by Virginia Szepietowski

Read this article and look up any areas you don’t understand. If you are able to use this content in your personal statement and interview you will make an incredibly memorable impression on the university admissions panel.

In your personal statement you must look at law not only as a career but as an academic subject. You must demonstrate to universities that you understand the wider impacts of law on society and that you take a genuine interest in the subject.

If you were able to discuss how legal regulation is insufficient to regulate cryptocurrencies and suggested a solution to this complex issue, you would instantly distinguish yourself as an incredibly desirable potential law student.


Executive Summary

Cryptocurrency poses risks for users, and challenges for regulators primarily by facilitating illegal activity through its anonymity including: theft, money laundering, market manipulation, tax evasion and drug trafficking. The regulation of such activity through cryptocurrency is minimal, particularly within the UK, as regulatory bodies do not yet fully understand the underlying technology or its effects and dangers. They remain tentative to regulate cryptocurrency as an unknown entity which does not fit current legal and regulatory frameworks. A new approach must be taken to encompass the benefits and mitigate the risks of such advanced technology on a co-operative and cross-jurisdictional scale. Regulators should encourage controlled implementation of cryptocurrency using permissioned, rather than permissionless, distributed ledger technology to maximise the remarkable blockchain opportunities.

  1. What is cryptocurrency

The origin of Satoshi Nakamoto’s Bitcoin[1]is arguably the origin of cryptocurrency and consists of three distinct parts. Firstly, the desire to remove governmental power and control in favour of an anonymous online community.[2]Secondly, the theory of a decentralised digital cash, free from financial institutions.[3]Thirdly, the invention and implementation of the distributed ledger technology which made it possible.[4]

Cryptocurrency is a decentralised digital medium of peer-to-peer value exchange that utilises technology, such as blockchain, to verify transactions. With no central governing body, mathematical algorithms are used to control the creation of ‘tokens’ and to verify the transfer of funds documented on the ‘ledger’. The tokens only exist as part of the network and because they are not ‘fiat currencies’ backed by a Bank of England reserve, they are not redeemable for another commodity such as gold. This brings in an interesting debate as to whether they are even ‘currencies’ at all.

Currently they are not interchangeable on each other’s networks, hence the rise in popularity of online exchanges. These exchanges are the primary method for obtaining cryptocurrencies.  Cryptocurrencies can also be obtained through ‘mining’, which involves receiving a reward for operating a ‘node’ (computer) on the network, or by participating in an initial coin offering (ICO).


  1. Current challenges facing the market
    • Manipulation

Market manipulation is conducted by ‘whales’ who acquire enormous influence by owning large stakes of cryptocurrency.[5]Using their power to employ techniques such as ‘rinse and repeat’[6], ‘painting the tape’ and ‘buy and sell walls’[7], whales cause smaller investors to panic sell or buy, fluctuating the market to the whales’ advantage.[8]Alt-coin cryptocurrency markets are more susceptible to manipulation due to their scale and liquidity. Amateur traders invest in alt-coins looking for the next ‘digital gold’ after bitcoin, but expose themselves to scams.[9]

These techniques remain unregulated on the cryptocurrency market, despite their illegality on traditional markets. The regulation of whales is an elusive notion, particularly considering the US government has flooded the market with thousands of confiscated bitcoins, creating major price fluctuations.[10]Cryptocurrency users are anonymous, therefore regulators cannot track market manipulation by monitoring the activity of individuals. Retail investors inevitably pay the price for such manipulation. Current Market Abuse Regulation and the Financial Services Act 2012 is not equipped to prevent, detect or punish such manipulation.[11]The FCA do not have access to transaction reporting data nor can they monitor activity on the blockchain.

  • Fraud and ICOs

Initial Coin Offerings (ICOs) are an integral part of the cryptocurrency eco-system, offering tokens in exchange for fiat funds. Fraudulent ICOs are becoming increasingly common with sham founders using false whitepapers to attract investors before disappearing with investors’ money upon completion of the ICO.[12]‘Pump and dump’ ICO schemes also continue to be a problem whereby scammers cash out after artificially driving up prices, leaving genuine investors with coins of little or no value.[13]There is no specific UK ICO legislation; some ICOs could be subject to IPO regulation whereas other ICOs do not constitute an ‘investment activity’. Investors must rely on the issuer’s accurate disclosure and applicable legal compliance.[14]The FCA’s unhelpful advice is “to be prepared to lose your entire stake”.[15]

  • Cybercrime and hacks

Bitcoin and Ethereum have suffered huge thefts, such as the Japanese exchange Mt Gox losing 500 million bitcoins[16], resulting in huge price fluctuations and communities divided on how to deal with the aftermath. After the collapse of Mt Gox, bitcoin’s price recovered extremely well, demonstrating that even realisation of the biggest threat cannot deter cryptocurrency users.

