Cryptocurrency Regulation

Martin Docherty-Hughes Excerpts

Tuesday 13th June 2023 Westminster Hall

[Dr Cameron]

I thank the right hon. Member for his valuable contribution. I totally agree. I saw some research from PitchBook last month that suggested that since the EU produced its regulatory framework on markets in cryptoassets—MiCA—investment in the EU has increased substantially. With a regulatory pathway over the next 12 to 18 months at the maximum, the UK could harness a leadership position in this sector. That will be essential because of the digital revolution that is happening. The next generation is a digital generation already. This is the way that things are moving in the world, and the UK must be at the forefront. I am pleased that the Minister is harnessing his skills and endeavours to ensure that happens.

We heard that without comprehensive regulation there are considerable risks in the industry, particularly regarding consumer protection, economic crime and financial stability, which I will speak about later. While there are clearly legitimate concerns about the potential risk posed by cryptocurrency and digital assets, it is important to acknowledge a number of positive use cases that show the potential benefits of the new technology.

One such example is the use of cryptocurrency at the frontline of the conflict in Ukraine. Many may not know this, but following the Russian invasion, the Ukrainian Government appealed for cryptocurrency donations and received millions of dollars in cryptocurrency to support military and humanitarian efforts on the frontline. Ukraine’s Deputy Minister of Digital Transformation, Alex Bornyakov, has said that cryptocurrency has been “essential” to Ukraine’s response to the Russian invasion. I am delighted to welcome Minister Bornyakov and his team, who are in the Public Gallery. We are delighted to have them here today.

Our inquiry heard that the growth of the sector suggests that cryptocurrency is here to stay. The latest research by the Financial Conduct Authority shows that cryptocurrency ownership has almost doubled in the last year, with almost one in 10 people surveyed owning cryptocurrency in 2022. That highlights the need for proper, clear regulation to protect consumers and support the industry’s growth in a reasonable way. As countries around the world move quickly to develop regulatory frameworks, we feel that the UK must move within the next 12 to 18 months to harness the industry’s potential in order not to lose out to other jurisdictions.

Throughout our inquiry, we heard that there are potential barriers to the UK’s realising its vision, which we set out in the report. We heard that the process for cryptoasset businesses to enter the UK is very lengthy, with limited engagement at times, and that many businesses ultimately choose to invest outside the UK. While the Government have said that they are open for business and for companies in the sector to set up and scale up, we heard that that has not been the experience of many companies seeking to obtain licences to operate in the UK. They have seen very lengthy delays and, in many cases, had their applications rejected. That is fine, because we do not want a race to the bottom, but it often happens without a clear explanation and with limited communication throughout the process.

To date, only 41 firms have been approved to operate in the UK. Will the Minister say what more the Government can do to ensure that legitimate and responsible firms that want to set up and scale up here are able to do so? What steps are the Government taking to ensure that regulators have the resources they need to deliver on their responsibility to process applications?

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

It is good to see you in the Chair, Mrs Harris, and I congratulate my hon. Friend on securing the debate. On regulation, my hon. Friend mentioned risks, and does she agree that the Government need first to admit that when it comes to crypto there is a lot of risk? We know there is a lot of risk—it is called fraud, so fraud regulation should be used in the first instance before they introduce other regulation. There needs to be a recognition that fraud is fraud, whether it is related to crypto or anything else.

[Dr Cameron]

I thank my hon. Friend for raising those important issues. There is a section in my report on fraud and scam risks to consumers, so he has pre-empted the latter part of my speech, but I will cover his points in full.

Another area of concern is access to basic financial services. To be a hub of cryptocurrency—of innovation, scale-ups and start-ups—companies need to be able to open a bank account and pay their employees. The inquiry heard that firms were struggling to secure access to UK banking services. A high proportion of banks have refused to provide bank accounts to digital assets firms, even when those firms are regulated and licensed to operate in the UK. In addition, just in recent months, a number of major banks have also announced limits on transactions, making it more difficult rather than less.

Such services are absolutely necessary for companies to operate regulatorily compliant businesses. The inquiry heard that that could be one of the single biggest barriers to growth and innovation for the UK. There are concerns that this could fundamentally undermine the Government’s ambition for the UK to become a global cryptocurrency hub and could be a barrier to growth and innovation in the digital sector.

I recently chaired a roundtable with the industry to hear more about their concerns. What more can the Government do to help find a way forward and to ensure clear pathways for firms to access fundamental banking facilities when they are operating legitimately and robustly within the guidelines? Will the Government consider using their powers to help facilitate meaningful dialogue between the banking and digital assets sectors to find a way forward that works for both?

We also heard strong support for the Government’s current approach of regulating cryptocurrency in line with financial services regulations; when we look at the research and the details, we can see that that offers the best and most robust protections for consumers. In that sense, my report supports the Government’s position on financial services regulation.

There is another issue. I worked in the health service and I am keen that people who make gains in the UK should pay their taxes. A regulatory framework in financial services enables the Exchequer to collect taxes, as opposed to using the gambling regulations, which would not allow for that. It is also important that the UK sets regulations within financial services to position itself in collaboration with other jurisdictions internationally and rather than appear an outlier by using other regulatory frameworks.

Our inquiry heard serious concerns about the risks to consumers from fraud and scams associated with the sector. As with all new and emerging technologies, the sector has the potential to be exploited by criminals. We heard that given the rapid pace of growth and consumer adoption, the risks in this area cannot be ignored, particularly if the UK wants to position itself as the global home of investment. Consumer protection measures must be at the core of everything that the Government do. We must mitigate the risks associated with new developments in the sector.

Research from the FCA in 2021 showed that overall public awareness and ownership of cryptocurrency had increased, but it also showed that

“the level of understanding of cryptocurrencies is declining, suggesting that some users may not fully understand what they are buying”.

