Cryptoassets: Regulation

Lisa Cameron Excerpts

Wednesday 7th September 2022 Westminster Hall

[Martin Docherty-Hughes (West Dunbartonshire) (SNP)]

I beg to move,

That this House has considered the Government’s regulatory approach to crypto-assets and currencies.

It is good to see you at least in the Chair, Ms Rees, and it is good finally to be here to talk about a subject that has produced an awful lot of heat and often little light in this place—that of the regulations on cryptocurrencies. I hope you will forgive me if I go on at some length about the issues that I think we have to debate in Parliament today.

We should start with a few pieces of accountability as, of course, we are not quite in the post-trust era. I am the chair of the all-party parliamentary group on blockchain, as well as being a vice-chair of the crypto and digital assets all-party parliamentary group. I see the chair of that all-party group, my hon. Friend the Member for East Kilbride, Strathaven and Lesmahagow (Dr Cameron), in their place today. The latter group is a relatively new kid on the block as it was established just last year, whereas the all-party parliamentary group on blockchain has been around for some time.

Let me come to the first of many aspects of what we can see as a sort of cognitive dissonance around the idea of crypto. Despite the fact that we often talk about crypto as a new kid on the block, it is now a pretty widely accepted concept, even if a poorly understood one, and I am glad to see that we have interest in today’s debate from across the Chamber—at least, I think we have interest from across the Chamber. I hope we will hear a lot of interesting ideas about what the future holds, and I will add a couple of suggestions of my own towards the end of my speech. Given that this is the first debate in the House on the subject, we require something of a tour d’horizon of the landscape as it lies today before we move on to the challenges and some opportunities that recent developments provide for the future of crypto.

Before doing so, however, let me place on the record my gratitude to the secretariat of the all-party parliamentary group on blockchain, led by Professor Birgitte Andersen of the Big Innovation Centre. Her leadership in creating space within the all-party parliamentary group to allow many of the big issues of the day to be debated over the past few years has been vital, and the work put in by her researcher, George Farrer—and indeed by his predecessor, Fernando Santiago—to ensure that the topics remain current and relevant has been much appreciated.

Through the forum that the all-party parliamentary group provides, I was able to meet Dr Robert Herian, now of the University of Essex, and I am much indebted to the work he has done, particularly in his 2018 book “Regulating Blockchain”, which will provide the basis of some of the suggestions I make today. If Members are interested in the subject, they should buy a copy of the book. I am sure Dr Herian will be glad of the plug.

For a movement that is often described as a cult, it is apt that crypto even has its own origin story: it was invented on 31 October 2008 with the release of Satoshi Nakamoto’s “Bitcoin Manifesto”. However, as with much of the myth and legend around the subject, it is unclear whether Nakamoto is a single person, or indeed whether much of the work was singly their own, given that theoretical work had been done on different concepts of blockchains, going back to the early 1980s.

What Nakamoto’s manifesto did, however, was bring the technology to wider prominence. There was a ready pool of adherents in the immediate aftermath of the 2008 financial crisis, who understood the importance of decentralised finance and the potential to move beyond financial institutions as they have been conceived hitherto. Progress was slow but steady at first, but it picked up in the middle of the last decade with the release of books such as Alex and Don Tapscott’s “Blockchain Revolution” in 2016, which was my gateway into the possibilities of the technology. That was followed by exponential growth over the past few years, with the rocketing in value of not only Bitcoin but other cryptocurrencies such as Ethereum and the range of memecoins, which made up so many of the initial coin offerings that we saw around 2018-19.

All the way through, many have predicted a crash, but the pandemic lockdown saw crypto reach unforeseen heights, whether it was furlough cheques or the lack of faith in existing investment that drove the trend. The high watermark seems to have been in November 2021, when the value of one Bitcoin reached about $68,000. The ultimate symbol of the bubble may well have been the adverts during the American Super Bowl half-time break, with Hollywood A-listers such as Matt Damon and Larry David imploring us to buy crypto.

The Super Bowl ads were not just good at showing us what the bubble looked like; they probably go down as one of the supreme examples of what crypto’s contribution to our discourse has been: its unique culture. One had comedian Larry David decrying seminal innovations throughout history—the wheel, the toilet, the light bulb—before doing the same with crypto. “Don’t be like Larry,” the ad exhorted the watching millions, “Don’t miss out on the next big thing.”

FOMO, or fear or missing out—there are plenty of folk in this place who have that—has certainly motivated many to get into crypto, but so have a range of other acronyms that appear on the profusion of online crypto culture forums. I hate acronyms, as many of my colleagues know, but the one that struck me the most is HFSP—have fun staying poor. It is a motto that manages to encapsulate so much: the unscrupulous nature of so much of this mainly unregulated space; the background of so many crypto investors, cut off from access to the traditional markets; and the pervading millennial jokey humour.

