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Select committee inquiry

Digital Currencies inquiry

Closed

Treasury Committee · Opened 20 February 2018 · Closed 20 December 2018

31 conclusions
Inquiry on parliament.uk ↗

What the inquiry looked at

“The inquiry will cover the role of digital currencies in the UK, including the opportunities and risks that digital currencies may bring to consumers, businesses, and the Government It will examine the potential impact of distributed ledger technology—such as blockchain—on financial institutions, including the central bank, and financial infrastructure. It will also scrutinise the regulatory response to digital currencies from the Government, the Financial Conduct Authority, and the Bank of England, and how regulation could be balanced to provide adequate protection for consumers and businesses without stifling innovation. Terms of Reference This inquiry will examine the use of digital currencies and distributed ledger technology in the UK. The inquiry will cover: The role of digital currencies in the UK, including the opportunities and risks digital currencies may bring to consumers, businesses and the Government (and associated bodies). The potential impact of distributed ledger technology on financial institutions, including the central bank, and financial infrastructure. The regulatory response to digital currencies from the Government, the FCA and the Bank of England in relation to Anti-Money Laundering legislation and how regulation could be balanced to provide adequate protection for consumers and businesses without stifling innovation. Some of the key questions the Committee will consider in this inquiry include: Are digital currencies ultimately capable of replacing traditional means of payment? To what extent could digital currencies disrupt the economy and the workings of the public sector? What risks and benefits could digital currencies generate for consumers, businesses and governments? How is distributed ledger technology being applied in the financial services sector, and how might it be applied in future? What work has the Government (and its associated bodies) done to understand, prepare for and, where relevant, encourage changes that may be brought about by increased adoption of digital currencies? How might the Government’s processes adapt should digital currencies be adopted more widely (e.g. tax implications, anti-money laundering measures)? Is the government striking the right balance between regulating digital currencies to provide adequate protection for consumers and businesses whilst not stifling innovation? Could regulation benefit digital currency start-ups by improving consumer trust? How are governments and regulators in other countries approaching digital currencies and what lessons can the UK learn from overseas?”

The committee's words, from the inquiry page on parliament.uk ↗.

What the government said

The government responded on 20 December 2018.

Summary written by Accountability Index from the government's response.

The Government says it "shares the Committee's concerns" about risks to consumers and market integrity from cryptoassets, and sets out consultations and planned action while also encouraging responsible innovation in distributed ledger technology.

  • The FCA "will consult on perimeter guidance" on how regulation applies to security tokens "by the end of this year"; the Government will consult "early next year" on whether other cryptoassets with comparable features to specified investments should be captured.
  • On exchange tokens such as Bitcoin, the Government will consult in early 2019 on "whether and how" they and related firms could be regulated effectively, "in the case that other measures" in the Taskforce's report do not adequately address all relevant risks.
  • On money laundering, the Government has asked the FCA "to consider" acting as supervisor, as the Committee recommended. It "will consult on its proposed actions in the new year, and will legislate during 2019".
  • The FCA says it has "committed to consult on a prohibition of the sale of all derivatives referencing exchange tokens" to retail consumers.

Read the government's response ↗ Read the report ↗ Report an error

How the inquiry ran

Each dot is a dated item listed on this page, from the inquiry's opening on 20 February 2018 to its close on 20 December 2018.

  1. Oral evidence 3 sessions
  2. Report 19 Sep 2018
  3. Government response 20 Dec 2018

What it recommended 0 recommendations · 31 conclusions

The committee's own words. Open an item to read it in full.

