Draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 Draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023

Peter Grant Excerpts

Tuesday 2nd May 2023 General Committees

[Peter Grant (Glenrothes) (SNP)]

Thank you, Mr Gray —it is Peter Grant, by the way, not Kevin Brennan. I am sure that Kevin will be more insulted than I am if you mistake him for me.

[The Chair]

I do beg your pardon.

[Peter Grant]

I can assure you I have been called worse, Mr Gray.

The Scottish National party, like the official Opposition, will not be opposing the draft order today, but I want to raise one or two points. I am concerned not about the way in which these transactions will be regulated, but about just how effective the arrangements will be. My concern is that the financial promotion regulation that we have for more traditional forms of financial products is not working. It is not protecting consumers. Too many of my constituents have lost a lot of money. I do not remember whether I have had discussions with the Minister about Blackmore Bond, which I have certainly discussed with a lot of his colleagues.

[Andrew Griffith]

indicated assent.

[Peter Grant]

I see from the Minister’s nodding that he knows what I am referring to. The Financial Conduct Authority just never got ahead of the chancers in the way that those bonds were being sold and promoted to innocent members of the public in my constituency and elsewhere. There is still an issue as to whether the Financial Conduct Authority takes seriously enough potential scams that may not break the economy, but will certainly cause untold harm to sometimes quite significant numbers of our constituents.

Will the Minister indicate what the Government are doing to make sure that the Financial Conduct Authority and others who are trying to regulate the crypto market have got the resources and expertise to do the job? If we are giving them more and more responsibilities and they are already saying that they do not have the resources they need to regulate as firmly as we would like, that means that significant additional resources will have to be put in. Will the Minister confirm whether, on the back of this order, there is an intention to increase the resourcing of the Financial Conduct Authority?

What are we going to do to make sure that where there are breaches, those who are in breach are brought to book much more quickly than often happens with more traditional promotions? One of the problems with any kind of e-commerce is that if things start to go wrong, they can go very wrong very quickly indeed. We need to make sure that the regulatory process can be speeded up.

Finally—this may be beyond the remit of the Minister today—what are the Government doing to make sure that when cases come to court, those hearing the cases understand what they are dealing with? A judge and jury trial in relation to these matters might not work, for example: where are we going to find a jury that understands the very fine points of technical detail that may be critical in deciding whether something is permitted or not permitted and therefore in deciding whether somebody is innocent or guilty?

My primary concern is whether those who will be asked to regulate under this new order will have the resources and the expertise necessary to make sure that they can do the job effectively.

[Kit Malthouse]

It is a pleasure to appear before you, Mr Gray. There are many reasons for not just consumers, but Governments, to fear cryptocurrency. The growth in cryptocurrency effectively represents a loss of control in nation states of our money supply, and a loss of control by co-ordinating nations across the world of the global money supply.

At the moment, cryptocurrency capitalisation, if you like, or gross valuation is anywhere between $1.2 trillion and $1.5 trillion, against a global liquid money supply of about $50 trillion, so it is not a huge percentage. Nevertheless, it could have an impact at the margin, and it is only going to grow. The Government should be careful about seeking to legitimise the use of cryptocurrency, not just among individual retail investors and users but among businesses. When I see this kind of legislation coming forward, I am not necessarily convinced that the full implication of the journey on which we are heading with cryptocurrency has been appreciated.

You will recall from your history studies, Mr Gray, the Dutch tulip bulb madness of, I think, the 18th century. Tulip bulbs became a form of currency, many a family were bankrupted to purchase one or two bulbs, and thereafter the market crashed. It was based on an imputed value of something that had no connection to reality. I am afraid that the same is true with bitcoin.

While bitcoin, ethereum and others—there are now hundreds, if not thousands, of these cryptocurrencies out there—are supposedly fungible and exchangeable, they effectively rely on trust between individuals as to the value, and an opinion of the value, unlike normal cash and assets such as the pound sterling or the dollar, which rely on the Government or the central bank standing behind the value of the currency. That makes them very different; it also makes them very volatile. There have been massive plunges in the value of bitcoin, for example, over the past few months: I think it is down something like 36% in just the past three to six months. That makes me wonder whether we want our constituents to be exposed to this currency—if it is one—at all.

In seeking to regulate the promotion of cryptocurrencies, the Government are, I am afraid, unwittingly giving them an element of legitimacy and bringing them into the same fold of investment as stocks and shares, bonds or anything that someone might put in their individual savings account. They will be promoted with a big banner headline, but at the bottom, tiny type that nobody reads will say, “The value of investments can go down as well as up. You could lose the farm, your house—everything—on this investment.”

