Following the statement issued by the Treasury Select Committee noting that:
‘Unbacked cryptoassets have no intrinsic value, and their price volatility exposes consumers to the potential for substantial gains or losses, while serving no useful social purpose. These characteristics more closely resemble gambling than a financial service, an impression reinforced by the evidence we have received of consumer behaviour.’
CryptoUK release the following:
CryptoUK strongly disagrees with the Treasury Select Committee’s conclusion, and we are both concerned and disappointed by these claims which are unhelpful, false, fundamentally flawed and unsubstantiated. The statement fails to reflect the true nature, purpose and potential of the crypto industry.
On the Treasury Select Committee’s claims of equivalency to gambling conclusion and a claimed lack of technology use cases, Ian Taylor, Board Advisor at CryptoUK, said:
‘The Treasury Select Committee’s statement is in direct conflict with HMT’s consultation proposals on bringing activities, including operating a trading venue and performing intermediary activities, into the existing financial regulatory perimeter.
Professional investment managers see Bitcoin and other cryptoassets as a new alternative investment class – not as a form of gambling – and institutional adoption of unbacked crypto assets has increased significantly.
Furthermore, gambling is exempt from capital gains tax. Does the Government really wish to exclude tens of millions of pounds in tax income from gains made by the buying and selling of unbacked crypto assets?’
Speaking about the claimed lack of technology use cases, Mr Taylor added:
‘The TSC’s statement does not reflect the evidence we gave the Treasury Select Committee. We set out strong use cases and measures implemented by the industry to track, monitor and report, with robust analytics to mitigate fraud and work closely with regulators and law enforcement agencies to address this.
Crypto has been crucial in serving the unbanked as a force for good, making secure and efficient peer to peer payments available to the most vulnerable in our society. Also, the report bears no mention of Tokenization of financial products which we specifically highlighted in the evidence session as a key benefit of the technology. The ability to represent financial products such as bonds and equities on a blockchain defers a host of benefits. These include faster settlement times, reducing intermediaries thus saving costs, new access to markets, increased liquidity, and automation through smart contract technology. We acknowledge that consumer risk exists, and this should be mitigated through education, awareness and a more robust regulatory framework. But equating cryptocurrency with gambling is both unhelpful and untrue.’
Below is a detailed response from CryptoUK to the Treasury Select Committee report’s conclusions.
TSC conclusion 1:
We recognise the potential for some forms of cryptoassets and their underlying technologies to bring benefits to financial services and markets. The most convincing use case we have heard is the potential for cryptoasset technologies to improve the efficiency and reduce the cost of making payments, especially cross-border and in lower income countries with less developed financial sectors. An effective regulatory framework would support development of such technologies in the UK, while also mitigating some of the risks cryptoassets pose. We therefore welcome the Government publishing proposals for how it plans to regulate cryptoassets used in financial services.
● CryptoUK supports this and agrees with the recommendation to support the Government as it moves forward with the regulatory consultation work. We have responded to the consultation highlighting the key areas that we believe the UK Government/HMT should be focused on to ensure the regulatory framework is fair, proportionate, balanced and fit for purpose for an innovative and evolving sector and industry.
● In addition, we believe crypto extends beyond efficient payment mechanics and financial markets and has significant potential to establish a competitive innovation ecosystem in the UK.
TSC conclusion 2:
It has been more than four years since our predecessor Committee’s Report called for greater regulation of the cryptoasset industry, and the FCA faces challenges in implementing existing and proposed crypto regulations. It is important that the
Government and regulators strive to keep pace with developments, including ensuring that the Financial Conduct Authority’s authorisations gateway is open and effective, so that potential productive innovation in financial services is not unduly constrained. (Paragraph 31)
● We continue to encourage the Government to ensure that as the FCA progresses towards establishing and implementing regulations for the sector, they are informed and well educated on the nuances and unique challenges. We lobbied this same committee in 2018 to encourage the implementation of regulation for the industry, and to date no actions or recommendations have been made in response to this. By establishing future regulatory frameworks that are bespoke and tailored to suit the evolving way the industry will develop the FCA is best positioned to provide the duty of care to consumers.
● To add this will help the sector to innovate, grow and reach the Government’s ambitions to make the UK a global hub for crypto and digital assets.
● We welcome the opportunity to ongoing dialogue with HMT and the FCA to find solutions to ensure these objectives are met.
TSC conclusion 3:
While we support financial innovation where there are potential benefits, the extent of the benefits cryptoasset technologies may bring to financial services in the future and the areas in which the technologies may have the most impact— remains unclear. In the meantime, the risks posed by cryptoassets to consumers and the environment are real and present.
● This is a concerning conclusion. Based on the evidence provided and within the report some of the key areas where cryptoasset technologies will have an impact are set out.
- Payments – The report highlights how cryptoassets are facilitating lower cost and highly efficient cross border and real-time payments.
- Serving the ‘unbanked’ – Availability of secure and efficient peer to peer payments, enabling opportunities for wider financial inclusion and the global ‘unbanked’ population to have access to control how and where they transfer their assets
- Institutional adoption – The cryptoasset sector continues to evolve and whilst the use cases for the technology grows and matures, the opportunities will also continue to develop and will be adopted by users and institutional market participants.
