Written evidence submitted by the Association of Accounting Technicians

1. Executive summary

1.1.   AAT does not believe that regulation of cryptocurrencies in the UK is currently sufficient.

Furthermore, enforcement of existing regulations remains a considerable challenge too.

1.2.   Cryptocurrencies continue to be viewed by consumers primarily as an investment vehicle rather than what they were designed for i.e. a payment method.

This means that their widespread usage as an everyday payment method appears highly unlikely in either the short or medium term.

1.3.   Distributed ledger technology is already being utilised in some areas of the accountancy sector.

However, the possibilities for its successful widespread adoption in both the accountancy and financial industries are considerable and remain largely untapped.

1.4.   Central Bank Digital Currencies (CBDCs) represent a very different proposition to private cryptocurrencies.

As a result, they may well prove to be a more acceptable and popular payment method.

1.5.   Dozens of countries have banned the use of private cryptocurrencies due to concerns around money laundering and financial stability.

However, some of these countries have simultaneously invested in developing their own CBDC, most notably China.

1.6.   Widely reported concerns about the negative environmental impact of cryptocurrencies, especially Bitcoin, need not hamper the development of CBDCs.

This is because such concerns can largely be eliminated at the design stage.

2. AAT response to the inquiry

Are the Government and regulators suitably equipped to grasp the opportunities presented by crypto-assets, whilst at the same time mitigating against the risks?

2.1.        Job creation is one seemingly obvious benefit of the crypto-asset industry and one that has been referenced by the UK Government as it attempts to turn the UK into a crypto hub. However, the loss of thousands of jobs in the cryptocurrency market over the last 6 months somewhat undermines this justification.

2.2.        Another much heralded opportunity is the possibility for investors to make outsized returns, which some consumers have been lucky enough to do but many have also realised substantial losses as a result of the inherently risky nature of crypto assets and the fact that despite being designed as a currency for payment, many consumers simply view private crypto as an investment opportunity.

2.3.        Historically, low interest rates have made crypto investments particularly attractive to those unable to obtain reasonable returns in recent years. Although this is now changing both in the UK and abroad, crypto investment may continue to be attractive as a means of keeping pace with record inflation.

2.4.        The opportunity for short settlement times is clear but this is now increasingly the case with standard banking payment systems. Where crypto does have an advantage is cost, given their comparatively low fees.

2.5.        In 2019, a report from the G7 on stablecoins[1] found that they pose a serious threat to a range of public policy areas, including “challenges to fair competition, financial stability, monetary policy and, in the extreme, the international monetary system”.

2.6.        Whilst the FCA and Bank of England have long warned that cryptocurrencies are such a high-risk investment that, if consumers invest in these types of product, they should be prepared to lose all their money[2] these words have proved far from a sufficient deterrent to UK consumers, more than 2 million of whom now own digital currencies, a vast number of whom have lost significant sums of money as a result of the cryptocurrency market losing 55% of its value in 2022[3].

To what extent are crypto-assets when used as digital currencies (such as Stablecoin) likely to replace traditional currencies?

2.7.        AAT believes private crypto-assets are unlikely to be used as digital currencies on a large scale in the short to medium term.

2.8.        It is clear that the majority of the 2 million+ consumers who hold cryptocurrencies in the UK are doing so as an investment opportunity rather than holding currency for utilisation as a payment method. 

2.9.        With regard to use as a payment method, although recognising that the likes of Amazon and Microsoft accept cryptocurrency payment, as have EY and PwC in relation to accountancy services, discussions with AAT Licensed Accountants – who provide tax and accountancy services to over 600,000 small businesses – reveal their belief that there is very little appetite for small businesses, especially small accountancy firms, to do the same.

2.10.    This is primarily due to the high degree of risk involved given the wild fluctuations in price – although it could be argued this is little different to other currency exchanges – and because it was unclear what benefit there was to using cryptocurrency over real money. That said, a small degree of client usage has been reported and this is being driven by the end user e.g. digital only businesses who felt it provided them with greater access to a specific consumer group.

2.11.    However, CBDC’s represent a different proposition. Increased trust, reduced risk, greater stability and government backing make these a more attractive proposition.

It is worth considering the Chinese example here given their CBDC has been rolled out to various Chinese cities and has seen over 260 million people open a digital wallet for a e-CNY (electronic Chinese Yuan) . An individual is required to use their individual ID card to open such an account, providing corporate confidence (and traceability) and goes some way to explaining why more than 10 million corporate accounts have been opened and almost 2million merchants now accept payments using e-CNY wallets. This has led to 87 billion yuan (around £10.7bn) of transactions taking place. As a note of caution, whilst these statistics superficially appear impressive, the high number of wallets indicates many have been opened but are neither being used for transactions or holding much or indeed any e-CNY balances.

