Cryptocurrency Regulation

Wednesday 25th January 2023 Westminster Hall

09:30

[Esther McVey (in the Chair)]

I will call Dr Lisa Cameron to move the motion and then call the Minister to respond. As is the convention in 30-minute debates, there will not be an opportunity for the Member in charge to wind up,.

[Dr Lisa Cameron (East Kilbride, Strathaven and Lesmahagow) (SNP)]

I beg to move,

That this House has considered regulation of cryptocurrency.

It is a pleasure to serve under your chairship today, Ms McVey. As Chair of the crypto and digital assets all-party parliamentary group, I am delighted to be able to raise this important sector of innovation. I thank the Minister for taking the time to respond today.

This is not the first time that cryptoassets have been debated in the House of Commons. Over the last 12 months, there has rightly been increased interest in the growth of the sector from the media and from colleagues in all parties across this House and the House of Lords. I am pleased by the increased interest, particularly in the work that we have been doing to bring ourselves up to speed with the sector. We have found that millions of people in the United Kingdom already own some form of cryptocurrency, yet there has not been as much discussion about it as was needed, particularly in terms of regulation.

Regulators around the world are now racing to develop their own frameworks for crypto. Recently, the European Union developed its markets in cryptoassets regulation—MiCA—and I look forward to hearing more about that with the all-party parliamentary group in the months to come. Whether people voted for Brexit and agree with it or not, it is where we are, and the UK has an opportunity to create its own bespoke regulatory framework for cryptocurrency.

Recent events, such as the collapse of the crypto exchange FTX, have focused minds and highlighted the importance of ensuring that consumer protection is at the heart of everything that we do. My own journey into this space started when a constituent said to me, “Who do I contact in Parliament? I have been following a scam online linked with cryptocurrency.” When I looked into what was happening at that point, there was no all-party parliamentary group on the subject and I was not sure where to direct my constituent, so, leading on from constituents’ concerns, we set one up. It is vital, given what has happened this year, that regulation and a framework are taken forward at pace.

The UK already has a rich legacy and strong track record as a leader in financial services and fintech, so there is huge potential here for economic growth, jobs and skills from the sector. As the mum of a 14-year-old who is choosing her subjects at school, I have been looking at reports on jobs for the future. She thought that, given our family’s history in medicine and pharmacy and so on, I would encourage her to become a doctor, but I said, “Coding is the way ahead for you.” She was shocked by that. Young people are already doing a lot of this in school—it comes very naturally to younger generations.

I have researched the subject and think that the jobs of the future will be placed firmly in science, technology, engineering and maths activity, and in the finance sector, too. In future, digital, health and tech will be across all sectors, and I am enthused by that. It would be good if the Minister and Cabinet colleagues identified the centres of excellence at college and university levels so that young people know where to go, and where the gaps are. That would ensure that we level up opportunities right across the United Kingdom for people who want to have a future in development and innovation in the sector.

We already have some fantastic examples of innovative companies in the UK, not just in London but in Scotland and elsewhere, creating jobs and development opportunities. In terms of international practice, I had the privilege to speak with Alex Bornyakov, Ukraine’s Deputy Minister of Digital Transformation, who told me that cryptocurrency had been essential to Ukraine’s ability to respond to the Russian invasion. It is right that we place consumer protection, regulation and robust regulatory frameworks at the heart of everything that we do, but we should also look to the sector’s potential to solve some of the issues that countries will face and some of the difficulties across the world just now.

It has been almost a year since the Government set out their landmark vision to make the UK a global hub for crypto investment. The Minister will be aware that I have been very supportive of the Government’s vision, and I am keen to work constructively with him to ensure that it becomes a reality. The Government’s announcement is welcome for business, because good actors want regulation. I was not sure about that when I started looking into the sector with the all-party parliamentary group. From media and things I had read, I thought it was very much a wild west, where people did not want structure or regulatory frameworks; but there are many good actors who do want those things, and investors need regulatory frameworks to take forward their work in the sector with confidence. Business certainty supports a fair and transparent market. There must never be a race to the bottom in the UK, and I urge the Government to take forward the regulatory framework at pace, because we need to protect consumers first and foremost in all that we do. Regulatory clarity and business certainty are at the core of that work.

Over the past year members of the all-party parliamentary group have very much been educating ourselves, and I include myself in that. One has to do a lot of reading about the sector to understand acronyms and so on. We spent a lot of time even understanding that, when people spoke about fiat, they were speaking not about a type of car but about money. We have upskilled ourselves, which is a great first step. When I spoke with Members of the Swiss Parliament, they said that they had been on a similar journey; upskilling across their chambers meant that they could engage much more effectively on “what works” legislation.

Over the past year, industry has raised with me a number of barriers, which I will set out to help the Minister and support the work he is taking forward. First, significant delays are still being reported by business operators seeking registration with the Financial Conduct Authority. Will the Minister update us on progress in that area, and on the number of firms that have been granted licences in the UK since the creation of the licensing regime for crypto firms?

