Crypto Asset Technology

Baroness Penn Excerpts

Thursday 21st July 2022 Lords Chamber

[Lord Davidson of Glen Clova]

To ask Her Majesty’s Government what progress they have made towards their ambition to make the United Kingdom a global cryptoasset technology hub.

[Baroness Penn (Con)]

The Government’s clear message to crypto asset firms is that the UK is open for business. The Government have announced a range of reforms to position the UK as a crypto asset technology hub, including legislating to bring stablecoins into payments regulation, committing to consult on regulation on a broader set of crypto asset activities later this year and exploring ways to enhance the competitiveness of the UK tax system to further encourage the development of the crypto asset market.

[Lord Davidson of Glen Clova (Lab)]

I thank the noble Baroness for her Answer. Cryptocurrencies are characterised by opacity, volatility, lack of intrinsic value and bare regulation. In recent days, even stablecoins have exhibited a lack of stability. The Government seem to be content for cryptocurrency to form part of the UK’s financial architecture. My question is: if the Government see a virtue in cryptocurrencies that transcends the way in which a fiat currency or a central bank digital currency operates, what exactly is it? Would the Minister kindly explain why cryptocurrencies operate as a better means of exchange?

--- Later in debate ---

[Baroness Penn (Con)]

My Lords, it is not necessarily the Government’s position that crypto assets offer a better means of exchange, but they represent part of a trend of rapid innovation in financial technology. That is something we want to encourage, particularly because of some of the technology underlying some crypto assets. But the noble and learned Lord is right that they also pose risks to consumers. That is why we have already taken action on, for example, financial promotions of crypto assets and are looking at the wider question of crypto asset regulation in a consultation later this year.

[Lord Vaizey of Didcot (Con)]

My Lords, I refer to my registered interests, particularly my work with Bifinity. The UK has no crypto unicorn. In fact, the one crypto unicorn founded in the UK has now moved abroad. Even Austria has a crypto unicorn. It is a tragedy that the FCA is not working harder to regulate crypto companies, which would provide much better protection for consumers. Given that successive Chancellors of the Exchequer have quite rightly said that the UK, with its history of prudential financial regulation, should be a hub for crypto, can the Minister update me on when we are likely to see progress on the regulation of crypto companies?

[Baroness Penn (Con)]

I would like to reassure my noble friend that we are taking a staged and proportionate approach to crypto asset regulation that is sensitive to the risks posed but also responsive to new developments in the market. I have referred to a number of areas in which we have already regulated for crypto assets, and in the forthcoming Financial Services and Markets Bill we will legislate to regulate stablecoins. Later this year, we will also consult on the wider regulation of the sector. I absolutely agree with him about the opportunities this market can provide for the UK economy.

[Lord Flight (Con)]

My Lords, if the cryptocurrency market got so huge that it posed a major credit threat, would the Government consider introducing some form of regulation?

[Baroness Penn (Con)]

The Government are considering some form of regulation; that is why we are consulting on it later this year. My noble friend is absolutely right that financial stability is one consideration that we have to bear in mind when looking at this market.

[Viscount Stansgate (Lab)]

My Lords, if the Government are to consult on this area later this year, can the Minister give the House an undertaking that they will consult scientific bodies such as the Council for the Mathematical Sciences or the Institute of Mathematics and its Applications? Underlying cryptocurrencies is a very complicated system of mathematics and, to be quite honest, I would challenge any Member of the House easily to be able to explain the nature of what a cryptocurrency is.

[Baroness Penn (Con)]

My Lords, I am glad the noble Viscount did not challenge me to explain the intricate details that lie behind crypto assets. The consultation will be public and we will make sure we engage a wide range of experts in the area to ensure that we are best informed of the way forward.

[Baroness Altmann (Con)]

My Lords, given the cybersecurity and the anonymous and open nature of risks in blockchains, this seems to be rather inconsistent with money laundering rules in the rest of the financial system. Can my noble friend comment on inconsistencies in the environmental protection issues that this Government have worked so hard to achieve, given the environmental dangers of the proof-of-work cryptocurrency development and the risk to consumers, even in stablecoins?

[Baroness Penn (Con)]

My noble friend is right about the risks around money laundering and illicit finance. That is why crypto assets were brought within the anti-money laundering regime a few years ago. She is also absolutely right that some crypto assets can have a significant environmental impact. It is about the method by which they are generated or proved, and that is something we will consider as part of our consultation later this year.

[The Lord Speaker (Lord McFall of Alcluith)]

I call the noble Lord, Lord Jones of Cheltenham, for a remote contribution.

[Lord Jones of Cheltenham (LD) [V]]

My Lords, has the Minister seen research from cybersecurity company NordVPN about cryptocurrency scammers targeting British pension pots? Fraud losses were more than £226 million in the year to May 2022, up 58% from £143 million in the previous year. To protect British citizens from these bitcoin bandits, will the Minister issue advice to “Beware of dodgy downloads; don’t be rushed; do your homework; be suspicious of celebrity endorsements; and use a virtual private network service so that hackers won’t be able to see what you do online”?

[Baroness Penn (Con)]

My Lords, I have not seen the specific report the noble Lord refers to, but he is absolutely right that the risks of online fraud are significant, particularly for potentially vulnerable people. The Government put a huge amount of effort into our anti-fraud measures, including some of the public messaging the noble Lord referred to.

[Baroness Wheatcroft (CB)]

My Lords, as the Minister has already said, derivatives of cryptocurrencies are regulated. However, for many years now, the FCA has been considering regulating cryptocurrencies. Can the Minister tell the House exactly how many years it has been considering it and what it would take to make it actually do something?

[Baroness Penn (Con)]

My Lords, as the noble Baroness noted, there have been a number of different interventions to regulate this market over the years, including the regulation of derivatives, including bringing crypto into anti-money laundering regulation, into the regulation of financial promotions and, in the forthcoming financial services Bill, the regulation of stablecoin. Action is happening now but, in terms of the broader market, there will be action this year in terms of the consultation on future regulation.

[Lord Tunnicliffe (Lab)]

My Lords, during the SI debate earlier this week, the Minister and I discussed the need to better regulate crypto assets, particularly in relation to money laundering. In her answers today, she seems to accept that cryptocurrencies potentially facilitate money laundering. Does she not feel that this is very important and must be gripped quickly?

[Baroness Penn (Con)]

I absolutely agree with the noble Lord about the importance of ensuring that crypto assets cannot be used for money laundering or, for example, for the avoidance of sanctions when it comes to Russia and its invasion of Ukraine. That is why we have brought it within our anti-money laundering regime. We have extended the scope of those rules. The SI that we were debating this week is part of the action to do so. We will also continue to work internationally on the regulation of crypto assets, because that action is needed to ensure that other jurisdictions cannot become areas where people use crypto assets for illicit finance.

[Lord McNicol of West Kilbride (Lab)]

My Lords, as we have heard from across the House, regulation is the key to this. How stable does the Minister think that stablecoins are? Some Governments are looking at introducing a central bank digital coin. Do Her Majesty’s Government have any plans to introduce a CBDC?

[Baroness Penn (Con)]

My understanding is that the Bank of England is looking at the question of introducing a CBDC. In terms of stablecoins, the name derives from them being linked to other assets, rather than because of any inherent stability. We are seeking to regulate them because of that link to other assets. They may become a form of payment within the wider system, which would raise questions of financial stability and is why we have prioritised regulation in that area.