I come to the first very important point at which more Government attention needs to be paid to crypto. The market has been allowed to proliferate, drawing in uninitiated small-scale investors, who begin crypto trading because they see only the upside: the market that lies beyond outright scams such as Squid coin or OneCoin, in which investments of dubious provenance have been hyped and pumped, attracting the hard-earned savings of so many people.

I represent one of the poorest constituencies in the country, West Dunbartonshire. I grew up in that community in the ’70s and ’80s and lived through what I believe was its ruination by Thatcherism. It is still a resilient community, but too many feel marginalised and remote even from our neighbour, the city of Glasgow. Many of my constituents are the type of people who have been caught up in the dubious practices around crypto, and I wish more could be done about it, especially as we head into the cost of living crisis. We need to remember that it is often those who feel they have nothing to lose who are the targets of scams.

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

I thank my hon. Friend for bringing this extremely important debate to Westminster Hall. Given all that he is saying, does he agree that consumer protection needs to be at the heart of a regulatory framework? We should highlight some of the good examples of innovative businesses, including in Scotland, such as Zumo in north Edinburgh and Scotcoin in north Glasgow, which are creating jobs in the industry.

[Martin Docherty-Hughes]

I do not disagree, but I will talk later about the reality of the existing regulation and how we should lead best practice.

It is important that regulation is able to make a clear delineation of where the legitimate business exists and outright scam cannot. Despite the halving of the value of Bitcoin since its peak in November, it remains at a price much higher than it held a few years ago. Although many will argue over the inherent value of crypto, the market remains remarkably buoyant, despite all that has happened.

Many of the challenges begin with the merest definitions involved in the whole business. As I said, I hate acronyms. All the DLTs, NFTs and CBDCs are confusing enough before we even get to the question of what crypto actually is. Is it an asset? Is it a technology? Is it an idea?

Another enduring problem of crypto, encapsulated in that Larry David advert, is its novelty: the idea that we have a genuinely world-changing thing before us. That idea falls apart immediately as it comes into contact with the real world. As an asset class, it has proven to be resilient neither to inflation nor to external shocks, never mind the fact that conventional and centrally regulated currencies have continued to attract a far larger interest as a holder of value in straitened economic times.

It has been difficult to keep up with the pretence of some of the more outlandish claims about the technology’s potential, as they struggle with the evidence of the past few years. International bank transfers, for example, are still cheaper, when taking into account the need to convert crypto into fiat currency. There remains a massive legitimacy problem given that the post-truth aspects of blockchain technology struggle when put beside existing institutions.

Even the idea of a decentralised and therefore more equitable structure has struggled against the demonstrable fact that so many cryptoassets remain in the hands of so-called whales—the few at the top who managed to get their timing right or to be there when the currency started. Far from being a novelty, the lived experience of the crypto bubble has reinforced the fact that there truly is nothing new under the sun. While so much of it remains a new arrangement of an old song, we hear riffs that echo debates that are being had outwith the crypto bubble; debates that have resonance in the fields of economics, sociology or computer science.

Solutionism is the idea that there is a clever, technological answer for all of life’s problems and that, somehow, human nature can be overridden with the application of the requisite solution. Crypto fits squarely in that space. One wag called it a solution in need of a problem, and a whole range of problems have been hastily set up to be solved by it. As we will see, that gets entirely in the way of the more durable and sustainable uses that it has.

Principal among those is the way in which many adherents seem to revel in the way that crypto offers the opportunity to turn the current logic of most of the internet on its head. The current logic is that we are offered free services in exchange for access to our metadata. Instead, this bold new vision goes, we should—or could—monetise these fractional shares of data, which we give back to, say, Facebook or Google. The value of popular tweets that we make could be released, as could that of those Instagram posts that have been gathering likes but no dollars. There is obviously not the same value to be released for everyone, especially a boring auld guy like me. [Interruption.] I am grateful for the support of my hon. Friends. There is a lot of doubt about how much that value would ever amount to, but the principal argument against this sort of future for crypto is that it adumbrates a dypstopia where every single aspect of our lives that could be monetised can be and where our maximum productivity can be released.

For many, including some in the House of Commons, that is the final step on the way to a new liberal utopia, where we know the price of everything, although the cynic in me thinks that we will miss out on the value of quite a lot. Given the way social media has descended into something of a mess, catering to what seems like a mixture of our lowest common denominator and our basest desires, I am not sure that giving human beings the ability to monetise absolutely everything creates a positive incentive.

This idea makes the assumption not only that the technology is the most efficient way to solve these problems, but that it is the most efficient version of itself. In speaking to those who have worked on the technical side of the crypto industry, it is remarkable how imperfect the technology itself is, mainly because it has humans involved in its creation. To take one example, coders make errors in one out of every 10 expressions, or every three lines of codes—code that is, of course, written in a way that reflects the biases of the person writing it.

