Blog Business Crime & Financial Services 16th Jun 2021

Cryptocurrency – As the CPS prepares for a surge in fraud, the FCA begins to regulate

Cryptocurrency fraud

Cryptocurrency is nothing new; Bitcoin was first created back in 2009. However the unprecedented rise in its value over the past year has led to increasing numbers of people investing in cryptocurrencies or other ‘crypto-assets’ which in turn has driven a surge in scams. Some are simply Ponzi schemes where investors are persuaded that they will see huge returns if they invest in a new cryptocurrency, others involve cryptocurrency theft or market manipulation. Action Fraud reported a 57% increase in cryptocurrency-related scams in 2020 compared to 2019 and by January 2021 frauds were being reported at twice the rate of last year. The Director of Public Prosecutions Max Hill QC said in April 2021 “Cases coming in are low in numbers now but my prediction is they will increase”.

FCA warnings and regulation

The government is beginning to flex its regulatory muscles. January 2021 saw the FCA issue a stark warning to consumers looking to invest in cryptocurrencies – “If consumers invest in these types of product, they should be prepared to lose all their money”. At the same time the FCA also banned the sale of ‘crypto-derivatives’ to retail consumers, its rationale being that derivatives (i.e. options, futures, contracts for difference) whose value is based on an underlying cryptocurrency are simply too risky for consumers, owing to the risks of market abuse and ‘extreme volatility in cryptoasset price movements’.

Since January 2020 all firms involved in the sale of cryptoassets have been required to comply with money laundering regulations, involving customer due diligence and the submission of suspicious activity reports (SARs). From January 2021 all cryptoasset businesses have also been required to be registered with the FCA. It is noteworthy that the FCA states that a significantly high number of businesses are not meeting the required standards under the money laundering regulations, resulting in an unprecedented number of businesses withdrawing their applications.

Speculative investment vs. Retail transactions

Whilst the FCA is sending disapproving signals regarding cryptoassets bought for speculative investment, the government appears to be notably more sanguine about those which are predominantly bought to buy things with. In January 2021 the Treasury issued a consultation on the ‘UK regulatory approach to cryptoassets and stablecoins’ in which it sought to draw a clear distinction between cryptoassets bought for speculative investment and those “which could reliably be used for retail or wholesale transactions”. ‘Stablecoins’ are cryptocurrencies whose value is referable to non-crypto assets, such as regular currencies or commodities. This makes their price more stable which in turn has led the government to regard them as more appropriate for consumers and therefore in need of regulation. The government therefore proposes to introduce a regulatory regime for stablecoins used as a means of payment whilst cryptocurrencies such as Bitcoin, which are largely bought for speculative investment, will continue to remain unregulated.

Ion Science Ltd v Persons Unknown (unreported, 21 December 2020)

Meanwhile, the High Court has ruled on an ex parte interim application involving allegations of fraud in relation to a cryptocurrency ‘initial coin offering’ (ICO). In Ion Science Ltd v Persons Unknown (unreported, 21 December 2020) the applicants allege that they have been the victims of a fraud in which they were induced to invest £577,000 (64.35 bitcoin) in two new cryptocurrencies – ‘Uvexo’ and ‘Oileum’. Despite claims that the investments were successful, no money has been returned to the applicants. The case is believed to be the first ICO case to come before the court and, although not authority, is the first in which the court has ruled that the lex situs (ie. location) of a cryptoasset is the place where the person or company who owned the coin or token is domiciled, as well as the first case in which the court has granted permission to serve a freestanding bankers trust order (a type of third-party disclosure order) against cryptocurrency exchanges located out of the jurisdiction.

The past six months have therefore seen both government and the courts begin to grapple with cryptocurrencies. Only time will tell how successful they will be in preventing fraudulent conduct.

 

Daniel Chadwick and Kenniesha Stephens


 


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