So-called “cryptoassets” span a wide and rapidly evolving range of digital instruments, although the market continues to be dominated by unbacked “cryptocurrencies” such as Bitcoin and Ether that we do not consider to have any intrinsic value. Given their potential impact on the financial services landscape, we have been paying close attention to cryptoassets for many years. 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.
Innovative technologies have the potential to bring benefits to financial services and the wider economy. Some of these innovations may include distributed ledger technologies such as those used in cryptoassets. 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.
But cryptoassets also pose significant risks. In particular, unbacked cryptoassets pose significant risks to consumers, given their significant price volatility and associated risk of losses. They can consume very large amounts of energy and are also used by criminals in scams, fraud and money laundering.
Effective regulation of cryptoassets should help to foster innovation and maximise any potential benefits of cryptoasset technologies for the UK, while also mitigating risks. We therefore welcome the Government publishing proposals for how it plans to regulate cryptoassets used in financial services. It is important that the Government and regulators strive to keep pace with developments, including by 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.
The extent of the benefits cryptoasset technologies may bring to financial services in the future remains unclear. In the meantime, the significant risks posed by cryptoassets to consumers and the environment are real and present. We therefore recommend that the Government takes a balanced approach to supporting the development of cryptoasset technologies, and seeks to avoid expending public resources on supporting cryptoasset activities without a clear, beneficial use case. The Government’s recent foray into seeking (and subsequently abandoning) the production of a Royal Mint non-fungible token (NFT) is a case in point. It is not the Government’s role to promote particular technological innovations for their own sake.
Consumer speculation in unbacked cryptoassets such as Bitcoin and Ether is one area where we have particular concerns, and think the Government needs to take a different approach in order to better protect consumers from harm. 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. 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 therefore 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 will continue to follow developments in this space as both the industry and the Government’s regulatory approach develop. We are also considering central bank digital currencies separately from the wider cryptoasset market like the Government and Bank of England. In each case our focus will be on ensuring that the right balance is achieved between not standing in the way of productive innovation on the one hand and mitigating risks on the other.