In cryptocurrencies that seek to use the technology to incorporate smart contracts, and therefore programming languages, that opens up a whole range of exploits, with systems not working as they should and money being vulnerable to theft. According to one estimate, 5% of all decentralised finance—or DeFi—funds are lost in that way, which is especially problematic when most of those funds are uninsured.

The technical issues are dwarfed by the environmental impact of crypto, which is a truly vast problem that threatens to undo all the good that it could bring. Essentially, the technology inherent in most forms of crypto—nodes competing to solve puzzles to access coins—creates the incentive to use increasingly large, expensive and energy-intensive servers. Not only does that consume vast amounts of electricity—the equivalent of the annual energy use of Argentina, accordingly to legend—but it creates another brick in the wall of a crypto oligarchy, with the largest investors able to control far more of the servers and thus far more of whatever cryptocurrency is held there.

There are certainly workarounds, and I hope to explore some of that in my speech, but as we stand here today, looking at the landscape, it is not only another challenge that cryptocurrency advocates need to overcome but, added together with the other questions I have laid out, it becomes something more significant that needs to be addressed if they want crypto to become part of their daily lives.

Before I am accused of being too much of a negative Nancy, it is important to understand exactly where we are at the moment, because only by doing that can we better understand the potential for blockchain technology. Then we can focus better on the regulation that we need to bring in to ensure that it thrives. My biggest fear is that bringing in regulation means changing so much of the culture in the industry, and dialling down so many of the solutionist expectations of its adherents, that it may not be possible, but I am going to give it a shot.

It will be difficult to push back so much of interest that has been created in the crypto community and it is important to understand what is motivating these investors, many of whom are young or from non-traditional finance backgrounds, especially as we stare down the barrel of a cost of living crisis and the inevitable recession that will follow. Blockchain’s genesis, following the 2008 financial crisis, is central to this.

The possibilities for demystifying finance, and for allowing normal investors access to resources usually only available to those able to access corporate lawyers, is certainly within reach, if the capabilities of so-called distributed autonomous organisations—or DAOs—are realised, not only as an add-on for existing companies, businesses and commercial practices, but as a way of creating a new type of entity that can avoid the pitfalls of oligopolistic capitalism.

Blockchain’s birth as something of a libertarian project has obscured the incredible potential for the technology to improve government efficiency, clamp down on tax avoidance and increase accountability for those in public life. The best existing example of that can be found in the Republic of Estonia; I should probably add that I am chair of the all-party parliamentary group on Estonia. Estonia began a roll-out of blockchain in its governmental processes from the Ministry of Finance, and in doing so made all other Ministries reliant on the technology themselves and ensured that one of the central pillars of the social contract—the relationship between the taxpayer and the Government—was radically accountable.

As things stand, the necessarily slow pace of regulation means there is every incentive for individuals to stay a couple of steps ahead of regulation, exploiting loopholes and bending the rules as much as possible. They are of course supported by an industry of enablers and administrators who find ways for their clients to keep to the letter of the law while evading the spirit of it, although often not even succeeding at that. That means that Her Majesty’s Revenue and Customs is always playing catch-up, with any deterrence factor it represents always being ex post facto.

The radical solution offered by crypto is turning that calculation on its head, as Dr Robert Herian outlines in his book, “Regulating Blockchain”:

“Blockchain may offer an opportunity to recalibrate the power play between those who would engage in aggressive tax strategies and planning, and those charged with regulating or containing them by, for example, more effectively enforcing tax liabilities ahead of settlement on trust, rather than relying on bringing trustees to account post settlement.”

This is the essence of blockchain for good—an idea that the all-party group, of which I am chair, very much tries to promote: both individuals and the Governments they elect should be given the ability to hold third parties accountable in liberal democracies, and hopefully beyond.

In ensuring that crypto plays the role that it could, regtech—regulatory technology—will come increasingly to the fore over the coming decades. Given its traditionally attributed birthdate of 2008, we should note that crypto is now entering its third decade of existence, and I like to think that that could herald a new-found maturity. If there is something that we need to take from the recent crash, it is that the wild west days of crypto are over. Too many people have been affected, and too much is now at stake. The Government now have the opportunity to rein in the crypto bros and ensure they make good on their promises to investors, creating the environment for an industry ready to realise its potential.

In that spirit, I hope to make a few suggestions of my own about I think the Government should proceed. In the spirit of there being nothing new under the sun, which I touched on earlier, it is important to start with the Government and stakeholders understanding how much law is already in place to curb the worst excesses of a supposedly unregulated market. To quote Dr Robert Herian again:

“sandbox culture as the sine qua non of contemporary regulatory standoffishness at the state level has ultimately spawned the problematic regulatory conundrum with which we are now faced, one in which innovations and solutions have been legitimised.”

Quite simply, in pretending that they have no levers at their disposal, the spies and speculators who have proliferated all the way through our economic history have re-emerged in the guise of the crypto bros. The biggest step that the Government could take to redress the balance is to enforce the law that they already have.