Consumer research by the Financial Services Compensation Scheme highlighted the low levels of understanding and the need for much greater financial education. Industry and the Government must partner to help raise awareness. We want a joined-up and co-ordinated approach, including industry, regulators, law enforcement and the Government, to clamp down on scams.

Before I conclude, let me briefly mention that the Government are making great strides with the consultation on a central bank digital currency, and we support the progress being made. I have also heard about improvements throughout industry on the sustainability of bitcoin mining and so on. That is very important because we must realise that we are in a climate crisis, and all innovations and new technological developments should contribute to net zero.

For our report, we heard about the need for a joined-up, co-ordinated approach across all Departments, and we have said that Government might consider the appointment of a crypto tsar, who could help to co-ordinate across Departments and support the Minister to ensure a consistent approach. Will the Minister update the House on the Government’s vision for the UK to become a global hub? I realise that yesterday the Prime Minister made a very important speech that contributes to the debate and I would be delighted to hear what more we can do, as the all-party parliamentary group, to support the Minister in his endeavours. We feel that things have been extremely positive, but there is a need to move at pace within the next 12 to 18 months.

--- Later in debate ---

[Andrew Griffith]

I pay tribute to my right hon. Friend for the points that he made about how important it is that we lean into this space. He used the excellent and apposite example of fintech—a flourishing industry, for which the UK is genuinely one of the leading centres in the world. I share his concern about the availability of bank accounts. As he understands—I am sure he would not wish it otherwise—that is a commercial decision for organisations, but to the extent that the regulatory framework, or indeed the regulatory culture, is a contributing factor, Parliament will bring cryptocurrency into the regulated domain and decide that it is a lawful activity that could reap many benefits for the United Kingdom. It would, of course, be a concern if those who take part in this lawful and well-regulated activity were unable to procure bank accounts, so I can undertake to keep a close eye on that. I do not plan to make an immediate intervention, but he and other colleagues have raised the issue, as has the APPG. I will undertake to keep a close eye on it, and I am open to hearing examples of where people cannot open bank accounts.

The hon. Member for Strangford (Jim Shannon) has left the room, but I can give him the assurances he seeks. As a proud Unionist, it is a delight to have such a diverse set of representatives from across all parts of the Union. It is wonderful to have contributions from all parts of the Union today, but financial services is a reserved matter, and the Treasury and Parliament will bring forward the right regulations. The regulators have hitherto been clear about some of the risks in this domain, and we seek to strike the appropriate balance between not regulating and introducing appropriate regulations while recognising the potential consumer harms and making sure that we have effective, clear, proportionate and timely regulation. Those seem to be entirely desirable attributes.

[Martin Docherty-Hughes]

I am afraid I am going to have to challenge the Minister on his point about regulation. We already have regulation, which he and I have talked about, especially in Committee on the Finance (No. 2) Bill. Pretending that we did not have levers for a technology that has, in its tech section, been around for 30 years is, quite frankly, pie in the sky. When will the Government implement the existing regulation around fraud to deal with some of the crypto bros we have all been talking about for years?

[Andrew Griffith]

Fraud sits separately as part of criminal law. Fraud is fraud, which is a long-standing offence. I am sure the hon. Member has studied in detail the Government’s most recent fraud strategy, which is excellent, and I would be happy to introduce him to the Government’s recently appointed fraud tsar, my hon. Friend the Member for South Cambridgeshire (Anthony Browne), who will redouble the Government’s focus on tackling fraud.

On regulation, the hon. Member for West Dunbartonshire (Martin Docherty-Hughes) will recall that we recently passed secondary legislation covering cryptoasset financial promotions, which has now been passed by both Houses of Parliament. The regulators are working on its implementation, which will happen later this year. Importantly, it will once again bring the domain within the realm of the regulators we seek. I should say that the Government have no plans for a crypto tsar, but I undertake to champion the sector, quite rightly, in my role as the Economic Secretary, because I am responsible for financial regulation in the UK.

Given the potentially vast benefits of cryptocurrency, it is right that the Government are leaning forward and taking proactive action to harness the opportunities. I recognise the balance struck in the all-party parliamentary group’s report. I also agree that the UK must show early leadership within this internationally competitive sector, which is why we are working flat out to give clarity and to implement the framework as quickly as possible. I welcome the offer of support from the hon. Member for East Kilbride, Strathaven and Lesmahagow—it is a dialogue that we should continue—and I welcome the work of the all-party parliamentary group. I have regularly engaged with the cryptoasset sector. Rather than set up a single taskforce, I am regularly having multiple engagements to try to move things forward.

Fellow parliamentarians have suggested that cryptoassets are akin to gambling. I refute that. That is not the Government’s position; the right bodies to regulate them are the financial regulators, with their deep expertise and understanding of the issues such as how to ensure that markets are fair and how to protect consumers. They have much greater resource. That is no reflection on anyone, it is simply an important fact.

Importantly, industry can see that the UK has clear and ambitious plans for cryptoassets. I was thrilled to welcome one of the world’s leading tech investors, Andreessen Horowitz, which has decided to open its very first international office—its first outside silicon valley—in the United Kingdom. I hope that it blazes a trail that many others follow, and that reaches into all parts of this wonderful United Kingdom because it is about much more than simply London and the south-east.

I hope that I have made it sufficiently clear that the Government want to be a leader in this space and on the opportunities for growth that it can bring to the UK economy. In my view and that of the Government’s view, the best way to do that is to continue to develop a comprehensive regulatory regime that will create a safe environment to encourage innovation while managing the risks. I look forward to continuing discussions with parliamentary colleagues on this important agenda.

Question put and agreed to.