The anonymity of cryptocurrency makes thieves and hackers untraceable, and stolen funds are almost impossible to follow. Without the private keys to a digital ‘wallet’, funds cannot be forcefully transferred and reclaimed in the same way as traditional bank accounts. The stolen cryptocurrency cannot be recovered, and exchanges hold no responsibility for theft. This remains a major hurdle for regulators, particularly with regard to consumer safety.

If the above challenges are not addressed, consumer fear itself will become a challenge to the market. This may lead to a price collapse and ultimately the failure of the cryptocurrency eco-system.


  1. Risks posed by using cryptocurrency

The risks posed by cryptocurrency can be categorised into three parts: personal, state and systematic risks.

  • Personal risks
    • Personal loss through financial instability

Bitcoin’s drastic price increase is comparable with a ‘bubble’ whereby individuals have invested not because of bitcoin’s ‘potential’ but because of the belief that the price will increase.[17]The threat of the bubble bursting poses the risk of huge economic losses for individuals worldwide.[18]An interventionalist stance would be required to deal with the governmental pressure arising from a significant financial collapse. The government can bail out the banks, but it cannot bail out bitcoin.

  • Theft and recovery

Individuals take a personal risk by placing their cryptocurrency into exchanges and wallets which are vulnerable to hacks since it is almost impossible for law enforcement to trace and recover stolen funds. Similarly, if a private key is lost, funds from a wallet cannot be recovered. Cryptocurrency users do not enjoy insurance or protection schemes to recover lost funds.

  • State Risks
    • Tax evasion

Regulators must classify cryptocurrency in order to begin to regulate it. This proves difficult as bitcoin’s practical use has evolved from a currency to an investment instrument. Cryptocurrency is considered a ‘single pooled asset’ for Capital Gains Tax purposes (TCGA 1992)[19]. Henceforth, authorities can initiate regulation of cryptocurrency as it would for assets. However, cryptocurrency’s anonymity forces HMRC to rely on individuals’ honesty in self-declaring gains and income earned from cryptocurrency.[20]A wallet’s private key can be passed down to children, illegally evading inheritance tax on large sums.

  • Facilitating criminal activity
    • Drug trafficking

Bitcoin notoriously facilitated anonymous payments on dark web sites, such as Silk Road, promulgating the illegal drug trafficking trade. After Silk Road was shut down, bitcoin’s price continued to grow, demonstrating that bitcoin is not popular solely for its online drug purchasing abilities.[21]Arguably, cash also plays a role in facilitating drug trade, however cryptocurrencies allow this trade to take place on a vast online and global scale.

  • Money laundering

Cryptocurrency can be used as a high-tech money laundering device, hiding financial transactions from law enforcement authorities. ‘Tumbling’ services mix illegally-obtained coins with others, confusing the trail back to the source.[22]Regulators have difficulty tracing proceeds of crime once converted into cryptocurrency due to its obscurity and anonymity on the network. Tracked accounts cannot be frozen on the decentralised network without the private keys. Currently 4% of European criminal proceeds are funnelled through cryptocurrencies, therefore regulators must tackle this in its early stages.[23]

  • Terrorist funding

Many hail cryptocurrencies as an enabler of terrorism because of its ability to anonymously transfer funds to rogue nations and terrorist organisations. However, one could argue that an encrypted information-exchange app facilitates terrorism, used by terrorists and citizens alike: WhatsApp.[24]

  • Systematic risks
    • ‘Proof-of-work’ systems losing miners

Permissionless decentralised cryptocurrencies that rely on ‘proof-of-work’ could simply stop functioning if miners were to cease work.[25]

  • Abuse of majority share of network

If an individual or company were to gain a majority share of the network’s computing power, it would give them phenomenal power to alter the rules and edit the ledger. Tokens could be counterfeited, transactions could be reversed, and the finality of payments would be brought into question.

  • Unknown future effects

The effects of widespread use of cryptocurrencies and self-executing financial products are unknown, which in itself is a risk. New vulnerabilities and risks are likely to surface.


  1. How may these risks be mitigated?

Cryptocurrencies have advanced the boundaries of existing regulatory frameworks, and new techniques are needed to control the advanced technology on a global scale.[26]

The UK’s first cryptocurrency trade body introduced a Code of Conduct with self-regulation at the heart.[27]This is problematic as it does not extend to ICOs and it relies purely on honesty. Other suggested means of regulation include the infamous New York ‘BitLicense’, which was so burdensome it drove bitcoin companies out of the state.[28]A changing approach to legal and financial regulation is required to implement new policies addressing new technology.