[Peter Grant]

I put it to the right hon. Gentleman that the self-same weaknesses in the current system apply already to investment bonds and property development bonds. The issue is not the kind of scam asset that is being sold, but the fact that they are not being properly regulated, regardless of whether they are traditional investments or crypto investments.

[Kit Malthouse]

The hon. Gentleman raises an interesting point. Of course, traditional investments very often have some foundation in reality. A stock or share very often has a company behind it that is producing revenue or otherwise. A bond will have the same thing. With bitcoin, all that is being sold is the assumption that somebody else will pay for that asset, even though there is no asset whatever that sits behind it. That is where it is subtly and importantly different.

The other thing to bear in mind is that cryptoassets are being overwhelmingly used in international organised crime. They have become the equivalent of the £50 note, in that they are being used by large international crime syndicates to move money around the world, largely undetected and unmolested by Governments. That is another major problem and a reason to be wary. As the Government regulates—and therefore brings into the fold and adds a veneer of legitimacy to—this form of exchange, they are effectively facilitating transfers between the illegitimate and criminal market and the legitimate market.

An individual will never know from whom or where their bitcoin is coming when they buy it from their investment adviser. It may well have been through the hands of several organised criminals before it gets to them, and unlike many £50 notes it will not bear traces of cocaine or heroin. We have seen the scale of the problem with cash in this country. The Bank of England has about £70 billion-worth of cash in notes and coins in circulation. Only about £20 billion is seen through the tills, so £50 billion is somewhere else. The Bank reckons that about £1.5 billion is in suitcases under the bed, held in cash savings or otherwise. The rest, I am pretty certain, is involved in crime. The same will be true, I am afraid, of so many of these cryptoassets.

I will not necessarily vote against the draft order, but the Government have to ask themselves whether they are legitimising a form of exchange that in the long term is likely to be damaging to the country’s economy and the global economy, and to those individuals who invest in it. For all the warnings that we put on things, once this sits alongside all the other investments that an independent financial adviser will offer, it becomes a legitimate option. At the moment, it is an esoteric investment available only to the most sophisticated of those looking to invest. I realise that that is growing every day, but when it gets a stamp of respectability I worry that it will become like the economic equivalent of cigarettes, which were out there for years causing millions of people to die of lung cancer before we stamped a health warning on them all. By then, they were just too legitimised for us to do anything about them. I worry about that in particular.

My second major point is about fraud and money laundering. I understand that one reason the Government want to bring cryptoassets into the fold is to give fraud and money laundering legislation greater purchase. However, we have to reflect on the fact that over the past 30 years we have had ever greater attempts by Governments of all stripes to introduce legislation to deal with fraud and money laundering yet it is worse than it ever was. Strangely, criminals worked out that they too had a passport and a utility bill and therefore found it fairly easy to open a bank account. We are certainly seeing much higher levels of money laundering, particularly around drugs, than there used to be, and that is now very much enabled by cryptocurrencies. Given how much more susceptible such currencies are to being used in money laundering, fraud and crime in general, because they are much less trackable and traceable, I would be interested to know from the Minister why the existing rules will make any difference at all.

My final point is about the exclusion of NFTs. As the hon. Member for Hampstead and Kilburn said, although NFTs are carved out in this legislation and are deemed to be different because, thus far, they have largely been used as collectibles because they are supposedly digital works of art, there is growing evidence that they are being used as a means of exchange and that, slowly over time, they will become fungible. It will not be long before there will be—in fact, there already are—central exchanges of NFTs that mark a price on them. We will have classes of price for different NFTs that will make them, in effect, the same as bitcoin. If the Government aspire to bring in this regulation, they really ought to include NFTs. Two students in a back room with a bit of sophisticated computer programming knowledge can create a class of NFTs and sell them—and people do buy them, sometimes for thousands of pounds. The idea that they should be excluded from the regulation seems to me to be a bit strange.

To conclude, I am concerned that a Government running helter-skelter towards cryptocurrency are not looking far enough ahead at the consequences. I realise that there is now a global consensus that crypto is a good thing, and we cannot be like King Canute and stick our finger in the dam, but cryptocurrencies present questions about the controllability of economies in the future. No one has yet come up with a solution to the significant and escalating crime problem that cryptocurrencies represent. No one has actually answered the question, before we bring in this regulation, of whether we think retail consumers should have access to this asset class at all.