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Volume 826: debated on Tuesday 20 December 2022


Asked by

To ask His Majesty’s Government whether they have revised their policy towards cryptocurrencies following the collapse of the cryptocurrency exchange FTX.

The UK remains committed to creating an environment where firms can innovate while maintaining financial stability and regulatory standards so that people and businesses can use technology safely. Recent events in the crypto market reinforce the case for timely, clear and effective regulation. The Government have already taken steps to bring certain crypto asset activities into the scope of UK regulation and will consult on proposals for a broader regulatory regime in the coming weeks.

I thank the noble Lord for the response. The reason for my Question is that it emerged in April of this year that the Government wish to make the UK a global hub for cryptocurrency assets. The incoming head of the FCA regards crypto platforms as “deliberately evasive” and facilitating money laundering. That rather sounds like the circumstances underlying the FTX collapse. The head of research of the Bank for International Settlements said in the Financial Times on Saturday that as far as he was concerned, he saw little tangible economic activity deriving from the crypto world—

The question is coming. He went on to say that public policy

“needs to start with a realistic assessment of the economic value that flows from blockchain technology.”

I assume that the Government have done the realistic assessment. What economic value have the Government detected within this technology?

Recent events in the crypto asset market such as the failure of FTX and the stablecoin Terra Luna have highlighted vulnerabilities in the sector and reinforce the need for timely, clear, appropriate and effective regulation. It is therefore important that we get that right. The Government’s commitment to strengthening strictly crypto asset regulation will support authorities in managing these risks to protect consumers, maintain financial stability and support innovation. This is, after all, a growth sector. The Government will continue to closely monitor the wider crypto asset market and will stand ready to take further regulatory action if required.

Does my noble friend agree that the Government could be accused of being slow to regulate in this field? What type of regulation do the Government intend to introduce?

I thank my noble friend for the question. At Fintech Week 2022 the Government announced their commitment to consult on a world-leading regime for a broader set of crypto asset activities. The Financial Services and Markets Act also ensures that crypto assets may be regulated within the existing financial services regulatory framework. Furthermore, the UK is committed to creating a regulatory environment in which firms can innovate while, crucially, maintaining financial stability and regulatory standards.

Some months ago, in the happy early days of the crypto world, the Treasury announced, rather to my surprise, that it was going to create its own non-fungible token. Is that still the case, and if so, why? If the Minister does not have the answer now, perhaps he can drop it in his Christmas card to me.

I thank the noble Lord for that question. The non-fungible token market has grown considerably over the past year. New types of NFTs have emerged that blur the boundary between financial services products and digital collector items. It is not the Government’s intention to apply financial regulation to NFTs. However, the Government will consult on the details of a future regulatory regime for crypto assets in due course, and NFTs will fall under this. We stand ready to take further legislative action as required.

My Lords, will the Minister look again at the consumer duty in the Financial Services and Markets Bill, recognise its woeful inadequacies and replace it with a proper duty of care? If he does not, the crypto industry will have huge scope as it is developing to sell inappropriate investments to inappropriate people without any ability to stem that activity through regulation.

Volatility is a characteristic of certain crypto assets. The FCA and the Bank of England have warned that crypto assets are high-risk and investors should be prepared to lose all their money. However, the Bank of England’s Financial Policy Committee continues to note that crypto asset markets do not pose a material risk to financial stability, although the stability risks will likely grow as connections between the traditional financial services sector and crypto markets increase. That is why the Treasury agrees with this assessment, which has been echoed by the Financial Stability Board.

My Lords, the use of centralised peer-to-peer crypto lending platforms has surged and crypto lending services have become part of the shadow banking industry. Despite past hints, the Government have failed to regulate the shadow banking sector; it is not subject to any capital adequacy or stress tests. Does the Minister know that, by delaying the regulation of the shadow banking sector, he is laying the foundations for the next financial crash?

I certainly hope that I am not laying the foundations for the next financial crash. This Question is specifically about crypto assets, not shadow banking.

My Lords, following the collapse of FTX there is great concern at just how volatile this sector is. Many young people presume that, because it is called a currency, it is more stable than it really is. I am told that, if you go online, you will find young people talking about eye-watering amounts of money that they have made and others have lost. What are His Majesty’s Government doing to educate younger people about proper investment understanding, so that they are aware of the risks they are taking if they enter this market?

The right reverend Prelate makes an excellent point. HMT is working closely with the FCA so that the risks involved in investing in this asset class can be clearly and explicitly conveyed to anyone who is thinking of making this type of investment.

My Lords, I recognise the Government’s desire to be a leader in financial services and new technology. However, can my noble friend explain how we have managed to get cryptocurrencies approved and used under regulatory firms when their whole purpose is to evade the usual checks and balances in conventional financial systems? They have been a money launderers’ and a thieves’ paradise. We are sanctioning foreign Governments, but they can freely use these so-called assets, and there is also the environmental damage being done. I urge my noble friend to consider banning this activity from all regulated firms.

The Government launched a new anti-money laundering and counterterrorist financing regime for crypto assets in January 2020. UK crypto asset exchange providers and custodian wallet providers are now in the scope of the UK’s money laundering and terrorist financing regulations. Furthermore, the FCA proactively supervises registered firms and has a range of criminal and civil enforcement powers at its disposal.

My Lords, in response to the collapse of FTX, Singapore’s Finance Minister and Deputy Prime Minister, Lawrence Wong, said:

“Cryptocurrency platforms can collapse due to fraud, unsustainable business models, or excessive risk taking. FTX is not the first cryptocurrency platform to collapse, nor will it be the last. Those who trade in cryptocurrencies must be prepared to lose all their value… No amount of regulation can remove this risk.”

With this in mind, does it remain Rishi Sunak’s ambition to make the UK a global crypto hub?

The UK is taking a tailored and proportionate approach to crypto asset regulation that is sensitive to the risks posed and responsive to new developments in the market. Our proposed approach focuses on near-term and longer-term regulation. This will vary across different jurisdictions.