Some considerations on future legislation and shared governance
It is clear that there are still many gaps and unanswered questions that need to be considered by the UK legislator. These gaps also involve considerations of appropriate legislative and policy actions that should be taken in the near future to tackle the phenomenon effectively and reduce the possibility of cryptocurrencies being used to facilitate money laundering in the UK property market.
As for the legislative response, comprehensive regulation of cryptocurrencies that would cover all sectors of the UK economy, including the real estate market, should be delivered. Real estate agents think that, at present, there is a problematic lack of regulation and that substantial work is required by the government.[1] [2] Despite the general concerns associated with the use of cryptocurrencies in the sector, future legislation should not include a blanket ban on them since they can also provide some benefits.[3] On the contrary, cryptocurrency transactions need to be regulated with effective and discerning provisions, especially in light of the possible future challenges (including Brexit) for the UK AML system.
Any future legislation on the topic should also include training requirements for real estate professionals. Some interviewees suggest that more guidance should be provided on the topic by the government, Her Majesty’s Revenue and Customs (HMRC), National Crime Agency (NCA), and other national agencies that deal with the real estate market.[4] This guidance should clarify important aspects of the use of digital currencies to buy real estate, such as how real estate agents can perform CDD checks effectively and how they can trace the source of funding. Moreover, national agencies should not simply urge real estate agents to avoid these types of transactions, but they should be able to provide more help to real estate professionals who want to advance transactions using cryptocurrencies.[5]
Regarding the future perspectives, not all real estate agents interviewed have a clear idea of the future of cryptocurrencies in the UK economy in general and the property' market specifically. Some argue that this will be a huge issue for the real estate market.[6] Others think that the blockchain technology’ might be an important tool to improve the sector and speed up transactions.[2] Others are waiting to sec how things will develop and how the government will regulate the phenomenon.[5] These opinions indicate that there arc two points of interest for real estate agents that will be relevant in the future of cryptocurrency transactions in the UK property market.
First, real estate agents are keen to understand what will happen with an increased use of cryptocurrencies in property transactions. Some professionals seem to be more positive than others, but there is a certain level of growing expectation linked to the future of these transactions. Moreover, despite the negative comments mentioned previously, there persists positive interest in these types of transactions, especially for the benefits that they might bring to the sector and the professionals involved in it. This perspective indicates the need for a balanced approach in the future regulation of cryptocurrencies in the real estate market (and in other sectors). This means that there is a need, on the one hand, to guarantee adequate checks on the transactions carried out in the sector to avoid illicit activities and prevent money laundcrers from profiting from it and, on the other hand, to allow the use of innovative methods of payment that might facilitate transactions and create a more streamlined process for the business.
Second, attention should be directed to the legislative approach that the UK government should take with regard to cryptocurrencies in general and their use in the real estate market specifically. As discussed earlier, real estate agents have expressed many concerns about the legislative gaps existing in the UK AML system on the topic and the lack of clarity on the issue by institutional agencies. Whilst at present, estate agents are left in a legislative limbo, there are certain
The use of cryptocurrencies in the UK 151 expectations that in the future, the phenomenon will be properly regulated, and precise guidelines will be provided to all those involved in the sector. This requires not only a legislative response that will address the obligations of real estate agents when dealing with cryptocurrencies but also adequate policies that will act as points of reference for the professionals to avoid inconsistency and loopholes.
Detailed regulation of cryptocurrencies is needed in specific sectors of the UK economy, including the real estate market. Future regulation should not ban the use of cryptocurrencies, but it should provide for a balanced legislative and policy framework where these currencies can be used following precise provisions and under the control of AML supervisory bodies.[9] Future legislation should address the two main problems of the use of cryptocurrencies in the real estate market: (i) the anonymity of the transactions, where the parties’ identities are unknown or difficult to verify, and (ii) the limited number of traditional intermediaries subjected to AML obligations (such as banks) and the challenges arising for AML checks.
Given the lack of knowledge about the phenomenon, the diffidence that accompanies real estate transactions involving cryptocurrencies, and the complexity of these transactions (particularly to conduct CDD checks), training should be provided for real estate agents (for instance by HMR.C). These activities should be designed to improve the technical skills and capacities of real estate professionals (especially real estate agents) to deal with cryptocurrcncy transactions and to carry out proper CDD checks in these cases by identifying the parties and assessing the nature and sources of funds. Moreover, the government and relevant national agencies should guarantee financial and logistic assistance to real estate agents who do not have the necessary resources by way of personnel and IT services to conduct AML CDD checks over real estate transactions in which cryptocurrencies are used (particularly to identify the customer, the source of funds, the beneficial owner in these highly anonymous and IT-complex transactions). This further aid should be tailored, considering the size and financial status of the real estate agencies requiring such assistance and the existence of IT services that could be used by the agencies in support of their activities.
The regulation of property transactions involving cryptocurrencies should also become the occasion for developing a model of shared governance.[10] In the United Kingdom, a good model of governance should include both the action of national agencies involved in AML activities and the direct participation of real estate agents who conduct the CDD checks provided in the Money Laundering Regulations 2017. Shared governance does not mean that real estate agents will be put at the same level as the legislator in the norm-making process, but it refersto the possibility to be heard and to have their views properly considered. This regime would be similar to what happens, for instance, in the financial sector, where the relevance of private actors is growing, and ‘'the agents in charge of the ‘doing’ end up shaping the content of governance too.’