What opportunities and risks would the introduction of a Bank of England Digital Currency bring?

Opportunities:

2.12.    Whilst money laundering is becoming a problem with private cryptocurrencies, replacing cash with a Central Bank Digital Currency (CBDC) could reduce money laundering, tax evasion, and other illegal transactions, including the use of forged notes. In the first half of 2021 there were 58,000 notes taken out of circulation by the Bank of England[4] (and many more that were not). In contrast, the largely cashless South Korean economy reported just 272 such notes[5]. 

2.13.    There would also be benefits for cross border payments. A joint study by the Bank of Canada, Monetary Authority of Singapore and the Bank of England, concluded that a CBDC would lead to improvements in counterparty credit as well as a reduction in payment and settlement risks.[6]

2.14.    Improving the efficiency of processes to make payment. These are likely to be especially notable with regard to wholesale or large-value payment systems.

2.15.    The eventual replacement of notes and coins would save millions of pounds in production and transportation costs too.

2.16.    Notwithstanding the 2022 losses endured by many cryptocurrencies, as Bitcoin and other private cryptocurrencies continue to increase in usage, central banks are effectively losing market share, a CBDC could help reverse this

Risks:

2.17.    CBDCs are very different to private cryptocurrencies such as Bitcoin and Ethereum but the seriousness with which CBDCs are being treated inadvertently gives credibility to private cryptocurrencies.

2.18.    Data protection and privacy risks are significant and whilst they may not feature prominently in countries like China, in the UK these could prove considerable.

2.19.    Earlier this year, the World Bank posed the question as to what the potential risks/challenges associated with introducing a CBDC are. They concluded, “The introduction of CBDC could disrupt the existing financial-intermediation structure. In addition, depending on design and country context, CBDC could pose risks to financial stability, financial integrity, data protection and privacy, and cyber resilience. Further, it can have implications for the legal and regulatory framework, increased responsibilities of the central bank, and could also lead potentially to currency substitution, especially in the context of cross-border CBDC.”[7]

What impact could the use of crypto-assets have on social inclusion?

2.20.    Again, this is a question that has been considered by the World Bank, albeit in an international context with a focus on developing countries but the findings can broadly be applied to the UK.

2.21.    The Bank concluded that; “For many developing countries, including some South Asian countries, low access to transaction accounts and low usage of digital payments have been seen as a motivator to introduce CBDC. Although not a panacea, CBDC could potentially help fill the gap in traditional payment systems and promote financial inclusion. To meet the financial inclusion challenge, however, CBDC would have to be designed with that objective in mind. CBDC design aspects that encourage financial inclusion include the affordable cost of onboarding and transaction, off-line capabilities, privacy, and remuneration. A CBDC system needs to be easy to access through a simple user-enrolment process, convenient to use through a large network of agents and service providers, and acceptable for daily-life use cases at merchants, billers, and by the government, on a continuous basis. However, even though CBDC can facilitate financial inclusion, it is not a necessary condition, as other existing payment systems and arrangements, such as well functioning and comprehensive fast payment systems, have also been successfully utilized for the same objective (For example, Brazil).”[8]

2.22.    According to the FCA, over 1 million people in the UK do not hold a bank account.[9] This means that there is a considerable attraction to a CBDC in terms of improving inclusion because individuals are unlikely to need a bank account to hold digital currency.

How can distributed ledger technology be applied in the financial services sector?

2.23.    This technology is already be applied in the accountancy and other sectors. For example, the use of smart contracts which are a cost effective means of saving time and increasing security, and in supply chains (Co-op and Asda are amongst companies in the UK using exploiting blockchain technology for this reason) but there is much more that could be done, especially in the accountancy sphere.

2.24.    It is likely to remove the need to enter accounting information into multiple databases, removing the need for auditors to reconcile disparate ledgers, thus saving time and resources whilst simultaneously eradicating the risk of human error.

2.25.    This could save substantial amounts of time and the risk of human error may be considerably reduced.

2.26.    The Committee may be interested in the work of the Accounting Blockchain Coalition (ABC)[10], a global coalition of representatives from blockchain industry leaders in the accounting, legal, tax, and technology sectors, which works with organisations such as the International Federation of Accountants (IFAC) of which AAT and most other UK accountancy professional bodies are members, to author guidance and offer training and advice on accounting for digital assets and currencies that run on blockchain technology.