Fraud is fraud—there are no two ways about it. The police are overwhelmed dealing with novel scams, but scams are what they are. Better training for those dealing with enforcement, and ensuring that they are able to work with those in industry who are ahead on best practice, is crucial. All of that cascades from an empowered and properly funded Financial Conduct Authority, which is not deliberately, as many have speculated, underfunded and under-resourced as a way of ensuring that many offenders slip through the gaps.

This situation has created many of the trust issues that crypto seeks to address: smaller-scale investors get stung by unscrupulous practices that larger entities can use an army of lawyers to protect themselves from. Although we could get into a long philosophical discussion about trust and the possibilities for post-trust, it is important to note that this aspect of crypto has not proven as transformational as many of its adherents promised.

The idea that Bitcoin and other cryptocurrencies would prove to be immune from inflation, speculation and the like has proven to be demonstrably untrue, as has the idea that a new form of stablecoin could come in as a forum of neutral exchange between the various types of crypto. The problems experienced, for example, by the Tether stablecoin demonstrate this. A simple solution whereby every dollar of the stablecoin is backed by a dollar of assets fell apart under the lack of accountability for the company’s owners, and the markets reacted in the way that markets usually do when promises are not met. In this place, vital to the functioning of any sort of crypto culture, the deliberate lack of trust—the post-trust aspect of the crypto stablecoin—came off worse after coming into contact with the entirely rational human instinct to need the sort of trust that has hitherto been provided only by institutions and, in this context, central banks.

My second proposal for regulation is therefore that the Government not only bring forward the regulation expected in the Financial Services and Markets Bill, but do their utmost to ensure that debates around that exceptionally important crypto development are able to be had in the House—and not only when the Bill is in Committee. The Bank of England published feedback on central bank digital currency proposals in June last year. It stated five core principles, the first of which is the most important:

“Financial inclusion should be a prominent consideration in the design of any CBDC.”

Paying heed to that core principle means the scales being tipped back away from the crypto whales, who are increasingly hoarding the new assets, in favour of the average investor, realising the potential that gave so many, previously excluded from the system, some hope that they could be part of it.

Similarly, the opportunities for Government to enable financial inclusion through the development of proposals for decentralised autonomous organisations are vital to ensuring that the benefits of access to stable digital fiat currencies can be extended to the broader commercial sector. I hope that company and contract law can keep pace with such developments in an inclusionary way. At the heart of that is, obviously, the Financial Services and Markets Bill. I hope the Minister will allow time in his remarks to elaborate on those aspects that may not come to the fore in the limited time that will be allocated to the new occupant of No. 11.

I have presented two solid, legalistic opportunities for the Government to regulate crypto, but I should also like briefly to touch on the opportunities that exist for the environmental impacts of crypto to be negated, with the creation of carbon-neutral data centres. It will come as no surprise to anyone who has paid attention to the renewable energy sector that the nation of Scotland is ultimately blessed with resources that should see us well placed to make the transition not only to a carbon-neutral future but—and forgive me for saying it—an independent, sovereign one.

However, thanks to the work of fellow SNP member Stuart Evers, we can see that Scotland also has the opportunity to become a hub for carbon-neutral data centres, which make use of three qualities that Scotland has in abundance: not only the technical expertise to provide new network security in large data centres, but the physical security offered by our natural landscape and the energy security provided by ready access to what are called dual renewable resources, whereby a primary green energy source is always backed by another green source should it fail. That is best accomplished by a combination of wind and tidal energy. Thanks to Stuart’s preliminary work, we can see that Scotland hosts a plethora of potential locations for such centres, primarily along our west coast and in the Orcadian archipelago. That is certainly not crypto-specific, but it is an important point to make when we think about the ways in which the benefits of a well-regulated and well-run crypto industry could be felt across these islands.

I appreciate that I have taken up quite a lot of the time allocated for the debate. I have set out three solid areas where this Government could legislate to better realise the promise of the crypto industry, but my primary objective was to ensure that there was, for the first time, a forum for debate on the many areas for regulation of the sector. I hope that I have provided a suitable introduction to the challenges and opportunities that exist in an increasingly fast-paced industry. I look forward therefore not only to the Minister’s remarks but to what hon. Members have to say about the potential they see in making crypto work better for everybody.

--- Later in debate ---

[Alexander Stafford (Rother Valley) (Con)]

I thank the hon. Member for West Dunbartonshire (Martin Docherty-Hughes) for bringing this important debate to the House, and for securing the first ever debate on crypto in the House of Commons—it is a pleasure to speak in it.

Before I start, I thank the Economic Secretary to the Treasury as well. He and I served on the Business, Energy and Industrial Strategy Committee, and he has done an amazing job over the last two months as Minister. I hope that, in the ongoing reshuffle, he is rewarded for his valiant efforts over the summer holidays.

