How will regulation affect the ‘wild west’ of cryptocurrency?

Tell us first and foremost about you – what is your background and how did you get into crypto?

I am attracted to new innovations as regulation is particularly interesting when looking at the intersection with new ideas. I started with crypto by working on the first successful new crypto asset launch (referred to as an initial coin offering) from the UK. Because it was successful and there were very few lawyers in the UK who were interested in the sector when things took off, my practice grew from there. As time has passed, working with crypto has moved from being almost a hobby to the core of my practice.

Who is gunnercooke and what areas of law do you practice?

Gunnercooke is a law firm with consulting models that has around 500 employees across Europe and a turnover of over 50 million pounds. We have the UK’s broadest crypto and fintech full service practice working with over 100 customers, as well as a huge presence in Germany led by Wolfgang Richter. More recently, we have launched a specialist in creative arts and blockchain practice, led by Kathryn Dodds.

We work with businesses across the blockchain ecosystem, including token designers and developers, crypto asset managers, blockchain platforms, crypto exchanges, exchanges operated using distributed ledger technology, crypto managers, crypto brokers, crypto funds and fintech organizations.

What are the key regulatory considerations for crypto and blockchain companies right now?

Globally, the starting point is that there are generally two main regulatory regimes. It is the AML regime, which focuses on preventing money laundering, with the application of these rules generally determined by where the business is based. Secondly, it is the securities regime, which decides whether a token should be processed in accordance with the laws of the place where cryptocurrencies are sold.

However, this position becomes more complex. For example, Mauritius is developing a broader framework for crypto-active companies, the UK is looking at a specialist regime for stable coins, and in the EU, MiCA (Markets in Crypto Assets) is being adopted. So we see an interesting interaction between different regulators – who are all concerned with doing the “right” thing in relation to cryptocurrencies, but may have different views on what it means in practice.

What can the industry do to reduce volatile periods, as we are in right now?

It is worth noting that investing is only one use case for cryptocurrencies, so this is only relevant when investing in cryptocurrencies speculatively. Many projects do not involve this, and it is therefore not relevant for these projects that cryptocurrencies used for investments can be volatile.

But when you look at cryptocurrencies as an investment, whether volatility is a problem depends on what you are looking for. The core issue here is the issue of risk and return.

Conventional wisdom is that low-risk assets tend to have low-risk returns, and higher-risk assets should provide the potential for higher returns.

In this light, cryptocurrencies are generally a high risk / high return asset. So as long as the participants recognize this, and then operate, there is no need to be nervous. For example, it is important not to be financially overexposed to cryptocurrencies. In this connection, the proposal from the FCA that sellers of crypto assets, for certain crypto assets, are required by law to limit each participant’s exposure so that it does not exceed 10% of the person’s assets, is interesting.

What should make you nervous is the concept of an asset with a low return / high risk, as there is a danger that people will mistake such an asset as a lower risk than it is.

Is the prospect of further regulation inevitably an oppressive force in the crypto space?

The concept of regulation is simply the action of a regulator who is responsible for an activity. Regulators simply want to do the “right thing”. Complexity comes when we try to define what we mean by “the right”. For example, in Europe, regulators prioritize the rights of the individual, hence the focus on consumer protection and legislation such as the GDPR. In the USA, the focus is on the company’s rights, based on the fact that the company is the backbone of the economy. In China, the focus is on the state, on the basis that the state is best suited to make decisions for the benefit of people as a whole.

When it comes to innovation, the key issue is not in itself to suppress innovation, as if the purpose of regulation is to stop innovation. Rather, the problem arises in general where an innovation does not easily fit with preconceptions about what is “the right thing” or how it should be achieved. The latter is especially important, as it raises the question of whether the same, or a better, result can be achieved by using a method other than conventional wisdom.

What is interesting at the moment is to see different regulators tackle the challenge with innovation, and try to balance the risk against the opportunities in a sector that is still very beginning. In the UK, a welcome development in this regard has been FCA’s CryptoSprints, which show that the regulator is actively engaging with industry stakeholders with a view to improving the approach to regulation.

Do you think there is a need for regulation?

Some degree of regulation is required and is actually welcomed by the participants because it provides security and helps to eliminate bad actors. The key point is to get the regulation right for the industry, and actually recognize the breadth of the sector. For example, a video game company that gives cryptocurrencies as prizes, where cryptocurrencies unlock multiple levels as an achievement, will have a completely different profile than a lending-based token that seeks to provide a return for investors. It must be recognized that any regulation must be sensitive to differences in the market, and be flexible enough to adapt. It is also likely that regulation will change over time, as functionality changes in the market.

What do you hope and expect future regulation to look like?

Often people want a simple global approach to regulation, the idea is that there must be a right answer to regulation. It will actually reduce legal operating costs, but it is not likely to ever happen.

I expect a number of regulatory approaches, and although it makes things more complicated, it can be a good thing to have a number of different approaches. In particular, it is likely that each business model moves towards the regulatory regimes that are best suited for that business. And this does not mean a race to the bottom, because operating in a well-run jurisdiction gives comfort to users and counterparties in terms of the solvency of a business, which in turn gives it a premium.

Many ordinary consumers still do not understand crypto, and they think it has no real value. Are they right?

Crypto currently has its “iPad vs computer” moment. In general, most business models that use blockchain do things that can be done through more traditional methods. This raises the question of why change something that already works. Apart from the fact that “works” really only means that people have set up with the option as the only option at the time, not that it works well.

In fact, several years ago I had a client who never mentioned the fact that he used blockchain because users found it offensive, rather he paid only a tenth of the cost to his competitors while having a larger profit per item, which was activated by to use blockchain.

A real example of the benefits of blockchain is transaction reporting. By law, when securities are traded on a stock exchange, certain reports must be made about the transaction. By using cryptocurrencies to act as relevant securities, this reporting process can be automated, significantly reducing costs.

Over the next five years, we can expect blockchain to be ubiquitous across different industries, and there will actually be no talk of being nervous about using blockchain or cryptocurrencies, but rather whether people will notice at all. for it to exist.

Your practice has recently begun to accept crypto as payment – how important was that to you? Was it a feeling to practice what you preach?

It was partly a feeling of practicing what we preach, because it is difficult to argue for cryptocurrencies if you do not accept them. But it is also about accepting where things are going. Businesses are moving fast along the adoption curve as cryptocurrencies are already accepted as a form of payment in many sectors, and large organizations such as Microsoft and PayPal readily accept bitcoin. Many large economies are considering how to incorporate cryptocurrencies as a payment mechanism along with traditional fiat currency. While the current market volatility is attracting headlines, the direction of travel into the mainstream seems clear, and it is highly likely that it will become even more widespread in the coming years.

It is also about following the business development more broadly. This is not in line with the traditional view that all lawyers are slow to adapt to modernization, as gunnercooke has one of the leading crypto- and fintech full-service practices in the UK. It only makes sense that the company accepts this payment method.

There is a growing demand from both customers and prospects in this area to pay fees in this way, so it is important from a customer service and new business perspective to offer this option.