  • Cross-jurisdictional legal responsibility

Permissionless cryptocurrencies lack a legal personality to be brought into a regulatory perimeter. They are nationless and function independently, therefore can be regulated only indirectly.[29]Additionally, cryptocurrencies are used for activities which under existing laws would be regulated by numerous regulatory bodies. Only globally-coordinated regulation will be effective within the blurred lines of cross-jurisdictional legal responsibility. Criminal activity including money laundering, theft, fraud, drug trafficking and terrorist funding could be mitigated under this regulatory advancement.

  • Third party exchange & wallet regulation

Exchanges are the bridge between fiat and cryptocurrency, making them an ideal target for regulation. Exchanges could be licenced and monitored for how they send, receive and store cryptocurrencies, ensuring they are held against FCA regulatory benchmarks for safety, efficiency and legality of use. Monitoring capabilities are also required in order to implement applicable standards of consumer and investor protection, market integrity, anti-tax evasion, anti-money laundering and anti-terror finance[30]. Such regulatory efforts would establish trust in the cryptocurrency system.

Similar regulatory principles could be applied to wallets. Ideally, the immediate anti-theft mitigation would be through education of safe practices and the dangers of 3rdparty wallets and exchanges.

  • Compatibility of parallel markets

Cryptocurrencies should be compatible with regulated financial entities to ensure their monitored adoption. This will help to mitigate the risks of money laundering and tax evasion. Furthermore, the introduction of stability is likely to reduce systematic and financial ‘bubble’ risks.

The strongest argument for rules and regulations is that they will prevent an average person from committing such crimes with ease. However, rules or regulations cannot prevent the issues entirely. The risks highlighted are already rife among traditional banks, evidenced by HSBC’s $1.9 billion fine for money laundering in 2012[31]and the extensive secretive banking rules in many countries which present similar tax issues.


  1. Does current regulation sufficiently mitigate the risks posed by the use of cryptocurrency?

In light of the challenges facing the cryptocurrency market, the risks of using it, and the extent to which they are currently regulated, stricter regulation is certainly required. The challenges, risks and benefits of cryptocurrency stretch the boundaries of current laws and compel authorities to reassess traditional regulatory stances to accommodate technological advancements in order to provide consumer protection and market consistency.

The FCA exercises a ‘hands-off-wait-and-see’ approach, adopting a stance of “technology neutrality” when addressing cryptocurrency regulation.[32]The consumer protection measures extend to posting warnings on its website. This seems inadequate in comparison to the FCA’s strict regulatory framework for other financial service providers with regards to enhancing consumer protection, market integrity and competition.[33]

The self-regulation approach adopted by the UK is not sufficient given bitcoin’s mainstream adoption. Higher priority must be given to consumer protection, not only when monitoring exchanges to prevent theft, but also when scrutinising ICO schemes. Consumer loss of trust in the market would undermine the entire cryptocurrency eco-system.


  1. Changing regulatory approaches

Fresh regulatory approaches should be implemented consistently, co-ordinating the regulatory burden across all jurisdictions. Regulation should embrace cryptocurrency’s benefits and technological advancements by adapting and creating laws to manage it, rather than narrowly combatting only the criminal activity facilitated by it. The risks posed by cryptocurrency should not dilute the extraordinary market-changing evolution of blockchain, recognised by governments and financial institutions as having benefits for wider application in the legal and financial sectors.

While regulators should take steps towards regulation, they must not rush to do so before fully understanding its uses, benefits and risks. Regulators must remain vigilant and diligent in the meantime in order to address new technological challenges as they arise to protect consumers. This should entail a more ‘hands-on’ approach than the FCA’s clumsy ‘warning system’.


  1. Adaptations rather than mitigations

Regulators should make adaptations rather than mitigations of cryptocurrency’s challenges and risks. Established UK institutions could create a privately-issued cryptocurrency using a permissioned blockchain whereby the ledger is distributed and accessible by all users but can only be edited and updated by authorised participants. This would eliminate the dependence on an honest majority in the ‘proof-of-work’ bitcoin system and add a layer of consumer protection. If banks were to issue cryptocurrency via a permissioned blockchain, they could retain control over the supply of currency and amend the transaction rules when required, giving policy makers more leeway, for example, when interest rates are negative.


