London is the envy of the world as a financial centre, and we can maintain this status with digital assets
Despite the fact that so many of us are still eagerly awaiting the next stage of the important Financial Services and Markets Bill (we are currently between committee stage and report stage in the Lords) we have nonetheless had a busy week of FS debates in Westminster.
The Treasury Select Committee has published a report calling for consumer trading in unbacked crypto to be regulated as gambling. The cross-party Committee of MPs report highlights that cryptocurrencies such as Bitcoin have no intrinsic value and serve no useful social purpose, while consuming large amounts of energy and being used by criminals in scams, fraud, and money laundering.
“Unbacked crypto assets – often called cryptocurrencies – are not supported by any underlying asset. They are the most prominent form of crypto, with Bitcoin and Ether alone accounting for two-thirds of all crypto assets.”
The Committee concludes that cryptocurrencies pose significant risks to consumers and “more closely resembles gambling than a financial service”. They also expressed concern that regulating consumer crypto trading as a financial service – as proposed by the Government – will create a ‘halo’ effect, leading consumers to believe this activity is safe and protected, when it is not. These conclusions led to a strong recommendation that the government regulate crypto as gambling rather than financial services.
I was signed up to speak in a special House of Lords debate on the UK-EU relationship and as well as raising the important topics of fintech, skills, talent, and regulatory accountability I took the opportunity to question the government on their reaction to this report and in particular this recommendation.
“On cryptoassets, would my noble friend the Minister care to comment on the recent Treasury Select Committee report and how one would choose to consider unregulated cryptoassets and their assertion around gambling?
“It is clear that the crypto market moves at pace. It is clear, putting it mildly, that not all within that is necessarily where one would choose to put one’s cash, but we need to have the right approach”
“I wonder whether the Minister has had time to consider the House of Representatives’ financial services inquiry last month. It called the chairman of the SEC before it to consider the whole question of the regulatory approach to crypto assets. There is much for the UK to consider within that.”
The government and regulators, not just in the UK but around the world, are faced with the challenge of balancing innovation and stability, while safeguarding consumers and the wider financial system.
In trad fi, the line between gambling and investment has been established over time and precedence. We are at the early stages of regulating crypto and as the impact (on the economy and people) grows we will undoubtedly reach the end of our risk tolerance and require state intervention.
There are 20,000 crypto assets – a large number of which will be scams but a small number of which will be the next Bitcoin or Ethereum and all that entails. According to HM Revenue and Customs around 10 per cent of UK adults hold or have held crypto assets.
It is right that we ask is caveat emptor sufficient for this scale of risk?
In Belgium, the regulator is insisting that crypto ads carry the message ‘the only guarantee in crypto is risk’.
But what of the opportunity and potential for growth and innovation?
This brings us right back to the need to balance innovation, stability, and consumer protection. Regulation can and should have a facilitation role as well.
Hong Kong has just announced they will be exploring formal authorisation of large digital asset trading by retail investors – what has been described as turning Hong Kong into a “financial Petrie dish”.
What is the “right” approach?
During my speech yesterday I went on to say:
“Similar to consumer protection and competitiveness considerations, we should not need either to consider completely shutting down crypto assets or to believe that they are the latest, greatest thing. We should be able to approach them with rational optimism, with the right regulatory framework in place. I am sure that my noble friend agrees that what the Bill currently proposes on the digital assets space is positive. We should commend the work of the Law Commission on digital assets and decentralised autonomous organisations.”
I was grateful for the Minister’s response:
“The Government have set out their approach towards crypto regulation in our recent consultation, and we will reflect carefully on the responses to that. Our approach is driven by embracing the opportunities of the technology that it represents while also protecting consumers against the risk. [Lord Holmes] talked of rational optimism and having the right regulatory framework; I believe that is a good way to describe the Government’s approach.”
There is no expectation that the Government would necessarily accept a SC report and indeed elsewhere the report pointed out that technologies underlying crypto assets may bring benefits to financial services, particularly for cross-border transactions and payments in less developed countries. The group of MPs call on the Government and regulators to keep pace with developments so potentially productive innovations are not unduly constrained.
I welcome and support the Government’s current approach. London has been a successful financial centre for hundreds of years, to the envy of many other places. We have an excellent regulatory tradition and I have high hopes for the good that will be delivered by the FMI sandbox – provided for in the FS&M Bill. I firmly believe we need to manage the risk but that the safest and best way of developing the right regulatory environment is by keeping crypto onshore.