The House of Commons Treasury Committee has issued a report on cryptoassets. It points out that 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 the Committee does not consider as having any intrinsic value. Given their potential impact on the financial services landscape, the Committee has been paying close attention to cryptoassets for many years. Its predecessor committee published a report in 2018 that called for greater regulation to protect consumers from an industry it described as a “wild west”. It says that it has heard nothing in the latest inquiry to change that impression.
It points out that 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 the Committee has 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.
However, it also says that cryptoassets may also pose significant risks. In particular, unbacked cryptoassets pose significant risks to more vulnerable 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.
The Committee says that effective regulation of cryptoassets should help to foster innovation and maximise any potential benefits of cryptoasset technologies for the UK, while also mitigating risks. Therefore, the Committee welcomes the UK government’s proposals about its plan to regulate cryptoassets used in financial services. It says 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 Committee also recommends 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. It mentions the government’s recent foray (NFT) as a case in point, and says “it is not the Government’s role to promote particular technology innovations for their own sake.”
Consumer speculation in unbacked cryptoassets such as Bitcoin and Ether is one area where the Committee has particular concerns. It believes that the government needs to take a different approach to better protect consumers from harm, saying “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”. The Committee says that these characteristics more closely resemble gambling than a financial service, an impression reinforced by the evidence it has received of consumer behaviour. It has concerns 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. It therefore strongly recommends that the government regulates retail trading and investment activity in unbacked cryptoassets as gambling rather than as a financial service, which it believes would be consistent with its stated principle of “same risk, same regulatory outcome”.
Finally, the Committee intends to follow developments in this space as both the industry and the government’s regulatory approach to develop. It is also considering central bank digital currencies separately from the wider cryptoasset market like the government and Bank of England. In each case its 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.
Despite many calls to do so, the UK government decided not to regulate loot boxes as gambling. It did mention cryptoassets in its Gambling White Paper, but has not suggested regulating them beyond its financial services plans. It has until 17 July to respond to the Committee’s report.
