Dear Chairman,

Meta appreciates the opportunity to share its perspective in relation to the consultation on the role of crypto assets in the UK and sets out answers below to the questions you pose.

By way of context, Meta has worked with digital payments since 2009, leveraging the latest technological innovations across apps and platforms to allow people and businesses to make payments in 160 countries and 55 currencies. This includes person-to-person, business-to-business, and business-to-consumer payments.

Today, we are focused on building for the metaverse, which we see as the next evolution in social connection and the successor to the mobile internet. Horizon Worlds - our platform in the metaverse - launched in the UK in June 2022, and we continue to invest in the content in those worlds, as well as the means to access it. Technologies that utilise cryptography, specifically blockchain and digital assets, will be fundamental to many experiences in the metaverse, and not just our part of it, because they have the ability to transform the way people connect, businesses grow, and creators earn a living by leveraging the inherent portability of assets native to blockchain technologies. To the extent that these have been given the label ‘crypto-assets’, it is often the case that there is some negative connotation attached. This overlooks the considerable positive contributions that this emerging technology will bring. Our response will focus on this.

Questions

Answers

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

The UK is predominantly a service-based economy, which has seen a significant growth in digital commerce and payments, not least as a result of COVID. It is very likely that future consumers will have a range of use cases for currency forms, from cash, through electronic money, to digital and cryptographically based formats. Some of the factors that will influence choice will be ease of use, security of design, and guarantee of value; another factor will be the role of intermediaries and digital wallets, and a third factor, linking the two, will be the interoperability of the assets between different digital platforms, including in the metaverse.

Blockchain technology has been critical for the rapid growth of the digital asset space and modernising aspects of the payment system, making it more efficient and inclusive. If it is easier, cheaper and more convenient to do transactions using crypto assets, it is only natural that there will be some level of displacement. For example, currently the costs faced today for cross-border payments are still expensive and inefficient, with an average cost to consumers of 6.5% (more than double the Sustainable Development Goal of 3%), and end-to-end settlement times of three days on average. Cross border payment costs and efficiencies can be significantly reduced by blockchain enabled transactions.

An important consideration is if Central Bank Digital Currency (CBDC - see answer to next Q on England Digital Currency) will be defined as legal tender or voluntary acceptance. Meta believes that a CBDC should be added to the list of payment instruments that are defined as legal tender and as such can be accepted in satisfaction of any tax obligations and will provide the confidence to be used widely for any private obligations, both payments and transfers. Defining certain payment instruments as legal tender plays an important role in anchoring the concept of money. The general public would be more likely to use this CBDC in practice, enhancing its credibility and adoption further.

The reality however is that in order for cryptocurrencies to become ubiquitous, it will require the enabling of the entire ecosystem, including merchants, consumers, infrastructure, underlined by creating trust with users to accept, receive, pay and transact with. For now, it’s potentially an alternative to fiat, and not a substitute.

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

It is far too early to predict what proportion of transactions will be in one form or another, i.e., cash, e-money or digital currency (whether public or private issued). We believe it is wise for authorities in such a significantly service based economy, such as the UK, to be looking at investing in the evolution of public forms of money, notably CBDCs. Project Hamilton, which the Bank of England has joined, is conducting cutting edge technical analysis regarding the operational issues that would need to be addressed to establish a scalable, safe, low latency public digital currency. Where countries are minded to introduce a CBDC, Meta believes that a well-designed CBDC should be intermediated, privacy-protected, widely transferable, and capable of being a means of increasing financial inclusion.

A well-designed CBDC could support the stability, integrity, and efficiency of the monetary, financial, and payment systems. It could also promote the UK’s leadership role in advancing technology leveraged by CBDCs and the changes to the financial markets and industries that CBDCs are likely to contribute to and result in financial inclusion.

It has been posited that a well-designed CBDC should be open and interoperable to ensure that the greatest number of people and businesses can access the benefits it would provide. It should be open to a wide variety of intermediaries, including nonbank wallet providers, subject to appropriate regulation and supervision. It should be interoperable across different online experiences and have the ability to work with and support multiple blockchains, other CBDCs, stablecoins, commercial bank deposits, and other digital assets. Providing new financial access channels to more people through technological innovation will promote financial inclusion without adversely affecting the safety, soundness or stability of the financial system.

In terms of risks, firstly, we note that some voices cite the same concerns that were brought up during the development of e-money systems over two decades ago. Those concerns proved to be unfounded, through a sensible approach to the introduction and supervision of the new format, and we see no reason why a similarly prudent approach would not result in a positive step in the evolution of public money.

Other key risks include the difficulty of balancing privacy of consumers with the traceability elements of a CBDC. Meta strongly believes that data protection and privacy are core considerations to be embedded into the design of digital money systems and digital wallet services to promote user confidence and trust, thus enabling uptake and sectoral growth.

