Evidence submitted by Coinfloor Limited (DGC0062)

Supplementary Written Evidence from Coinfloor Limited

Following our original written submission and Coinfloor’s CEO Obi Nwosu’s oral evidence provided to the Treasury Select Committee on the 20th June 2018, we thank the Committee for allowing Coinfloor to submit supplementary written evidence.

1.                About Coinfloor

Founded in the UK in 2013, Coinfloor is one of the longest established groups of cryptocurrency exchanges globally. Our exchanges are designed for institutional and sophisticated investors and traders rather than the retail market. This is reflected by our requirement for all potential investors to have a minimum deposit amount of £5,000, per deposit. We deliver trust and confidence amongst our investors and traders in numerous ways, such as through:

•                   100% Multi-Signature cold storage custodian services, which safeguards client portfolios from theft, loss or security issues associated with partially online or online-only storage (‘warm or hot storage’).
•                   Monthly Provable Solvency reports which give investors’ confidence that Coinfloor has sufficient Bitcoin liquidity to manage market fluctuation.
•                   Strict governance procedures as well as robust Know Your Customer (KYC) and Anti-Money Laundering (AML) policies which are modelled against regulatory standards.
•                   We only support cryptocurrencies that show a significant use case. Currently Coinfloor lists Bitcoin and Bitcoin Cash only. We do not currently list Initial Coin Offerings (ICOs).
•                   Whilst some exchanges do not currently publish their location, Coinfloor was one of the first to make public its registered office.

2.                OTC clarification

We wish to clarify a key point concerning OTC trading, raised by Ms. Kaminska during the 20th June oral evidence session. OTC trades are agreed privately and then settled on the blockchain. Ms. Kaminska stated that OTC trades are not going through the blockchain system at all.  However, many OTC trading firms require trades to be settled on chain within a predefined period of time.

3.                The need for regulation

The current lack of regulation presents risks to consumers and is stifling consumer trust and institutional investment which in turn is inhibiting innovation. We believe that regulation is needed to increase institutional investment which, in turn, will ultimately increase liquidity and therefore subsequently contribute to the stabilisation of price volatility.

4.                5th Anti-Money Laundering Directive

Coinfloor recognises that some cryptocurrencies are being used for illicit means and the need for regulation to combat this. Chainalysis, which provides a Blockchain Intelligence Platform, has set out that ‘less than 1% of bitcoin transactions went to darknet market in 2017, compared to 30% in 2012, as detailed here (also in response to Q150 as detailed on the transcript).

Coinfloor employs trade surveillance technology to detect potential market manipulation and halt trading if suspicious activity is identified. We work closely with the National Crime Agency and immediately report any potential criminal activity to them via Suspicious Activity Reports. We can also monitor the source and destination of funds via cryptographic tools.

We urge the UK Government to transpose the 5th Anti-Money Laundering Directive into UK law as quickly as possible. The Directive extends Anti-Money Laundering (AML) and Counter Terrorism Financing (CTF) rules to entities that hold, store and transfer digital currencies. Implementation of the Directive will put much greater onus on cryptocurrency exchanges and associated actors to identify their customers and report suspicious activity. We believe that the Financial Conduct Authority are best placed to oversee this piece of legislation.

5.                Further regulation

We welcome the establishment of the Cryptoassets Taskforce. The taskforce is an important first step and will help to ascertain what further regulation is required. We envisage that future regulation may be required around how exchanges hold cryptocurrencies in a safe manner. In this regard, Coinfloor operates a 100% Multi-Signature cold storage policy meaning that all of our clients’ cryptocurrencies are stored securely offline - adhering to similar high security standards as the Bank of England.

The introduction of regulation will also likely result in the development of ancillary services and supporting infrastructure. This includes the provision of insurance products which would protect against possible consumer harm.

6.                Ensuring cryptocurrency exchanges adhere to the highest possible levels of

security

Coinfloor are concerned by the hackings that have taken place at exchanges. We note that these have tended to take place at exchanges that operate some form of hot or warm storage. In other words, such exchanges hold client cryptocurrencies that are fully or partially online, exposing them to remote hacking from unidentified third parties. We also note that some of the exchanges that have been hacked have decided to move some or the remainder of their assets to cold storage.

We encourage all exchanges to operate a 100% cold storage policy as Coinfloor does. Coinfloor also supports its 100% cold storage policy with strong IT and operational security mechanisms.

7.                The responsibilities of the cryptocurrency sector

In the absence of a regulatory framework, we believe it is fundamentally important that companies in this sector operate in a responsible manner. We urge the Committee to look at the steps that Coinfloor have taken in this regard - as outlined above in section 1: ‘About Coinfloor.’

8.                The opportunity for the UK

If the UK is to truly benefit from the deployment and wider uptake of cryptocurrencies, we believe that the following steps need to be undertaken:

•                   The UK should be amongst the first EU member states to transpose the 5th Anti-Money Laundering Directive into domestic law, with the FCA overseeing its implementation.
•                   The Cryptoassets Task Force should ensure regular dialogue with the sector and this should be the precursor to more regular dialogue between policymakers, regulators and industry.
•                   Regulation beyond the 5th Anti-Money Laundering Directive should examine how exchanges hold cryptocurrencies in a safe manner and thereby reduce vulnerability to hacking.
•                   Exchanges should employ mechanisms to detect market manipulation and suspicious activity.
•                   Policies need to be introduced to ensure consumers are treated fairly and there should be means to exclude bad actors. This should include: Know Your Customer (KYC), Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) requirements; proof of source of funds requirements; and suitable advertising regulations in line with those applied to financial products.

We would be happy to provide the Committee with further details of any of the topics outlined above or indeed made during Coinfloor’s oral and original written evidence.

July 2018