1Functioning currencies are generally understood to serve as a store of value, a medium of...
Concluded (the committee's words)
Functioning currencies are generally understood to serve as a store of value, a medium of exchange and a unit of account. As yet, there are no so-called “cryptocurrencies” that serve all these functions. Well-functioning cryptocurrencies currently exist only as a theoretical concept, and the term “crypto-assets” is more helpful and meaningful in describing Bitcoin, and the many hundreds of other ‘altcoins’ that have emerged over the past decade.
2Crypto-assets and blockchain were originally designed as an alternative system of making payments in exchange...
Concluded (the committee's words)
Crypto-assets and blockchain were originally designed as an alternative system of making payments in exchange for goods and services. But even the most widely- used crypto asset—Bitcoin—is not widely accepted by merchants. Moreover, the blockchain that underpins Bitcoin transactions cannot process anything like the volumes of transactions that would be required for it to become a mass-market payments system. Even at current levels, the energy costs of verifying transactions appear disproportionate to the potential benefits of a decentralised payments system.
3The slow, costly and energy-intensive verification process for transactions is not unique to Bitcoin, but...
Concluded (the committee's words)
The slow, costly and energy-intensive verification process for transactions is not unique to Bitcoin, but a fundamental feature of crypto-assets based on public, decentralised blockchains. This may ultimately limit the extent to which crypto- assets and blockchain can replace conventional money and payments systems.
4The arguments put forward that crypto-assets could further financial inclusion are unconvincing.
Concluded (the committee's words)
The arguments put forward that crypto-assets could further financial inclusion are unconvincing. Efforts to further financial inclusion are best focused on reducing the number of people without access to bank accounts, rather than increasing the numbers with access to crypto-assets.
5There are a number of examples of blockchain being deployed in the financial services industry...
Concluded (the committee's words)
There are a number of examples of blockchain being deployed in the financial services industry and supply chain management. The Committee is supportive of good innovation, but notes that blockchain should not be pursued for its own sake. Rather, Government and industry should identify what problems exist and consider whether blockchain offers the most appropriate solution. The Committee recognises that blockchain technology may have the potential to solve problems caused by a lack of trust in data integrity and may be a more efficient method of managing certain types of data in the long term, offering higher levels of security than centralised databases.
6However, at present—although small scale uses for blockchain may exist—the Committee has not been presented...
Concluded (the committee's words)
However, at present—although small scale uses for blockchain may exist—the Committee has not been presented with any evidence to suggest that universal applications of the technology are currently reliably operational.
7Crypto-assets have no inherent value.
Concluded (the committee's words)
Crypto-assets have no inherent value. In the absence of any market fundamentals, their prices fluctuate according to sentiment. This causes far higher volatility than other asset classes, exposing investors to larger potential gains, but correspondingly greater risk of loss. The use of blockchain as a payments system exacerbates these risks, since the exchange rate (vis-à-vis other crypto-assets, or conventional currency) can fluctuate significantly during the time it takes to settle a transaction.
8On account of their volatility alone, crypto-assets are especially risky, particularly for inexperienced retail investors.
Concluded (the committee's words)
On account of their volatility alone, crypto-assets are especially risky, particularly for inexperienced retail investors.
9Investors typically access and invest in crypto-assets through exchanges.
Concluded (the committee's words)
Investors typically access and invest in crypto-assets through exchanges. A number of these have been hacked, with customers losing significant amounts of money as a result.
10There is no collective deposit insurance scheme to compensate investors in the event of a...
Concluded (the committee's words)
There is no collective deposit insurance scheme to compensate investors in the event of a hack, nor do individual exchanges generally have arrangements in place to do so. The risk of hacking associated with crypto-assets may not be something investors in conventional assets have experience of, and therefore they may not be well placed to judge this risk. It constitutes further evidence that crypto-assets are particularly ill-suited to retail investors.
11There have also been instances of investors losing access to their crypto-assets when they have...
Concluded (the committee's words)
