Long reads

The Westminister Series: Westminister cryptoasset debate

Chris Holmes

Chris Holmes

Peer, House of Lords

One of the last debates in the most recent Parliamentary sitting, suspended following the tragic death of Her Late Majesty, was on cryptoassets, cryptocurrencies, and their regulation. A good debate in which positive, encouraging comments were made by the Minister.

Martin Docherty-Hughes, the MP who secured the debate, is a long-time blockchain supporter and chair of the All-Party Parliamentary Group on Blockchain with which I am also involved. Docherty-Hughes opened the debate with the point that discussion about crypto has often “produced an awful lot of heat but often little light in this place.” The same can be said of the discussion outside Parliament.

His speech drew upon the work of Dr. Robert Herian and his book, Regulating Blockchain. The book is a good read, clearly setting out the issues at hand and remains just as relevant now as it was when first published in 2018.

In 2017, I published a report, Distributed Ledger Technologies for Public Good: leadership, collaboration, innovation, and in 2016, Sir Mark Walport, the Government’s Chief Scientific Adviser published Distributed Ledger Technology: beyond blockchain

As Docherty Hughes put it, blockchain is in no sense “the new kid on the block” and my key message is that we must act to make the most of the opportunity afforded by this technology, and that we focus on the potential for the public good also still stand.

There are applications beyond what most people still think of as a speculative asset class, making a small number of ‘crypto bros’ wealthy while the rest of us more traditional or merely risk-averse investors HFST (Have Fun Staying Poor)!

I do think one reason for optimism is that many ex-regulators are now involved in blockchain business’, associations, and organisations. This is certainly cause for some confidence in what can be achieved from a standards and regulatory perspective.

Back to this key question of regulation, in particular how should effective, modern regulation interact with the somewhat ‘solutionist’ belief of some blockchain proponents? Solutionists see the technology as the solution, even sometimes taking the technology off in search of a problem to solve. On the other hand, clearly there is no inevitability that blockchain adoption across our economy and society would see us all roll away to hell in a crypto-crashed handcart. As ever, we must tread a steady path through the noise with our focus on the opportunity and potential benefits.  

The public good, set out in detail in my 2017 report, has far more potential than most muse on right now.  Take Estonia, worth referencing, where, as Docherty-Hughes pointed out: “They 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.”

Echoing Herian: “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.”

Imagine that. Blockchain’s potential to completely reimagine the social contract between citizen and State. That’s blockchain for good.

Another important point on regulation. Current thinking in the crypto space - the myth that there is no regulation - should be thoroughly put to bed.  Quite simply, the biggest step that the government could take to redress the balance is to enforce the law that they already have.

Dr. Lisa Cameron MP highlighted current difficulties with business registration: “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.”

Responding to the debate, the Economic Secretary to the Treasury made several positive points starting by highlighting potential benefits to the wider economy:

“During today’s debate, Honourable Members have rightly focused largely on the risks of the new technology, concerns about consumer protection and areas for regulatory clarity, but I suggest that we all share the hope that, through innovation and creating the right conditions, we can achieve opportunities for the crypto industry in the UK to contribute largely to the growth of the wider economy.”

He also referred to financial inclusion playing a central role in any decision on the issuance or design features of a CBDC which, as a passionate advocate for both financial and digital inclusion was good to note:

“There has been no decision on the issuance or design features of a CBDC, or indeed whether we will do one. In those decisions, considerations about financial inclusion and accessibility of central bank digital currencies will be at the heart of any technical design decision.”

The Minister was also clear to balance volatility with potential value and also had a good grasp of blockchain applications outside of financial markets such as in healthcare, housing, and supply chains – another area I have done a lot of work in:

“There has been substantial volatility. Notwithstanding those market fluctuations, the potential for DLT technology underpinning cryptoassets remains powerful in many ways.”

The Minister’s positivity was clear:

“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 ground-breaking new products and services, and bridge the current position of UK financial services into a new era.”

He highlighted the dark side and how the government is already attacking this:

“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, cryptoassets 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.

I was pleased with the strength of his conclusion:

“We are undertaking this work because we have a choice: the UK can either be a spectator as this technology transforms aspects of life, or we can become the best place in the world to start and scale crypto technologies. The government choose the latter course. We want the UK to be the dominant global hub for crypto technologies, and so will build on the strengths of our thriving fintech sector, creating new jobs, developing ground-breaking new products and services.”

Overall, a good debate with reasons to be cheerful, and useful signposts to the upcoming Economic Crime (Transparency and Enforcement) Bill (new powers to seize crypto assets) the Financial Services and Markets Bill (regulatory framework including stable coins) – and another (not mentioned in the debate) but absolutely key in demonstrating how we can pass good enabling legislation around this technology is the Electronic Trade Documents Bill (digitisation of trade documents).

I remain rationally optimistic, and equally determined that, together, we can plot out the right regulatory framework to enable consumer protection, competition, economic, and social benefits for us all in the years to come.

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