Some of the most desirable features of cryptocurrencies – their anonymity and lack of regulation – are also some of the biggest risks for investors and the loudest alarm bells for governments around the world.
Cryptocurrency: The volatile investment
There are many cryptocurrencies, the most famous of which is probably Bitcoin, and the most successful have become popular investment vehicles that are traded similarly to physical commodities.
But despite using similar terminology (e.g. ‘mining’ new coins), cryptos are usually not asset-backed, leading to huge volatility and massive losses when investors pull out of a particular currency.
As Facebook prepare to launch Libra, their own cryptocurrency, analysts claim that the mainstreaming of cryptos and the growing attention from regulators could spell the end of the ‘Wild West’ of virtual currencies.
Cryptocurrency laws to be reined in
In a recently published report, BTVK Advisory said: “The portrayal of the crypto world as a lawless one has attracted the attention of lawmakers who have pledged to take a much tougher stance in 2019.
“Meanwhile, financial investigators are becoming more skilled at tracing assets and shining a light on some of the shady corners of the crypto asset market.”
It adds that there have already been several landmark dates in this process in the UK:
- September 2018: UK Treasury Committee report calls for regulation of the crypto asset market.
- October 2018: UK Cryptoassets Taskforce sets out plans to tackle crypto instability, use for illicit means and future responsible development.
- January 2019: FCA launches consultation on the ‘regulatory perimeter’ surrounding crypto assets.
The report notes that “by the end of 2019 jurisdictions across the EU will be required to transpose the provisions of the Fifth Anti Money Laundering Directive into national law” with implications for regulation of crypto currencies and illicit use of crypto assets.
Protecting against loss of legitimately invested funds
Finally, and crucially, greater regulation could help to protect against the loss of legitimately invested funds.
Cryptocurrencies require accountholders to securely store a private key – similar to a bank account number – which should be known only to the individual.
Already there have been high-profile cases in which individuals have died without recording their account key elsewhere, making it impossible to retrieve their funds and those they were holding for any external clients.
Regulation could help to close some of these high-risk gaps – making it harder to use cryptocurrencies anonymously, but protecting investors against avoidable losses at the same time.
Contact us today if you’d like advice on an investment in cryptocurrency.