In this regard, it is posited that real estate agents might make two distinct contributions to the UK AML system. On the one hand, real estate agents should be consulted by national authorities in different phases of the development of the AML system. In particular, they should be involved in the pre-legislative phase (as already happens with the opening of public consultations) but also in the concrete implementation stage. This means that there should be a process of consultation with relevant stakeholders (the real estate professionals) on a regular basis, in which there is an assessment of the practice of AML in the specific sector of relevance. On the other hand, real estate agents should be actively involved in the policy-making process as effective gatekeepers of the property' sector. In contrast to what happens with the 2017 Regulations, AML obligations should be conceived not as top-down provisions but as shared-responsibility norms that identify private actors (including real estate agents) as ‘active’ and not ‘passive’ recipients of national legislation. Consequently, real estate agents should be able to inform the provisions that relate to their sector and activities, and they should be able to influence the decisions taken at the national level with their practices.
The shared governance model should apply to all property transactions in the United Kingdom, but, as explained in this chapter, it would be particularly relevant for real estate transactions involving cryptocurrencies. Indeed, here the complexity of the operation requires direct control by real estate agents as the first subjects money laundcrers encounter in the transaction (alongside solicitors). Therefore, there is a need for more cooperation between national authorities and the professionals who deal with property' transactions on a daily basis.
Conclusion
This chapter has critically analysed the use of cryptocurrencies in the UK real estate market and discussed some of the money laundering risks associated with these transactions. In particular, it has examined relevant points that have emerged from the literature on cryptocurrencies, pointing out their most problematic features that might be of concern for the UK AML system. Moreover, attention has been given to the specific issues emerging from the perspective of real estate agents interviewed for this study, considering important aspects of their AML obligations that might be undermined or complicated by the use of cryptocurrencies.
From the foregoing study, the author advances two ideas. First of all, the use of cryptocurrencies in the UK real estate market is a complex phenomenon that
1
Tsingou, E., ‘New governors on the block: the rise of anti-money laundering professionals’ (2018) 69(2) Crime, Law and Social Change 191, 204.
The use of cryptocurrencies in the UK 153 cannot be cither disregarded or overestimated given the lack of official data on its extent. It requires necessary attention by national authorities with a balanced approach, meaning regulation capable of promoting the positive aspects of cryptocurrency transactions and limiting possible abuses and illicit activities. To this end, the national legislator should carefully assess the features of cryptocurrencies that make them attractive to money launderers, with a specific focus on the real estate sector. In particular, attention should be given to two aspects discussed in the chapter. The first aspect concerns the structural elements of cryptocurrencies. These include the issue of anonymity and the lack of traditional intermediaries involved in the transaction. These elements should be tackled by the legislator to avoid loopholes and help real estate professionals deal with cryptocurrencies. The second aspect relates to the practical approaches of real estate agents to transactions that include cryptocurrencies. In this regard, the legislator should consider various aspects: from the procedures to be followed to the training; and from the financial and logistic sources at the disposal of real estate agents to the guidance provided by the HMRC and NCA.
Second, the approach to property' transactions involving cryptocurrencies should become the occasion for developing a model of shared governance. This model would see both the participation of national agencies and real estate agents that have to perform the CDD checks provided in the 2017 AML Regulations. This model of shared governance should not create equal obligations and level of responsibilisation for the institutional actors and the real estate professionals. On the contrary, it should lead to a distribution of functions and duties between the two, but with the possibility for real estate agents to have their practice and opinion properly considered. In so doing, the fight against money laundering would see a better, more informed legislation and policy system put in place, with a combination of theoretical and practical considerations. As a final caveat, it is worth noting that the shared governance model proposed is not intended as a substitute of the existing UK AML framework but as a part of it. So, the model should work as a defined part of the AML framework, integrated as an additional section or regulation to the 2017 AML Regulations. In other words, the new model of shared governance would improve the UK AML framework with a suitable transition from lex lata (the law as it exists) to lexferenda (the law as it should be).
1
A general analysis on the use of cryptocurrencies in other sectors and some data can be found in the House of Commons Treasury Committee, Crypto-Assets (2017-19 HC 910) 5-7; 12-15.
- [1] See European Parliament, Virtual Currencies and Terrorist Financing: Assessing the Risks and Evaluating Responses, PE604.970, May 2018; Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018, OJ L156/43; Egan, M., ‘A Bit(Coin) of a problem for the EU AML framework’ in King, C., Walker, C., and Gurulé, I. (eds.), The Palgrave Handbook of Criminal and Terrorism Financing Law (Palgrave MacMillan, 2018).
- [2] Interview 10.
- [3] Interviews 9; 10.
- [4] Interviews 8; 13; 14.
- [5] Interview 9.
- [6] Interview 14.
- [7] Interview 10.
- [8] Interview 9.
- [9] Interestingly, similar considerations are made by the House of Commons Treasury Committee, Crypto-assets (2017-19 HC 910) 16ff.
- [10] On governance and cryptocurrencies, see Campbell-Verduyn, M., 'Bitcoin, crypto-coins, and global anti-money laundering governance’ (2018) 69(2) Crime, Law and Social Change 283.