2.27.    With specific reference to the financial services sector, this is not something that AAT is best placed to comment on but one obvious area where blockchain could usefully be employed is in relation to property transactions. It is also worth noting that four years ago HM Land Registry stated it would explore the use of blockchain[11] with a view to becoming one of the most digitally advanced  land registration services in the world but very little appears to have happened since.

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 crypto-assets?

2.28.    Government and regulators are best placed to answer this question but AAT is aware that some steps have been taken. For example, in April 2021 the Bank of England and HM Treasury created a CBDC Taskforce to co-ordinate the exploration of a potential UK CBDC.

2.29.    In June 2021 the Bank of England set out its thinking on the opportunities and risks of new forms of digital payment.[12]

2.30.    This was followed by a joint HM Treasury/Bank of England “next steps for a UK CBDC” paper in November 2021.[13]

2.31.    HMT and the Bank have also committed to a joint 2022 public consultation on CBDCs at some stage this year – replicating what others have been doing, most notably the European Union which held a public consultation in May and June 2022 attracting over 16,000 public responses.[14]

2.32.    So, it is clear that steps are being taken to better understand the implications of a UK CBDC and even to prepare the ground for the launch of a CBDC, but very little has been done to proactively encourage change, i.e. by seeking to gain public support for such a change.

How might the Government’s processes – for instance the tax system – adapt, should crypto-assets be adopted more widely?

2.33.    A recent AAT Digital Advisory Panel meeting (July 2022) revealed that AAT Licensed Accountants who rarely, if ever, received cryptocurrency enquiries from their clients, were now doing so at a rate of 2 or 3 a week. Queries were varied but mostly related to tax treatment e.g. around Capital Gains Tax implications. Accounting packages are built around currencies, most do not have the capabilities to incorporate digital asset transactions and there are no accounting standards relating to digital assets (they can be considered as either an intangible asset, stock, or a financial asset, depending on how they are being utilised, which means the accountant must have an understanding of the underlying asset). There is increased consumer expectation that accountants have the awareness and understanding to answer any consumer queries on the issue which they will endeavour to do but legislation, regulation and processes need to keep pace.

2.34.    The Committee should also be aware that criminals are estimated to have laundered £6.4bn via cryptocurrencies in 2021 and with the war in Ukraine and sanctions being placed on record numbers of individuals, this figure is likely to be higher still in 2022. It is clear that more needs to be done with regard to Government AML regulations and enforcement.

2.35.    With specific regard to tax, the annual HMRC tax gap report does not specifically include cryptocurrency but this is covered in a separate HMRC report which shows whilst the crypto tax gap tripled over the 12 months to March 2021, it remains very small with just £428,000 of tax under consideration on cryptocurrency investments. Whilst it is impossible to say with any certainty, AAT believes this is likely to be the tip of an iceberg and should prompt HMRC to devote considerably greater resources to this area – resources that Government must ensure HMRC has.

How effective have the regulatory measures introduced by the Government - for instance around advertising and money laundering - been in increasing consumer protection around crypto-assets?

2.36.    Meeting last month, AAT’s Digital Advisory Panel of senior external technology professionals were in uniform agreement that there is a clear need for greater regulation. It was acknowledged that save for some FCA consumer warning about not investing more than you are prepared to lose, regulation in this space was not keeping up with developments, especially in relation to widespread advertising of cryptocurrency scams – where consumers are asked to invest small sums of money (typically £200) to generate thousands of pounds a month.

Is the Government striking the right balance between regulating crypto-assets to provide adequate protection for consumers and businesses and not stifling innovation?

2.37.    Whilst the Government this year confirmed it wishes to ensure Britain becomes a global hub for cryptoassets technology and investment[15] this comes with inherent risks.

2.38.    AAT appreciates the requirement to balance the need for regulation and the encouragement of innovation but believes more regulation – perhaps just better enforcement – is needed in this area. For example, although the FCA states 90% of crypto firms seeking FCA approval for anti-money laundering controls have either withdrawn their applications or been refused because they could not meet the required standards, this does not mean money laundering is being prevented, it simply means firms are unapproved.

2.39.    At the same time, AAT sympathises with FCA Chair Charles Randell who recently said he was opposed to including crypto firms under the Financial Services Compensation Scheme (FSCS) as this would mean the fees paid by regulated financial services firms from banks to financial advisers would be available to compensate the victims of failing crypto firms[16].