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

A digital currency (DC) can improve financial inclusion by being open, interoperable, and widely accessible. The DC must be open to a wide range of intermediaries, including low-cost non-bank wallet providers, in order to promote inclusive payment, use cases. A digital currency should be interoperable with multiple blockchains, other national CBDCs, stablecoins, commercial bank deposits, and other digital assets. Such a DC could give the unbanked and underbanked citizens, who have mobile phones, the ability to hold and transfer digital pounds through the channels that they have easy access to and consider to be convenient and trustworthy, which may include digital wallets accessible through smartphone applications. We anticipate smartphone applications will play an increased role in improving financial inclusion in the future.

In that regard, digital identity and authentication services are core affiliated services that support the development and adoption of digital wallets. These services also help to facilitate compliance with financial and legal obligations, and to that extent, regulators should ensure users have access to easy-to-use, convenient, low cost and fast digital payments, which means promoting outcome-based solutions. For example, the use of facial recognition systems for the purpose of user authentication should be fully supported by regulators as equal alternatives to manual options. While the design of such systems should always safeguard privacy, it should also facilitate user onboarding through pragmatic privacy-preserving solutions which are supported by regulation that provides options to those without the traditional paper-based means of identification.

Offline capabilities will also promote financial inclusion because certain segments of the general public do not have access to online payments, and some have no internet access at all. Meta believes that a digital currency should have offline capabilities to keep those without access to online services connected to the payments system. In addition, offline capabilities promote the policy of wide transferability in periods when there are unexpected power or internet outages.

Meta believes that a key feature of a digital currency is to support financial inclusion efforts to decrease payment costs, thereby expanding access to groups of consumers who can least afford fees involved with digital payments today. This is particularly pertinent in relation to cross-border transactions, furthering the need for interoperability with other DCs. In furtherance of financial inclusion aims, intermediaries should commit to demonstrating inclusion as a principle in their business models. Technologically innovative, robust, and AML/CFT regulation-compliant technology solutions for consumers who may not have access to standard Know Your Customer documentation should also be encouraged.

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

The UK government and regulators have a substantial role to play in supporting the responsible development of digital assets and have gone some way in engaging and supporting this new sector already. The Government has primarily focused on consumer protection and distinguishing between regulated versus unregulated crypto assets which is a good start to a nascent industry. The openness of the UK to consult with the industry to keep abreast of new opportunities and risks is to be lauded, and the cautious approach of not rushing to legislate has encouraged businesses to consider the UK as their home.

Meta is already seeing how creators are looking to new types of digital assets and digital goods, underpinned by blockchain technology, to have more control over their work, their relationship with their fans, and their ability to monetize both.

We believe that the next step for authorities is to focus on the potential of the metaverse and the supporting Web3 technologies. Robust partnerships with the private sector, clear regulatory guardrails and authorities, and leadership at a global level in standard setting are among the most important areas where government leadership would be valuable in advancing innovation in digital assets, as well as in the development of Web3 and to create a safe and transparent ecosystem for digital assets and the digital economy.

What opportunities and risks could the use of crypto-assets—including Non-Fungible Tokens—pose for individuals, the economy, and the workings of both the public and private sectors?

The blockchain based smart contract technology underpinning what we call ‘digital collectibles’ (also known as NFTs), is evolving to support a range of empowering use cases: digital tickets for online events, proof of ownership of digital and physical goods, and even proof of legal service of proceedings before the High Court. The range of applications is facilitated through the work of developers who support the creation of Ethereum Request for Comment (ERC) standards, and this activity will be an important motor of innovation in the use of crypto assets.

Just as NFTs themselves are still in the early stages of development and adoption, we know that regulators and standard-setting bodies are just beginning to grapple with the application of regulatory frameworks in this context. The Law Commission’s recent consultation on digital assets[1] deserves wide attention, since the recognition of digital assets as deserving the same treatment as other physical property will be a critical step in underpinning the positive role they can play in the growth of the UK economy. We were also supportive of the UK Treasury’s push to make the UK a global crypto hub.

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

Blockchain technology has been critical for modernising aspects of the payment system, making it more efficient and inclusive through the rapid growth of digital assets. The application of blockchain technology to financial services in the form of cryptocurrencies, CBDCs, stablecoins and other digital assets brings the potential of low-cost, fast, and efficient payment services. These advancements are essential for consumers and small and medium-sized businesses, as they drive economic growth, increasing the financial welfare of individuals, communities, and the global economy.  Further, cryptocurrencies and underlying blockchains contribute a new paradigm for secure data and value transmission, storage and access.

Some of the use cases for blockchain technology include but not limited to:

Greater Transparency: With blockchain, users are executing activities on a public ledger. As a result, the industry is becoming more transparent and exposing inefficiencies, and finding appropriate solutions. Privacy concerns in this area can be addressed with well-designed CBDCs.

Smart Contracts and operational efficiencies: Blockchain along with smart contracts allow financial service providers to track buyer payments and seller deliverables. Such automated systems reduce the chance of human errors and improves the efficiency of the system. Blockchain allows financial institutions to track several parties in real-time and manage letters of credit and bank guarantees, for example. It simplifies operations for the merchants and the customers.

