Regulation may be the only way out of crypto’s ‘Horrible Year’

by Peter Fitzgerald of Counsel and Amalia Neenan, trainee solicitor at Peters & Peters Solicitors LLP 

In the latest season of Netflix’s The Crown, Imelda Staunton delivers the Queen’s ‘annus horribilis’ speech with spectacular aplomb.

The famous quote refers to the Queen’s horrible year in which she saw three of her four children split from their spouses and – of course – the Windsor Castle fire.

Perhaps three decades later, in the year we mourn the Queen’s passing, we too are experiencing an annus horribilis, only this time in the crypto-sphere.

2022 has seen crypto-controversy after crypto-controversy with increasing alacrity. In May, the Terra/Luna collapse sparked a crypto-market wipe-out of approximately $1 trillion. In October, we saw the culmination of the celebrity crypto-endorsement scandal, when Kim Kardashian paid a $1.26 million fine to settle an investigation by the US Securities and Exchange Commission into her advertising of EthereumMax after failing to disclose that she had been paid to promote the asset on Instagram. And now in the first weeks of November there’s FTX – the latest crypto-crash to grace the front pages. 

Token gestures

The disgraced former CEO of FTX, Sam Bankman-Fried, once widely hailed as the ‘King of Crypto’, was forced to step down when the $32 billion crypto-exchange filed for bankruptcy having imploded in epic fashion. 

A run on the exchange was ignited after a series of accusations came to light concerning its fiscal viability. Compound this with the Binance sell off of its FTX tokens, and the deed was done.

It is estimated that over one million creditors could be owed money. But who can they turn to? 

Crypto is essentially still the Wild West, in regulatory terms at least. In the UK, cryptocurrencies are policed to an extent by the Financial Conduct Authority. For instance, in 2020, UK cryptoasset businesses were required to register with the FCA in an effort to reduce the risk of money laundering and counter-terrorist financing.

However, the FCA states that those dealing with cryptocurrencies are unlikely to ‘have access to the Financial Ombudsman Service or the Financial Services Compensation Scheme (FSCS) if something goes wrong’ and ‘if you invest in cryptoassets, you should be prepared to lose all your money’. For UK-based FTX investors, and those who have dealt with other unregistered crypto-firms, the FCA offers no recourse.

However, more regulation may be on the horizon.

Much may hinge on the enactment of the Financial Services and Markets Bill, which includes a shakeup of how the UK regulates digital assets – empowering the Treasury to establish new (and adapt existing) regulatory structures.

In a recent modification, the Bill now seeks to amend ‘the Financial Services and Markets Act 2000 to clarify that the powers relating to financial promotion and regulated activities can be relied on to regulate cryptoassets and activities relating to cryptoassets’, essentially broadening the scope of what assets will be caught by new regulations.

By seeking to clarify the position on existing piecemeal crypto-regulations and with the ability to create more bespoke rules, it could be that the UK has offered something to rival the EU’s Markets in Crypto-Assets Regulation (MiCA). 

However, one factor that is likely to hamper either regime’s effectiveness is funding. When the crypto-market crashes, trillions can disappear. Funding is therefore an essential ingredient needed to finance studies and collaborations between the public and private sectors to road-test potential (and workable) regulatory solutions.

Cross-jurisdictional cooperation must also be considered.

Cryptocurrencies know no borders. Regulation should thus provide for mutual legal assistance mechanisms to work towards a worldwide solution to this global problem.

Only time will tell whether these instruments will promote much-needed stability in the crypto-sphere. Failure would mean that the FTX fiasco is but the beginning, and that our crypto annus horribilis could stretch on for decades.