According to Chainalysis – a global leader in blockchain research – cryptocurrency-based crime such as terrorist financing, money laundering, fraud and scams hit a new all-time high in 2021, with illicit activity in the UK estimated to be worth over $500m. 

Despite pressure from Labour and the financial sector, ministers have yet to acknowledge the scale of the threat.

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The FCA has identified over 230 unregistered crypto asset firms operating in the UK. Many companies have not even applied to register for anti-money laundering or “know your customer” checks, yet face little or no sanction from the government. This has allowed some firms to exploit anonymity-enhancing technology to protect the identity of criminals and individuals linked to hostile states such as Russia.

Also concerning is the rise of crypto-related scams in the UK – reports of digital assets fraud were up by 50 per cent in 2021 compared with the previous year. The government has stood by and let the firms responsible for these scams trade with impunity and has continued to delay introducing stronger rules on the advertisement and marketing of cryptocurrency products.

A survey by investment platform AJ Bell found that many crypto investors are simply unaware of the high-risk nature of their investments. This is worrying, particularly as many of these investors have sunk a huge proportion of their savings into crypto – half don’t have an ISA while four in ten don’t have a pension. A serious collapse in crypto could therefore not only wipe out the life savings of many people, but also significantly destabilise the UK’s financial market.

US President Joe Biden has announced plans to introduce a comprehensive, all-of-government framework to address the emerging risks and opportunities posed by crypto assets. If the UK doesn’t follow suit, we are at risk of falling behind our global competitors, including the US, in the crypto space. We could be leaving ourselves open to market failure. A Labour government would be serious about attracting fintech companies to the UK and safely harnessing the progressive potential of crypto technology. But it’s time to reject the arguments of the libertarian right and properly regulate the sector. 

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