- Tokenization – The report bears no mention of Tokenization of financial products. In the evidence session this was specifically highlighted as a key benefit of the technology. The ability to represent financial products such as bonds and equities on a blockchain defers a host of benefits, including – faster settlement times, rescue intermediaries thus reducing costs, new access to markets, increased liquidity, automation through smart contract technology.
- 24/7/365 – The incumbent financial system does not operate within 24/7/365 parameters and yet it aims to serve the global internet economy. Crypto assets and underlying tech offer the only viable alternative to support economic growth for the Information Age. Assets need to move at the speed of information and failure to recognise crypto as the only medium that can support this paradigm will create huge jurisdictional disadvantages when it comes to innovation.
- It is noted that consumer risks exist, and these should be mitigated through education, awareness, and a more robust framework giving clarity on the regulatory landscape in which they operate. It is also worth noting that fraud and scams, whilst considered high for this industry, are usually (upon investigation) frauds utilising crypto as an incentive, targeting individuals in social engineering or phishing schemes. More often than not, crypto is actually not involved at all, only the promise of delivery or financial gains – similar to any other financial scam.
TSC conclusion 4:
We recommend that the Government takes a balanced approach to supporting the development of cryptoasset technologies. It should seek to avoid expending public resources on supporting cryptoasset activities without a clear, beneficial use case, as appears to have been the case with the Royal Mint NFT. It is not the Government’s role to promote particular technological innovations for their own sake.
● We agree that any use of Government resources should be proportionate. However, given the earlier comments around the lack of understanding and regulation balanced with the the growing adoption of crypto and digital assets within the UK population, there is a duty of care to ensure that the right level of protection is in place for UK consumers and for organisations operating in this sector to ensure they can retain a competitive edge in a growing global industry.
TSC conclusion 5:
Regardless of the regulatory regime, their price volatility and absence of intrinsic value means that unbacked cryptoassets will inevitably pose significant risks to consumers. Furthermore, consumer speculation in unbacked cryptoassets more closely resembles gambling than it does a financial service. We are concerned that regulating retail trading and investment activity in unbacked cryptoassets as a financial service will create a ‘halo’ effect that leads consumers to believe that this activity is safer than it is, or protected when it is not.
● We strongly disagree with this conclusion and reject this unhelpful, false and unsubstantiated equivalency with the gambling industry. The comparison to gambling is fundamentally flawed and does not reflect the nature, purpose or potential of the crypto industry.
● We have not seen any other jurisdiction taking this approach, and contrary to this, we are seeing proactive attempts to implement regulation in relation to cryptoassets.
● The crypto and digital asset industry provides a wide and varied range of financial services, including investment vehicles and transactional mechanisms, and should be regulated accordingly. Broadly we advocate for a same risk, same regulatory approach methodology, whilst calling for nuanced regulation where appropriate as befits an innovative and evolving sector.
● The Government has set out its aspiration for the UK to be a global crypto hub and set out within its recent consultation paper a large number of scenarios and questions to understand the way that transactions are undertaken and how these should be classified and regulated.
● This approach is in conflict with the government’s current proposals as per the HMT consultation (closed Apr 30th), on bringing a number of the activities (including operating a trading venue and performing intermediary activities into the existing financial regulatory perimeter.
● Furthermore gambling is exempt from capital gains tax. Does the UK government wish to exclude tens of millions of pounds in tax income from gains made by the buying and selling of unbacked crypto assets?
● Liking this sector to gambling is not a like for like comparison and we would strongly advise that the UK Government does not take this approach.
TSC conclusion 6:
We strongly recommend that the Government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service, consistent with its stated principle of ‘same risk, same regulatory outcome.’
We strongly disagree based on the comments made above. Taking this approach will not take into account the nuances of the sector and the real opportunities for inward investment and growth for the UK economy as a whole. No other global jurisdiction has taken this approach and referencing MiCA in the EU, we need to be taking a bespoke and tailored approach for regulation within the industry to ensure the UK does not become a hostile environment for businesses to be domiciled. Likewise, this approach will not provide the right level of protection for UK consumers – they will likely take opportunities to invest and transact with non-UK organisations which is wholly against the objective of protecting these consumers through regulation.
Treasury Select Committee conclusion
Our predecessor Committee published a Report in 2018 that called for greater regulation to protect consumers from an industry it described as a “wild west”. Nothing we have heard in our current inquiry has changed that impression.
CryptoUK concluding response:
We are very disappointed that following the testimonies given at the inquiry, including those provided by CryptoUK and our members that the Treasury Select Committee has reached this conclusion.
To assert that the industry is not striving to protect consumers overlooks both compliance with new regulations, such as the Money Laundering Regime, and the broad range of Anti-Money Laundering, Counter Terrorist Financing and fraud prevention solutions proactively invented and implemented by industry participants.
Additionally, it fails to recognise the efforts of industry bodies (including CryptoUK, Payments Association, Stop Scams and Action Fraud), and digital assets businesses themselves to offer free education to consumers looking to participate in crypto.