As mentioned, today’s debate comes at a time of great change, both in Westminster and in finance. The latest game-changing financial assets continue their exponential growth. Crypto—be it NFTs, CBDCs, stablecoins, currencies like Bitcoin or Tether, or the blockchain technology that underpins it all—represents a massive opportunity for British businesses and British investors, and we cannot simply sit back as the next financial revolution comes our way.

However, there is an issue: crypto is, by its very nature, a decentralised platform, with no ties to any particular economy or region. Britain is already world renowned as the beating heart of finance, banking and markets, so it is only natural for crypto to similarly look to Britain as its home. Equally, Britain should welcome the investment and opportunities of crypto. One of the major advantages of welcoming this decentralised platform is the benefits it will bring to the whole UK—not just London and the south-east. Cryptocurrencies can be bought, sold and mined from anywhere with an internet connection—something that the last Government worked so hard to roll out across the UK, and which our new Prime Minister reaffirmed in her commitment to us all yesterday.

Crypto really is an opportunity for everyone, from Truro to Thurcroft and Rother Valley, and all the way up to Scotland and Northern Ireland. If we first fix the problems with education and regulation, I believe we will have a thriving industry here in the UK.

[Dr Cameron]

The hon. Gentleman is making an excellent speech. However, does he agree that there are concerns regarding the slowness to register companies in the UK, and issues with registration linked with the FCA at the current time, which are seeing some companies who want to be based in the UK now moving to Switzerland, France and other jurisdictions?

[Alexander Stafford]

I thank the hon. Member for her intervention and for all the hard work she is doing on this subject. She is right: we need to get these business regulated more quickly. We cannot rest on our laurels; we need to get things going, although that applies to all business, whether crypto or not. The UK needs to encourage more businesses to establish themselves more quickly, and we should have the regulations in place to make the UK accessible.

This new Government must look at increasing the level of public education around cryptocurrencies. The most common crypto-related Google search query is, “What is cryptocurrency?” That is nearly five times more common than any other. The public—from the schoolyard to the retirement home—need to be educated about the risks and rewards of this new financial asset. As with all new technology or financial tools, there clearly are risks. According to Action Fraud, nearly £150 million was scammed and stolen through crypto-related fraud last year. Educating people is the only way to ensure sensible decisions.

That being said, there are significant rewards to be gained from crypto, including instant free transactions, which will help businesses deal internationally. Meanwhile Britons will be able to transact in new ways that were previously impossible: they will be able to pay their energy bills per unit used, have their hourly wages paid on the hour or have increased privacy when paying for goods and services. Britons must be shown that the benefits are there if they approach crypto sensibly, but they must also know the risks.

That being said, given that crypto ownership is already on the rise, we cannot rely on education alone. The estimates of how many Britons own some form of cryptoassets range from 5% up to 20%, with that number clearly increasing year on year. As well as educating the public, we must rethink the regulator’s approach to cryptocurrencies. As I mentioned, there are serious risks involved in investing in crypto, even with the so-called stablecoins, as we saw with the rapid decline of Terra earlier this year. However, the current system serves only to suppress British businesses, without offering enough protection to customers and consumers.

--- Later in debate ---

[Peter Grant (Glenrothes) (SNP)]

Thank you, Ms Rees, on behalf of all of us for saving this morning’s debate. It would have been a great pity if all the work that some hon. Members had put into their speeches had gone to waste. I thank my good and hon. Friend the Member for West Dunbartonshire (Martin Docherty-Hughes) for leading the debate in such a well-informed way. From conversations I have had with him, I know that although he definitely sees the huge potential benefits of cryptocurrency, he is also all too well aware of the potential pitfalls.

My hon. Friend gave us a helpful history of cryptocurrency and, importantly, reminded us that it has a particular culture that some of us might be interested in. We have to recognise that there may be certain attitudes to risk in that culture; I think he used the phrase “have fun staying poor”. If people involved in those games—and they are games for too many people—are happy to stay poor or run the risk of being poor, that is all very well. However, many people are sucked in without understanding the risk that they might suffer significant financial losses.

My hon. Friend repeatedly referred to the crypto bubble, which is an accurate description. The one thing all bubbles have in common is that they burst; we have to ensure that regulations are brought in quickly enough to stop it being a bubble before it bursts. He also pointed to flaws in the way the Financial Conduct Authority operates, on which I agree with him wholeheartedly. He referred to the collapse of Terra, whose total value went from something like $45 billion to nil in approximately 72 hours. That is how quickly things can go either well or very badly in the world of crypto.

The hon. Member for Rother Valley (Alexander Stafford) made an interesting speech. He was correct in describing Britain as the beating heart of financial services, or words to that effect; financial services are a massive part of the economy of London and the whole United Kingdom. However, I would caution him that we must recognise the fact that, although some people are in denial, Britain—London in particular—is gaining a reputation as one of the best places in the world to commit financial services fraud. If we continue to deny that and think of it as a problem that will go away, the entire future of London as a financial services centre of excellence could be in doubt.