We have also heard real frustration about lack of communication. Some companies are not certain about what is required of them; they are being left for months on end with no response to tell them whether anything further is needed, whether their application is in process, or whether they need to take additional steps. I have met with the FCA on a few occasions and learned of their CryptoSprint event last year, which brought together industry and regulators to look at a number of areas, including how to protect consumers and markets while supporting innovation. I felt that that was a real step in the right direction, but could more be done to take this work forward?

Will the Minister update the House on the average FCA processing times for crypto registrations? I fully understand if he is unable to do so today, but it would be helpful if he wrote to me with that information. The FCA reassured me that it was employing more people to work in its department dealing with this specific sector, given the public interest in and engagement with cryptocurrency. It needs that expertise and wants to move forward at a greater pace.

It would also be helpful to know what more the FCA has planned to foster sustained and meaningful engagement with the sector. I have spoken to businesses that have such a bond with the UK—businesses that have been here and that want to set up here, and whose representatives have been to university here and feel that the UK is the place to be. Regrettably, because of the delays and lack of engagement, some have gone to Paris, while others have gone to Zug in Switzerland and elsewhere. That is a great shame if they are good actors and want to support the United Kingdom economy.

The all-party parliamentary group is undertaking an inquiry. We have heard about opportunities for the sector from businesses and regulators, and from those in overseas territories. I have noticed the importance of engagement between Government, regulators and the sector to ensure that the policy developed is practical and fit for purpose. Members of Parliament in Switzerland told us about the value of thinking about the different pillars of the sector—not just finance but research, university development and innovation hubs—and about bringing them all together with companies, regulators and Government to ensure that there are opportunities and a robust framework.

When we talk about the future of cryptocurrency regulation and what it might look like, it is imperative that everybody works together in the same direction to get it right. That has to be the case for consumer protection, which is the reason I became interested in this area in the first place and is at the core of everything that we are trying to do. At times, there has appeared to be a disconnect between the Government’s vision and some of the statements made by the banking industry and so on. How is the Minister pulling that together so that everyone is moving ahead in tandem? Yes, concerns are being raised and addressed as we go, but we need to ensure that people are moving in the same direction, rather than pulling in different directions away from the vision of the UK cryptocurrency hub set out so meaningfully by the Prime Minister.

We need a proportionate approach to regulation that balances risk and ensures high levels of consumer protection, but does not unnecessarily restrict growth or innovation for our future. That should be built on a strong evidence base to ensure that sound decisions are made. I recently heard from a number of economic crime experts at Elliptic, Chainalysis and the Royal United Services Institute; they indicated to our inquiry that crypto-related crime still accounts for quite a small percentage of overall crypto transactions, and that economic crime remains a challenge for financial services as a whole. Cryptocurrency is a part of that, but the focus is not just on that sector.

I have written to the FCA and the Bank of England to get further information. In recent statements, the incoming chair of the FCA has said that crypto platforms are “deliberately evasive”, facilitate money laundering on a large scale and create “massively untoward risk”. The Governor of the Bank of England said that cryptocurrencies are the new frontline in criminal scams and have created an

“opportunity for the downright criminal”.

Of course, these issues must be addressed, but that has to be balanced with the evidence to ensure proportionality. That is why it is even more important that Government regulators and industry come together to move things forward in a way that is meaningful and that everyone can agree on.

Another potential barrier is the recent announcements by leading banks to limit or block cryptocurrency transactions. I have written to them to tease out a little more information. Nationwide, Starling Bank, Santander and Virgin Money are among a number of banks that have announced limits and restrictions on transactions. Starling Bank has claimed that crypto exchanges are

“high risk, and heavily used for criminal purposes”,

which is a real concern. Other banks, such as Revolut and Monzo, are said to be open to crypto and largely positive towards cryptocurrency transactions. Again, the divergence of views within the sector should be grounded in evidence and be addressed in a way that protects consumers and puts them at the heart of what we do.

On the timeline for the Government’s plans, I have been speaking with many members of other Parliaments and businesses that operate internationally, because this is an international issue and hopefully there will be guidance internationally that we can come together on. If we want to harness the UK’s position at the forefront of this industry, we need to move at pace while ensuring that the work we do is robust.

I reassure the Minister that the all-party parliamentary group will continue to advocate for the UK cryptocurrency hub set out in the vision, and work in conjunction with his office. We will be extremely pleased if he updates the House on timescales for the year ahead and how he sees this playing out, so that we can continue to work constructively to support everything he is doing to protect consumers, while harnessing the innovation of cryptocurrency for the future in the United Kingdom.

11:12

[The Economic Secretary to the Treasury (Andrew Griffith)]

It is a pleasure to serve under your chairmanship, Ms McVey. I congratulate the hon. Member for East Kilbride, Strathaven and Lesmahagow (Dr Cameron) on securing this debate on crypto regulation, which follows the first debate on cryptoassets, led by her fellow party member the hon. Member for West Dunbartonshire (Martin Docherty-Hughes) in September last year. The hon. Lady is absolutely right that this is an important sector for innovation, and I commend her and the crypto and digital assets all-party parliamentary group for their work to upskill Members of this House in this important emerging area.

