This was the first oral evidence session by the committee as part of its inquiry into cryptoassets. This is also the first time since 2018 that the committee has looked exclusively at crypto by way of an official inquiry.
The session was chaired by the newly elected chair of the committee Harriett Baldwin MP who has replaced the former chair of the committee Mel Stride MP following his appointment to a ministerial role in the Department for Work and Pensions by new Prime Minister Rishi Sunak.
Also attending the committee alongside the chair for today’s session were:
Rushanara Ali MP (Labour)
Anthony Browne MP (Conservative)
Alison Thewliss MP (SNP)
The session covered a broad range of topics from the recent collapse of FTX, the intrinsic value and use cases for cryptoassets in general, volatility in the market, consumer protection issues, taxation and the environment.
The session heard testimony from:
Ian Taylor, Executive Director at CryptoUK
Tim Grant, Head of EMEA at Galaxy Digital
Susan Friedman, Head of Policy at Ripple
Daniel Trinder, Vice President Government Affairs, Europe and MENA at Binance
Key points from the session:
The session began with questions about the role and potential of cryptoassets with the panel stressing that the cryptoasset sector eoncompasses a wide range of different assets with different purposes and use cases.
There were questions about the utility of some tokens given the vast number of different types of assets in the market. The panel acknowledged that some assets had greater utility and benefit than others but also stressed that this provided choice for consumers.
The panel also advised that some cryptoassets can be risky and volatile and that there is a risk people can lose some or all of their investment and stressed the importance of ‘doing their homework’ when investing.
It was noted that in the committee’s last inquiry in 2018 the industry had called for the need for regulations and that there have been poor business practices by some actors in the sector since then.
The committee quizzed the panel on the intrinsic value of cryptoassets and why people might be minded to invest in crypto.
Ian Taylor highlighted recent research from HMRC demonstrating the number of consumers now holding some form of cryptoasset and also highlighted the range of different use cases within crypto including payment and utility tokens and stablecoins.
There were several questions from the panel on the recent market crash and the fall in the value of certain tokens. The committee was keen to learn about the reasons behind the fall in value.
Some panellists stressed the importance of nuanced regulation to cater for the diverse nature of the cryptoasset ecosystem and also the importance of a regulatory framework for consumer protection.
The committee asked panellists about the positive contribution of crypto and the sector to the UK economy.
The panel articulated a number of benefits from the crypto sector ranging from economic impact and employment, citing examples of offices in the UK even in instances where they may not be regulated in the UK.
Ian Taylor also highlighted the broader potential benefits from the sector to the UK including jobs and investment, tax revenue, as well as digital payments and broader financial inclusion and societal benefits.
The committee asked panellists about the lessons that need to be learned from previous market failures. The panel agreed that there were lessons to be learned but that there were also distinctions to be drawn between previous failures and that of FTX and also that policymakers should be careful not to tar the entire sector with the same brush over individual operator failures.
Ian Taylor also highlighted the importance of good governance and regulation in this regard including examples of operators with auditable reserved or holding assets in insured banks. The panel also spoke about the need for more transparency and clarity in the market in terms of market and the importance of guaranteeing proper use of consumer funds.
The panel suggested the MiCA went some way to addressing some of these concerns through disclosures and parameters, asset backing and the segregation of funds, and that some of these elements could be incorporated in the UK.
Ian Taylor said that unlike the EU the UK has thus far adopted a piecemeal approach to regulation and that CryptoUK has been advocating for a more collaborative and joined up approach by Government also proposing the appointment of a ‘crypto tsar’ by Government as a potential solution.
The committee asked about the potential use case and benefits of Stablecoins which were described as the step evolution in digital payments and the panel also highlighted some of the benefits of stablecoins as a solution to some current issues in traditional finance such as transaction fees and settlement times as well as cross border payments.
The committee was also interested in NFTs, primarily in terms of their legitimacy and use case as well as any consumer protection risks.
Ian Taylor highlighted the range of benefits and potential from NFTs saying they had brought new users to the sector and that global brands were embracing this new form of technology, however urged Government to proceed slowly when it comes to regulating this new type of asset whilst it properly evaluates and assesses the various issue involved.
The committee focused quite significantly on the collapse of FTX especially in terms of any impact on UK consumers specifically and also whether this had damaged trust in the broader crypto sector.
The panel stressed that this example was largely distinct from other market failures, that it had largely impacted institutional investors, and that all signs pointed to internal mal practice rather than an inherent issue in terms of the variability of the crypto sector as a whole.
The panel agreed that this highlighted the need for regulation which the sector has been calling for since 2018.
There was also specific interest from the committee in terms of Binance’s specific involvement in the events surrounding FTX’s collapse and the committee requested further information from Binance in terms of its involvement.
The committee was keen to learn from the panellists what specific improvements to regulation could be made.
The panel broadly agreed that there was scope for better engagement and communication with the sector by Government and regulators.
Ian Taylor said that the sector awaits details about the Cryptoasset Engagement Group announced by Treasury earlier this year, and called for better resourcing and a more detailed understanding of the sector by the FCA, as well as for the FCA to build on the sector engagement it has done thus far.
Ian also raised the issue that many crypto firms are still unable to secure access to basic banking services which presents a barrier to growth.
There were also questions from the committee on the low levels of consumer awareness around cryptoassets and what more could be done to improve this, as well as questions about the potential for self regulation of the sector and if this would be effective.
The committee asked a number of questions on the subject of economic crime in relation to crypto.
The panel was clear that the sector does not want to see economic crime and that crypto has a positive role to play through its inherent transparency and plays a proactive role in helping to work with law enforcement.
Ian Taylor also cited research from Chainalysis on the scale of illicit activity in crypto which he said was less than 1% of all transactions.
The committee asked several questions about the potential use case and benefits of CBDCs including how these could potentially fit alongside the wider cryptoasset sector. The committee asked specifically if crypto operators felt that CBDCs were a threat in terms of competition.
Ian Taylor said he believed that CBDCs could complement the wider sector and that public – private collaboration could be beneficial but that there were still issues in terms of design that needed to be carefully considered.
The committee asked about an appropriate approach to taxation of cryptoassets and specifically in relation to Capital Gains Tax.
Ian Taylor said that this was a clear example of the need for a joined up and consistent approach to crypto policy across Government citing the example of the recent HMRC guidance issues in relation to lending and staking which was issued without consultation or engagement with the sector. He also stressed the importance of user friendly guidance which was not overburdensome or overly complicated for consumers.
The committee asked the panel to back up its claims that cryptoassets could help improve financial inclusion asking for specific examples of how this could work in practice particularly in relation to the unbanked or older generations.
The committee also asked about the advertising and promotion of cryptoassets, and specifically NFTs and fan tokens in sport.
Ian Taylor said that fan tokens played an important role in providing a new revenue stream for football clubs as well as providing engagement opportunities for fans.
Ian also highlighted some of the challenges in relation to financial promotions at present and the challenges surrounding authorising and approving promotions.
The committee asked whether this sort of token use was similar to some of the issues policymakers have seen in relation to gambling to which the panel disagreed.
The committee also asked about the environmental impact of cryptoassets and the ethics of supporting an energy intensive sector during a global energy crisis. The panel said that this was less of an issue in the UK and spoke about the geographical shift of many mining operations specifically to the US.
Ian Taylor said that there was a shift towards more renewable energy use and highlighted the work by Zumo as an example in terms of their Zero Hero renewable energy pilot programme.