Towards the end of his speech, the hon. Member for Rother Valley made a strange comment in response to the reminders of my hon. Friend the Member for West Dunbartonshire about the huge energy input required for crypto to operate. The hon. Gentleman said that there is no point going for a low-carbon future if that undermines our economic growth. I gently point out to him that there is no future that is not low carbon. If we do not achieve a low-carbon future, we have no future whatsoever.

The hon. Member for Strangford (Jim Shannon), who I hope I can refer to as a friend, admitted to being one of the 85% who do not own cryptocurrency. It is nice to see that he is still very much in the majority with regard to some things in Northern Ireland, although he might find that that becomes a minority at some time—who knows! We could have an interesting philosophical discussion over his wee story about the young man who made so much money on crypto, increasing £1,000 to £40,000. That is slightly more modest than others who have made gains on crypto. Where did that £39,000 come from? The world did not become £39,000 richer. The amount of money in the world did not increase by that amount during that time, so somebody somewhere was £39,000 worse off, or a lot of people were a few pounds worse off. Every time somebody makes money on a speculative investment, somebody somewhere else loses it. We have to be prepared to face up to that.

I hope the Government will take the same approach I do: clearly, cryptoassets and currencies are here to stay. We cannot uninvent them. The nature of the thing is that even if we wanted to, it would be practically impossible to legislate to keep them out of the United Kingdom all together. People we are responsible for will continue to get involved in crypto. They will invest in it, play the game and speculate on it; whatever terminology we use, they are going to put their money into crypto. We have a responsibility to ensure that when they do, they are not taking risks they do not understand or running the risk of losing money they did not realise they were liable to lose. We certainly do not want to see people losing money they cannot afford to lose.

The challenge is to maximise the very obvious potential benefits while, at the same time, minimising the risks to individuals, businesses and potentially—let’s not kid ourselves—to entire economies. This thing will get big enough that if it goes wrong, it could bring down entire economies. If it goes well, clearly it would have massive benefits for us all.

Consumer protection must be at the heart of the Government’s regulatory approach. I find the implication that consumer protection has been deprioritised in the Financial Services and Markets Bill quite concerning; it will not be one of the things to which the regulators will be instructed to give high priority. I urge the Government to ignore the siren voices of some on their own Benches who call for a completely unregulated free-for-all, which would be the way to absolute disaster for the many. There would undoubtedly be untold riches for the few, but it would be a highly irresponsible approach.

[Dr Cameron]

I thank my hon. Friend so much for giving way and for the important points he is making. I wholeheartedly agree that consumer protection must be at the forefront of the work that is taken forward. Does he agree that it is important that as many people who are interested in this sector as possible get in touch with the crypto and digital assets all-party parliamentary group, which is currently engaged in an inquiry into the sector, in order to consider regulation, recommendations and consumer protection, as well as the opportunities for growth?

[Peter Grant]

I am quite happy to take that unashamed plug for the APPG. Given that it has been mentioned and will be recorded in Hansard, I have no doubt that those who are interested in its work will take up my hon. Friend’s offer.

Crypto has all the characteristics of all the great scams in history; indeed, it has most of them on a scale that very few of those other scams had. It has the possibility to become and to facilitate the biggest scam in human history, if we let it. We need to co-operate with other jurisdictions to regulate in such a way that means that the sector continues to grow and deliver benefits, but does not expose, as I have said, either individuals or potentially whole economies to unacceptable risks.

Although I welcome the Government’s steps on regulation, which I hope will be only the first steps on a much longer journey, I am concerned that what has been offered to date has been a patchy and piecemeal approach to regulation, compared to the far more comprehensive proposals in, for example, the EU’s draft regulation. I would not expect the Government to admit it, but I worry that this is another example of settling for second best just to prove that we are different from the European Union.

We should always remind ourselves that even technological advances that end up having massive benefits for humanity can have their downside. I know a lot of people, including a lot of Members of Parliament, who are only alive today because of radiology and radiotherapy, and that would not have happened without the genius and greatness of Marie Curie, who is one of the greatest human beings ever to have lived. Marie Curie was killed by her own discovery. Indeed, almost all the people who were the first to receive the benefits of the “miracle” radium pills that followed on from her discovery died a horrible death from cancer.

The message is: let us not turn our backs on new technologies or be scared of innovation, but seize the opportunities that such technologies offer. But just as developments in scientific and medical technology can carry risks for humanity as well as huge benefits, so can advances in financial technologies. The technological advances that we are seeing just now are happening at a pace that we could not have imagined even four or five years ago. That means that regulation must be flexible and able to adapt very quickly to identify where the potential risks are and to close them down.

I would like to say that we have a Financial Conduct Authority that I am happy to trust with taking that message on board, but in my heart of hearts, as I have said both here and in the main Chamber often enough, the Financial Conduct Authority as it stands is not fit for purpose. It needs to be given a significantly stronger remit and significantly greater resources. There is no doubt that the FCA is the correct place for regulation to reside, but I ask the Minister not simply to talk about what is in the Financial Services and Markets Bill just now, but to give us an indication of how quickly the gaps in regulation that will still exist after the Bill has been passed will be filled. It is not only people who are enthusiastic about cryptocurrency who are watching this debate to see when regulation is going to become adequate; there are also people watching this debate who are looking for an opportunity to make vast sums of money at the expense of our constituents, if we allow them to do so.