There have also been instances of investors losing access to their crypto-assets when they have lost their passwords to their accounts with exchanges or crypto-asset platforms. Exchanges and crypto-asset platforms have subsequently been unable to recover their customers’ details, so customers are locked out of their accounts permanently. This often unexpected outcome for investors is a stark contrast against how customers of banks, and other regulated financial services firms, are treated when they have forgotten their details.
12The FCA’s stark consumer warning on ICOs is evidence that they present significant risks to...
Concluded (the committee's words)
The FCA’s stark consumer warning on ICOs is evidence that they present significant risks to investors. But apart from drawing attention to the risks, there is little the FCA can do to protect individuals from being defrauded or losing their money. This is because most ICOs do not promise financial returns, but instead offer future access to a service or utility, meaning they fall outside the regulatory perimeter.
13While there may be no explicit promise of financial returns, investors in ICOs clearly expect...
Concluded (the committee's words)
While there may be no explicit promise of financial returns, investors in ICOs clearly expect them: they are not buying tokens to gain access to as-yet unbuilt theme parks, or to obtain dental services in years to come, but in the hope of selling them at a profit. The development of ICOs has exposed a regulatory loophole that is being exploited to the detriment of ordinary investors. The Regulated Activities Order should be updated to bring ICOs within the FCA’s perimeter as a matter of urgency, and bring investor protections into line with those in the United States.
14Crypto assets and ICOs are extremely risky, and the Committee agrees with the FCA that...
Concluded (the committee's words)
Crypto assets and ICOs are extremely risky, and the Committee agrees with the FCA that investors should be prepared to lose all their money.
15Owing to their anonymity and absence of regulation, crypto-assets can facilitate the sale and purchase...
Concluded (the committee's words)
Owing to their anonymity and absence of regulation, crypto-assets can facilitate the sale and purchase of illicit goods and services, and can be used to launder the proceeds of serious crime and terrorism.
16The absence of regulation of crypto-asset exchanges—through which individuals convert crypto-assets into conventional currency—is particularly...
Concluded (the committee's words)
The absence of regulation of crypto-asset exchanges—through which individuals convert crypto-assets into conventional currency—is particularly problematic.
17The adoption of the Fifth Anti-Money Laundering (AML) Directive represents a step forward in this...
Concluded (the committee's words)
The adoption of the Fifth Anti-Money Laundering (AML) Directive represents a step forward in this respect. Under the Fifth AML Directive, crypto-asset exchanges will have to comply with anti-money laundering and counter-terrorist financing rules. The Committee urges the Government to treat the transposition of the Directive as a priority, and to expedite the consultation process, which is currently not planned to finish until the end of 2019. If the UK leaves the EU without a transition period in March 2019, the Committee would nonetheless expect the Government to seek to replicate the relevant provisions of the AML Directive in UK law as quickly as possible.
18The Committee believes that the FCA should be the relevant regulator for supervising anti-money laundering.
Concluded (the committee's words)
The Committee believes that the FCA should be the relevant regulator for supervising anti-money laundering.
19Crypto-asset markets are particularly vulnerable to manipulation, and they fall outside the scope of market...
Concluded (the committee's words)
Crypto-asset markets are particularly vulnerable to manipulation, and they fall outside the scope of market abuse rules. In responding to this Report, the FCA should outline the approach it would take to market manipulation were these markets to fall within its remit.
20The Committee agrees with the Bank of England that, since they are not being widely...
Concluded (the committee's words)
The Committee agrees with the Bank of England that, since they are not being widely used as a means of payment, and the linkages to systemically-important firms and markets are negligible, the risk to financial stability arising from crypto-assets is low. The Committee expects the Bank of England and the FCA to continue to monitor developments in crypto-asset markets, and financial institutions’ exposure to them.
21The FCA’s consumer warnings are a feeble corrective to advertisements—on social media, billboards, trains and...
Concluded (the committee's words)
The FCA’s consumer warnings are a feeble corrective to advertisements—on social media, billboards, trains and taxis—that only emphasise the upside opportunities of crypto-asset investing. The advertisements for crypto-asset investing are clearly misleading to consumers and as crypto-asset activities fall outside the FCA’s regulatory perimeter, the FCA is restricted in actions it can take. The FCA needs more power to control how crypto-exchanges and ICO issuers market their services, by bringing the activities they perform into the regulatory perimeter. Such a step would also provide investors with wider protections against mistreatment, including loss of deposits through fraud and hacking, or losing access to funds due to the loss of passwords.
