The continued growth of cryptocurrencies and criticisms of the sector have manifested various limitations, this is largely due to widespread fraudulent activity such as money laundering and hacking.
For instance, in March 2022, the FCA published a warning about the ongoing operation of illegal crypto ATMs in the UK and in June they published updated warnings regarding online investments scams involving non-existent crypto assets. The UK’s national centre for fraud and cybercrime – Action Fraud – has issued similar warnings regarding crypto assets. Not to mention in September 2022, there was purportedly the first known case of insider trading in the crypto worlds, as per a press release issued on 12 September by the US Department of Justice.
Though crypto assets are gradually becoming more accepted, various intermediaries (such as many UK law firms), will not allow crypto assets as a source of funds. For instance, if a consumer wished to buy a property and their source of funds originated from crypto assets they may have difficulty doing so, due to being an increased AML risk. As cryptocurrencies do not leave a paper trail for their transactions, they are far more likely to be misused for illegal purposes, this is the primary reason many countries and companies hesitate in accepting cryptocurrencies.
International Regulation of Crypto Assets is Hindered by Mixed Global Response
Furthermore, due to the volatile nature of cryptocurrencies many companies will not accept crypto assets as payment, as the product could be purchased with a high value in crypto and then due to a crash the same cryptocurrency could be worth a fraction of the transaction amount.
Various authorities have prohibited the issuance or holding of crypto assets by residents or the ability to transact with them, on the other end of the spectrum some countries have been more welcoming and have even sought to entice companies to develop markets in these assets. The resulting fractured global response does not assist in the regulation in an international market, with agents able to migrate to the most regulatorily favourable jurisdiction, all the while remaining accessible to anyone with internet access. Due to the lack of specific regulatory measures and authority there is also the increased risk that agents may lose their entire deposit amount with no obligation to be reimbursed.
Some countries have also placed limitations on the way cryptocurrencies can be used, with banks banning or placing strict limits on its customers' cryptocurrency transactions. Other countries have banned the use of Bitcoin and other cryptocurrencies outright with heavy penalties in place.
Countries Are Using Bitcoin as Legal Tender Despite Vulnerabilities
While some countries are banning cryptocurrencies altogether and others placing limitations on their usage, some are proposing to make their own virtual currencies, or using Bitcoin as their legal tender - the first to do so was El Salvador in September 2021, followed by the Central African Republic in April 2022, thus centralising the cryptocurrency. This has been widely criticised by other nations. Cryptocurrencies are generally an example of decentralised finance and criminals take advantage of it to cover themselves and move the black money between countries more easily. The biggest vulnerabilities pertaining to crypto assets are:
Decentralised finance
Malicious software
Security vulnerabilities
The anonymity of transactions
Therefore, when investing in crypto assets it is prudent to consider the limitations that may be imposed, such as restrictions transacting with intermediaries (such as lawyers), being an increased AML risk, which may hinder deals and transactions, bank transfer limitations, a lack of security and an inability to transact in certain jurisdictions.
Written by Andie Henderson, Legal and Compliance Associate of Financial Associates International FAI Comply
FAI Comply undertakes the preparation and submitting of applications for CySEC CASP licensing and provides post-submission support leading up to the granting of the license, which authorises companies to provide investment services in accordance to applicable EU laws and regulations.