[Abena Oppong-Asare (Erith and Thamesmead) (Lab)]

It is a pleasure to serve under your chairship, Ms Rees.

I congratulate the hon. Member for West Dunbartonshire (Martin Docherty-Hughes) on securing this important debate and on setting out in detail many important issues, particularly a number of matters that he raised around fraud and things that the Government can do. He has significant expertise in this area, as is evident from what he has presented in today’s debate and the fact that he chairs the all-party parliamentary group on blockchain. I thank other hon. Members who have taken part in the debate, particularly the hon. Members for Rother Valley (Alexander Stafford) and for Strangford (Jim Shannon), who raised a number of issues, such as fraud. I also thank those who have made interventions, raising consumer protection issues.

I welcome the opportunity to debate the important issue of cryptocurrencies and cryptoassets, and the Government’s regulatory approach to the industry. This debate is well overdue. In recent years, crypto has entered the mainstream, with an estimated 2.3 million people in the UK owning cryptoassets and the number of companies trading in crypto likely to grow further over the coming years, so this is a good moment to reflect on both the benefits and risks of cryptoassets and related technologies.

Many early advocates of crypto believed that it could lead to the end of central banking, the replacement of the dollar and fiat money by Bitcoin—or digital gold—and an upending of the regulation of markets and of the potential surveillance of consumers. However, crypto supporters have so far been disappointed. Like many utopian projects, this had collided with the realities of geopolitics, corporate power and illicit finance. I echo the comments made by the hon. Member for West Dunbartonshire. With reports that Russian oligarchs may have converted their assets into cryptocurrencies to avoid sanctions, many are rightly questioning whether crypto has a future at all.

In recent months, we have seen a huge crash in the value of many of the leading cryptoassets. During the recent period of crypto market turmoil, Bitcoin, Ethereum and other coins have collapsed, putting millions of UK consumers’ savings at risk. Research published by crypto trading platform Gemini found that the number of people investing in crypto has rocketed in the last 12 months, and as many as one in five people in the UK has lost money in the crypto crash. Despite this, the Government are wilfully using out-of-date data, which estimates that only 3.9% to 4.4% of British adults own crypto. I am not sure whether the Minister has more up-to-date stats. Not only that, but the Government have so far failed to properly regulate the crypto sector and protect consumers. They also have no idea how many people have been affected by the current crypto crisis, so there is clearly a desperate need for a clear strategy on the regulation of cryptoassets and blockchain technology.

Labour believes that we do not need to choose between a total crackdown on ownership of cryptocurrencies and the wild west approach advocated by some. Properly regulated blockchain technology has the potential to transform our economy and the financial services sector. Many innovative companies are embracing different forms of blockchain technology to improve transparency in order to finance and create highly skilled, high-productivity jobs across the UK. This has the potential to reduce inequalities, with £69.6 million having been invested in financial technology companies based outside London and the south-east in 2021 alone, driving efficiency in all sorts of industries.

I am afraid, however, that so far the Government have risked undermining the reputation of the sector. In the absence of a comprehensive strategy regime, the UK has become a centre for illicit crypto activity. According to research by Chainalysis, which is a global leader in blockchain research, cryptocurrency-based crime, such as terrorist financing, money laundering, fraud and scams, hit a new all-time high in 2021, with illicit activity in the UK estimated to be worth more than £500 million; that is really alarming. Despite the pressure from Labour and the financial sector, the Treasury has yet to acknowledge the scale of the threat, and the FCA has identified more than 230 unregistered cryptoasset firms operating in the UK right now. Many companies have not even applied for anti-money laundering or “know your customer” checks, yet they face little or no sanction from the Government. That has allowed some firms to exploit anonymity-enhancing technology to protect the identity of criminals and individuals linked to hostile states such as Russia.

As several Members have mentioned, there is a rise in crypto-related scams in the UK, which is very concerning, and reports of digital asset fraud were up 50% in 2021 compared with the previous year. I suspect there is even more such fraud now.

[Dr Cameron]

On the point that the shadow Minister is making, it is important that the Minister addresses the issue of potential sanctions evasion via digital currency. Also, I pay tribute to the fact that Ukraine is now one of the countries that uses most crypto, and during this horrendous wartime experience it has been able to support its economy and its troops—buying military supplies and supporting those on the frontline—through crypto. There is a mixed picture, but one that has to be addressed.