My goal is simple: we want the UK to be the home of an open, well regulated and technologically advanced sector. As the hon. Lady said, recent events have highlighted some vulnerabilities in the cryptoassets sector, but it is a big sector. We have seen how FTX’s collapse has impacted some consumers, but as with any emerging technology—and this technology is at an emerging stage for all its myriad potential uses—there will be risk. We understand the importance of risk in the system and that, regrettably, that brings failures as much as success and opportunity. That is part of the process of change itself.

The hon. Lady talked about how cryptocurrencies could be an area of Brexit opportunity, and because we have taken back control of our rulebook, this House—importantly—has the opportunity as well as the obligation to bring forward regulations. In that context, she talked about being the mum of a 14-year-old, all the potential jobs and the advice that she would give. Clearly, this is a world that has captured the imagination of young people. Anything we can do to get our young people to equip themselves with more STEM skills is very positive.

The hon. Lady also talked about the positive benefits in a sector in which, owing to its nature as a nascent and emerging sector, people are not always clear about its use cases. She made a powerful point about the use case in Ukraine and allowing that financial system to continue to work. Government policy is that we will introduce timely, sensible and balanced regulation to allow the safe use of the technology and allow participants in the sector to understand with certainty the environment in which they operate.

On the potential economy, the hon. Lady might be familiar with the work done by PricewaterhouseCoopers that estimates that blockchain technology, which underlies what is often referred to as crypto, could boost the UK economy by £57 billion by 2030. That is a sizeable opportunity and we are keen for the UK to seize its fair share. She talked about other jurisdictions that have introduced regulation, and it is right that we learn from them and use the opportunity to perfect our own regulation, but obviously we must ensure that we capture—if that is the right word—a fair share of the opportunities.

The fintech sector is a great success story for both the City of London and the wider UK economy, and last year the UK attracted more fintech investment than the next 13 European countries combined, so we have a real lead. Natural extensions of that sector are crypto firms and cryptoassets—people working with blockchain. It is important, therefore, that the regulations we introduce facilitate that.

The hon. Lady rightly raised the role of our regulators and their speed and agility. I will write to her, but will share now the figures that I have. I understand from the Financial Conduct Authority that 41 such firms are registered in the UK. Obviously, the FCA has its own regulations around that—the hurdles that firms have to clear—and I am interested in general, as we seek to have an agile and proportionate financial regulatory system, in our regulators moving at the right pace.

There are measures in the Financial Services and Markets Bill more generally to encourage the regulators—indeed, to compel them—to be more transparent about their key operating statistics, such as those in respect of speed. I think the hon. Lady talked about the number of authorisations and the average processing time for authorisations, which I hear about widely across the financial services sector and know is a focus for the FCA. It is important that it is: we cannot have a financial system that is competitive internationally if it has a slow latency and if it does not operate at speed. I share the hon. Lady’s concern, and if there are any additional measures I can obtain, I will of course write to her.

The hon. Lady talked about the importance of engagement between Ministers and the sector. I want to assure her that during my relatively short time in this role I have held a desire for broad and deep engagement. This is a really big sector. She might be interested to know that rather than having a standing council, as it were—Governments sometimes set up a group of 12 anointed figures and all the engagement is there—I want to be much more agile and to engage with a much broader range of people. My undertaking is to have six roundtables with the sector, but with a variety of sector participants, during calendar year 2023. That will build on the three roundtables that I have already held with the sector in the first few months since my appointment. That is a real commitment; this area rewards a lot of time being spent on it.

I assure the hon. Lady, members of the all-party group and industry bodies that I want to take an evidence-based and proportionate approach to regulation. That is something to which we all aspire. It is not helpful in any domain for people to make sweeping statements without offering facts and proof.

I hope I have addressed most of the hon. Lady’s points. There is one final point on which I wish to offer clarity: where we go from here. I do not have the precise date, but I assure the hon. Lady that the Government will very soon come forward with our consultation paper on the regulatory approach to cryptoassets. That will be a matter of weeks, not months, but I do not have the precise date. I urge people to get ready to respond to that paper. We will engage on the back of it, because it is of course just the next step in the process. The purpose of the consultation is that we have proportionate regulation, that we do it right and that it is practitioner led.

Of course, the flipside is that consultative processes sometimes makes things take a little longer than one might wish in a fast-moving domain. In order to get the balance right, I urge those with views to be ready to advocate them. They should be assured that they have a Minister and a Government who are keen to see the sector grow and to harness the benefits for the United Kingdom and the hon. Lady’s constituents. I would be delighted to return to update this place frequently on the progress of this exciting new sector.

Question put and agreed to.

11:22

Sitting suspended.