22Crypto-assets have been embedded in certain pockets of society and industry, and it is highly...
Concluded (the committee's words)
Crypto-assets have been embedded in certain pockets of society and industry, and it is highly likely that they are here to stay. The UK Government and financial services regulators appear to be deciding whether they will allow the current “wild west” situation to continue, or whether they are going to introduce regulation. The current ambiguity surrounding the Government’s and the regulators’ positions is clearly not sustainable.
23The Committee is aware of the establishment of self-regulating bodies in the crypto-asset industry such...
Concluded (the committee's words)
The Committee is aware of the establishment of self-regulating bodies in the crypto-asset industry such as Crypto UK, which set out codes of conduct and best practice for the industry. However, as these standards are wholly voluntary, there are inevitably firms ignoring them. When industry is self-regulating, there is no authority to hold industry to account. Throughout the inquiry, the Committee has heard of the crypto-asset industry distributing misleading advertisements and laxing on their self-imposed ‘know your customer’ rules. Self-regulation within the crypto-asset industry is clearly insufficient. The introduction of formal regulation would make standards compulsory and relevant regulators can hold industry to account.
24Given the scale and variety of consumer detriment, the potential role of crypto- assets in...
Concluded (the committee's words)
Given the scale and variety of consumer detriment, the potential role of crypto- assets in money laundering and the inadequacy of self-regulation, the Committee strongly believes that regulation should be introduced. At a minimum, regulation should address consumer protection and anti-money laundering.
25In deciding the regulatory approach, the UK Government and regulators should evaluate the risks of...
Concluded (the committee's words)
In deciding the regulatory approach, the UK Government and regulators should evaluate the risks of crypto-assets, and assess whether their growth in the UK should be encouraged.
26If the Government decides that growth is to be encouraged, the Committee believes that the...
Concluded (the committee's words)
If the Government decides that growth is to be encouraged, the Committee believes that the introduction of regulation could lead to positive outcomes for the crypto- asset market. The implementation of crypto-asset regulation in the UK may enable the market place to move to a more mature business model that improves consumer outcomes and enables it to grow sustainably. The entry of institutional investors into the market would increase liquidity, which in itself could reduce some of the inherent risks that exist at present.
27If the UK develops an appropriate and proportionate regulatory environment for crypto-assets and if future...
Concluded (the committee's words)
If the UK develops an appropriate and proportionate regulatory environment for crypto-assets and if future innovations in crypto-assets proved themselves as beneficial to society and industry, the UK could be well placed to become a global centre for this activity, providing that the crypto-asset market adhered to high standards and was not associated with criminality.
28The Committee considers that introducing the regulation of crypto-assets and associated activities by extending the...
Concluded (the committee's words)
The Committee considers that introducing the regulation of crypto-assets and associated activities by extending the Regulated Activities Order would be the quickest method of providing the FCA with the necessary legal powers to execute its duties of protecting consumers and maintaining market integrity. Designing a new framework of regulation would inevitably take much longer and given the growing risks surrounding crypto-assets and subsequent consumer detriment, the introduction of regulation should be treated as a matter of urgency.
29The Committee recommends that the Government consider what “activity” related to crypto-assets should be specified...
Concluded (the committee's words)
The Committee recommends that the Government consider what “activity” related to crypto-assets should be specified in the RAO and the ramifications of this introduction. As discussed earlier, this should include at a minimum the issuance of ICOs and the provision of crypto exchange services.
30The global regulatory response to crypto-assets is in its infancy.
Concluded (the committee's words)
The global regulatory response to crypto-assets is in its infancy. Nonetheless, given the UK has yet to introduce any crypto-asset regulation, it is in a position to learn from those experience of countries that have done so.
31The Committee recognises the importance of international cooperation on the regulation of crypto-assets and associated...
Concluded (the committee's words)
The Committee recognises the importance of international cooperation on the regulation of crypto-assets and associated activities. The Committee encourages UK regulators to continue engaging with international bodies to ensure best practice from other regulators is learned and applied to the UK context.

Evidence

Oral evidence sessions 3