[Abena Oppong-Asare]

I support the hon. Member’s comments about Ukraine. I am not saying that using crypto should be scrapped, but the Government need to take more action to address the fact that there are issues related to the growth in fraud and in activity that is damaging to the UK. Too often, the Government have stood by and let firms responsible for these scams trade with impunity. They have continued to delay the introduction of stronger rules on the advertisement and marketing of cryptocurrency products. A survey by investment platform AJ Bell found that many crypto investors are simply unaware of the high-risk nature of their investments.

--- Later in debate ---

[Richard Fuller]

Absolutely. One of the issues, which the hon. Gentleman raised in his speech, is how pervasive the technology has become since 2008. We are still looking at the different applications and different levels of the technology, as I outlined at the start of my speech, both within financial services and more broadly within Government. He mentioned the issues in Estonia and in the economy as a whole. The technology has been around for a while, but it has many tentacles that have spread in many different ways through countries and international economies.

The hon. Gentleman will also know that in addition to that growth, as he and other hon. Members have mentioned, there has been substantial volatility. Notwithstanding those market fluctuations, the potential for DLT technology underpinning cryptoassets remains powerful in many ways. Across the world, NFTs are entering common parlance. The hon. Member for Erith and Thamesmead (Abena Oppong-Asare) talked about one that could have a revolutionary impact on the creative industries.

Blockchain technology is being used in healthcare to store patients’ medical records securely; in housing to record property rights; and in supply chains to track the path and safety of food throughout the farm-to-table journey. In Government, we are developing opportunities here in the UK to use distributed ledger technology for customs and international trade, to ease the import of goods. DLT has the potential to change how our financial markets work, too. That is why new have started work to understand how it might be applied to a UK sovereign debt instrument.

Even the fundamental architecture of the internet may undergo changes as Web3 becomes more popular, with blockchain offering the potential to drive a more decentralised, user-owned ecosystem. The innovation powered by DLT could spill across society, well beyond the scope of today’s debate, which rightly focuses on financial services.

As crypto technologies grow in significance, the UK Government are seeking ways to achieve global competitive advantage for the United Kingdom. We want to become the country of choice for those looking to create, innovate and build in the crypto space. We are already the leading European fintech hub, second only to the US worldwide. By making this country a hospitable place for crypto technologies, we can attract investment, generate new jobs, benefit from tax revenues, create a wave of groundbreaking new products and services, and bridge the current position of UK financial services into a new era.

[Dr Cameron]

I thank the Minister for his important points about taking things forward in a progressive way. Given the current uncertainty in the Government sphere, while the UK is still committed to making the UK the global home of crypto, what progress has been made in establishing the cryptoasset engagement group that was announced in April, to bring on board leaders from the sector and engage positively?

[Richard Fuller]

The hon. Lady is right to mention the importance of bringing people together. I will refer to that. May I also take the opportunity to re-emphasise the work that her APPG is currently doing on regulation for consumer protection in this space? There are multiple participants and interests, so I echo her point.

At the forefront of this is something that we have talked a lot about when it comes to the culture. We have highly driven entrepreneurs with great skills. Having their teams in the UK enables us to build the wealth and experience that can power further discoveries and growth in a constructive way.

As is always the case with innovation, there are risks that need to be managed. For one, cryptoassets can be used to hide ill-gotten gains through corruption or organised crime. Since January 2020, cryptoasset firms operating in the UK have been subject to the money laundering regulations. We recently brought forward legislation to implement the financial action taskforce travel rule for the transfer of cryptoassets.

Cryptoasset firms must conduct customer due diligence checks, just as banks do, including sanctions screenings. Through the Economic Crime (Transparency and Enforcement) Bill, we will give law enforcement new powers to seize and recover cryptoassets. As would be expected of a global financial centre, we will put a very robust system in place, and will never compromise on our high standards. That was the key point made by the SNP spokesman, the hon. Member for Glenrothes (Peter Grant).

Separately, there are legitimate concerns, highlighted by the hon. Member for West Dunbartonshire and echoed by my hon. Friend the Member for Rother Valley (Alexander Stafford), about the energy intensiveness in the process of creating some types of cryptoassets. As a global centre for green finance, we are already looking closely at energy usage associated with certain crypto technologies, and I will take away the point the hon. Member for West Dunbartonshire made about carbon neutral data centres regulation.

We have also said that we will seek to protect consumers by legislating to bring certain cryptoassets into the scope of financial promotions regulation, because it is essential that investors understand the risks they are taking and that there is more transparency from firms. I know that some firms are concerned about the way in which this regime might be implemented, to the possible detriment of UK firms. We are looking very seriously at that issue.

I say in reply to the hon. Member for Erith and Thamesmead that the UK’s approach on a lot to do with financial services is to have an agile system that relies robustly on the regulators to write their rules as things are brought within the regulatory perimeter. That underpins our approach. It underpins the work in the new Financial Services and Markets Bill, and that is distinct from the perhaps more legalistic approach of the European Union trying to define in statute right from the start what the regulations should be. In the United Kingdom we trust regulators to work at speed and effectively to write the rule books that are right at that point in time.