Could regulation benefit crypto-asset start-ups by improving consumer trust and resilience?

2.40.    Yes, absolutely. Given the likely superior regulation of a CBDC and in turn increased trust and resilience, it is likely that start-ups would benefit from the same. As in many other developments, smarter regulation, greater awareness of regulation and strong enforcement usually provides greater consumer confidence and therefore greater consumer participation.

How are Governments and regulators in other countries approaching crypto-assets, and what lessons can the UK learn from overseas?

2.41.    The Treasury Committee know that the establishment of such a Committee suggests such plans are now credible, realistic and increasingly likely.

2.42.    As stated above, China is far advanced in this regard and is widely acknowledged as the world leader having commenced work on its CBDC back in 2014 and having millions of users and billions of pounds worth of transactions. However, what is less widely recognised is that China has also banned all private cryptocurrencies such as Bitcoin. The official justification is to eliminate money laundering risks and any risk to financial stability but an obvious benefit of such a regulatory approach is increased usage of their own CBDC.

2.43.    China is not alone in completely banning the use of private cryptocurrencies. Qatar and Morocco, have completely banned cryptocurrencies and more than forty others have indirectly done so by imposing restrictions on banks and imposing bans on cryptocurrency exchanges[17].

2.44.    In June 2021, European Central Bank Governing Council member Francois Villeroy de Galhau publicly expressed his fear that China’s rapid progress in developing a digital yuan poses a key risk in preserving the euro’s international role[18]. Just a few weeks later, the European Central Bank launched a 24 month project to explore the establishment of a digital version of the Euro.[19]

2.45.    In addition to fears in Europe, China’s lead in this new world could arguably challenge the global dominance of the American dollar but American regulators seem unconcerned about such threats with the Vice-Chair for Supervision at the Federal Reserve recently stating; “It seems unlikely, …that the dollar's status as a global reserve currency, or the dollar's role as the dominant currency in international financial transactions, will be threatened by a foreign CBDC.[20]”

2.46.    That said, the US is now examining CBDC options and appears to be in a similar position to the UK. President Biden signed an Executive Order in March 2022, which committed the US to research and develop a US CBDC, “should issuance be deemed in the national interest”. The Order also directs the U.S. Government to, “…assess the technological infrastructure and capacity needs for a potential U.S. CBDC in a manner that protects Americans’ interests. The Order also encourages the Federal Reserve to continue its research, development, and assessment efforts for a U.S. CBDC, including development of a plan for broader U.S. Government action in support of their work. This effort prioritizes U.S. participation in multi-country experimentation and ensures U.S. leadership internationally to promote CBDC development that is consistent with U.S. priorities and democratic values.”[21]

2.47.    Given the international direction of travel towards CBDCs and the rapidly growing use of private sector digital currencies in the UK, AAT has repeatedly said it supports meaningful exploration of the advantages and disadvantages of establishing a CBDC and when considering the many negatives of existing digital currencies such as Bitcoin, AAT is inclined to agree with Bank of England Fintech Director, Tom Mutton, who last year stated, “…let’s not throw the blockchain baby out with the Bitcoin bathwater.”[22]

The environmental and resource intensity of using crypto-asset technology

2.48.    The Cambridge University Bitcoin Electricity Consumption Index provides comprehensive details as to Bitcoins’ energy consumption, which it suggests is 83.9 TWh per year, more than the entire electricity consumption of individual countries such as Belgium, Sweden and Finland[23].

2.49.    As Bitcoin is just one of more than 1,500 cryptocurrencies, the energy usage of these currencies is naturally a serious concern. 

2.50.    It should be remembered that there are other equally damaging single activities that use more energy than entire countries, concrete usage being one, but this does not negate the environmental impacts of cryptocurrencies or make them any more acceptable.

2.51.    However, as the IMF highlighted in June 2022, depending on their configuration, CBDCs may not just be more energy efficient than existing private cryptocurrencies they could also be more energy efficient than much of the existing payments landscape[24] or as they put it, “Both DLT and non-DLT CBDCs have the potential to entail lower energy consumption for core processing functions compared to prevailing traditional means of payment”.

2.52.    As a result, AAT believes it is imperative that Government takes these design factors into account when devising a UK CBDC to ensure low energy usage.

3. About AAT

3.1.        AAT is a professional accountancy body with approximately 50,000 full and fellow members and over 90,000 student and affiliate members worldwide. Of the full and fellow members, there are more than 6,000 licensed accountants who provide accountancy and taxation services to over 600,000 British businesses.

3.2.        AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law.

August 2022

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