[1]Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, (3 January 2009) <> accessed 6 June 2018

[2]‘The Crypto Anarchist Manifesto’ (A Cypherpunk’s Manifesto) <> accessed 6 June 2018

[3]Wei Dai, ‘b-money’, (1998) <> accessed 6 June 2018

[4]Satoshi Nakamoto, ‘Bitcoin: A Peer-to-Peer Electronic Cash System’, (3 January 2009) <> accessed 6 June 2018

[5]‘Whale Watching’ (TMTalks, December 14, 2017) <> accessed 6 June 2018

[6]Neeraj Pandey, ‘Bitcoin Whales Technique 1: Rinse and Repeat’ (Koinalert, February 24, 2018) <> accessed 6 June 2018

[7]‘Major Problems in the Cryptocurrency Market – Hacker Noon’ (Hacker Noon, January 25, 2018) <> accessed 6 June 2018

[8]‘Major Problems in the Cryptocurrency Market – Hacker Noon’ (Hacker Noon, January 25, 2018) <> accessed 6 June 2018


[10]Rakesh Sharma, ‘How The US Government Handles Its Massive Stash Of Bitcoins’ (Investopedia, February 26, 2018) <> accessed 7 June 2018

[11]‘Market Abuse’ (FCA, December 20, 2017) <> accessed 7 June 2018

[12]Thuy Ong, ‘SEC Charges Founders of Fraudulent ICO Backed by Floyd Mayweather That Raised $32 Million’ (The Verge, April 3, 2018) <> accessed 7 June 2018

[13]Anna Irrera, ‘U.S. Regulator Warns of Cryptocurrency ‘Pump-and-Dump’ Schemes’ (Reuters, 15 February 2018) <> accessed 14 June 2018

[14]‘Regulation of Initial Coin Offerings’ (Oxford Law Faculty, 6 February 2018) <> accessed 14 June 2018

[15]PatrickCollinson,‘Bitcoin Investors Could Lose All Their Money, FCA Warns’ (The Guardian, 12 September 2017) <> accessed 14 June 2018

[16]AdrienneJeffries, ‘Inside the Bizarre Upside-down Bankruptcy of Mt. Gox’ (The Verge, 22 March 2018) <> accessed 14 June 2018

[17]Cherry Reynard, ‘Is Bitcoin A Risk To Wider Financial Markets?’ (Forbes, 31 December 2017) <> accessed 14 June 2018

[18]Gian Volpicelli, ‘If the Bitcoin Bubble Bursts, This Is What Will Happen Next’ (WIRED, 20 December 2017) <> accessed 15 June 2018

[19]‘Capital Gains Manual’ (GOV.UK) <> accessed 14 June 2018

[20]‘Capital Gains Manual’ (GOV.UK) <> accessed 14 June 2018

[21]Christopher Woody, ‘NARCONOMICS: ‘The Real Drugs Millionaires Are Right Here in the United States’’ (Business Insider, 16 March 2016) <> accessed 15 June 2018

[22]Joshua Fruth, ‘’Crypto-Cleansing:’ Strategies to Fight Digital Currency Money…’ (Reuters, 14February 2018) <> accessed 15 June 2018

[23]KieranCorcoran, ‘Criminals in Europe Are Laundering $5.5 Billion of Illegal Cash through Cryptocurrency, According to Europol’ (Business Insider, 12 February 2018) <> accessed 15 June 2018

[24]‘Tech Giants Are under Fire for Facilitating Terrorism’ (The Economist, 8 June 2017) <> accessed 15 June 2018

[25]Andrew Tar, ‘Proof-of-Work, Explained’ (Cointelegraph, 20 June 2018) <> accessed 15 June 2018

[26]‘BIS Annual Economic Report 2018’ (Bank for International Settlements, 17 June 2018), <> accessed 18 June 2018

[27]Jennifer Boldon, ‘World Trade Center attacks two events, not one’ (Kennedys Law)<> accessed 18 June 2018

[28]Chrisjan Pauw, ‘BitLicense Approval Shines Fresh Light On New York-Crypto Relationship” (Cointelegraph,1 June 2018) <> accessed 14 June 2018

[29]‘BIS Annual Economic Report 2018’ (Bank for International Settlements, 17 June 2018), <> accessed 18 June 2018

[30]Financial Services, The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017

[31]Robert Peston, ‘HSBC to Pay $1.9bn in US Money Laundering Penalties – BBC News’ (BBC, 11 December 2012) <> accessed 14 June 2018

[32]‘FCA Publishes Feedback Statement on Distributed Ledger Technology’ (FCA, 15 December 2017) <> accessed 19 June 2018

[33]‘Best Bitcoin Exchange in UK – Cryptocurrency Exchanges List’ (forexbrokerz) <> accessed 19 June 2018