Faster Settlement: Cash and remittance transfers are known safe payment methods, but fraud risks remain and international transfers can be expensive and time-consuming. Blockchain-based payments technology enables the real-time transfer of funds between financial institutions, eliminating friction, reducing costs, and fastening settlement

Improving seamless customer experiences: Most banks have implemented blockchain technology for international payments, cutting out the intermediary, which helps save time and money. Customers can also utilise blockchain money transfers online using mobile devices which means there is no need to visit a money transfer facility, stand in line, and pay high transaction fees.

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?

In April, the then-Chancellor of the Exchequer Rishi Sunak said he aimed to make the UK a “global hub for crypto asset technology” and promised new rules to allow consumers to confidently pay with stablecoins. This signaled the UK’s desire to allow innovation to flourish while mitigating risks associated with new technologies. The UK has already been leading by designating the Financial Conduct Authority (FCA) as a “one-stop shop” for innovators and considering new legislation to add an international competitiveness objective for UK regulators, as a means of positioning the UK as the international hub for crypto activities.

Meta believes the following elements will be essential in maintaining the UK’s competitiveness in the digital space:

●    Continue to remove regulatory uncertainty for innovation. Regulatory uncertainty means that investors turn to other jurisdictions that are moving forward to provide guidance and protections for the digital asset industry. The United Arab Emirates, Switzerland, Singapore, France, and the European Union have been leaders in erecting clear guardrails and promulgating rules for digital asset companies. A centralised regulatory approach provides consistency and allows innovators to build relationships and communicate with one authority. Further, crypto products and services from the largest technology companies may also fall in the very broad scope of the Government’s proposed digital competition regime, which -as currently designed- risks giving the Competition and Markets Authority an unprecedented level of discretion to intervene in the UK’s digital economy, protected only by a weakened appeals regime based on basic judicial review. To both minimise regulatory uncertainty and adequately protect users and businesses from regulatory mistakes, the Government should ensure any reforms to competition law are backed up by an appropriate appeals regime that considers the merits of regulatory decisions.

●    Sandboxes: “Test and see” Approach. The recent announcement that the Taskforce would implement a Financial Market Infrastructures Sandbox to be in place by 2023 that would allow companies to explore the use of distributed ledger technology (DLT) in financial markets infrastructure is a promising recognition by UK regulators of the need to ensure legislation can accommodate and support tokenization, and to enable digital asset businesses to build and test their products under supervision. According to the Alliance for Innovative Regulation (AIR), “[s]andboxes have been among the most valuable tools available to the [Financial Conduct Authority] agency to enhance its own learnings and inform its policies, while advancing innovation in the marketplace.” Meta believes this “test and see” approach is the ideal tool for innovators looking to pilot and test new concepts, from idea to incubation.
Crypto Asset Engagement Group: To further this already good start to providing an environment to test new products and share the results with regulators through sandboxes, we commend the call for a Crypto Asset Engagement Group to be chaired by ministers and host members from U.K. regulators and crypto business. We caution however that the taskforce may require a more hands-on approach to work with and learn about new technologies from industry. Digital asset hubs are forming and growing in countries such as Switzerland and Singapore, where policymakers and regulators have created centralised channels to hear from digital asset businesses and work with stakeholders on developing sound, pro-growth policies. These offices are a resource for innovators; however, there are often limitations for these offices to provide legal guidance or to further help the innovators as they move forward. Often these offices are not at the table for policy decisions, even though they have the most direct interaction with innovators. The UK can take this a step forward and include a platform to discuss the regulations that affect their operations, with a view to further empowering them through regulatory changes or other steps.

●    Prioritise the development and execution of a forward-thinking, whole-of-government strategy for the next generation of the internet. While we commend recent efforts to respond to technological innovations impacting financial services, we also see an opportunity for the UK to be more proactive and forward-thinking in its approach to the digital economy. A national strategy should prioritise areas such as developing standards and frameworks for digital identification and access to financial services; privacy standards and the data collection and storage standards that go hand-in-hand with privacy protection; property rights associated with tokenized assets; systems resilience; and standards for interoperability. Guidance in these areas is essential for establishing a foundation for an innovative economy and some, such as the development of digital identification standards and frameworks, will also facilitate the governments’ own efforts, such as developing a CBDC and improving the delivery of government services.

●    Project New Era pilot by the Digital Financial Market Infrastructure. This cross-industry pilot is focused on real-world testing of purpose-built technology infrastructure and exploring use cases to evaluate a future digital currency ecosystem that includes the coexistence of existing forms of money, regulated crypto assets and stablecoins, and CDBCs in the UK. The pilot will include engagement with the House of Lords, House of Commons, Her Majesty’s Treasury, BOE, the FCA and the Payments Systems Regulator to inform them of progress and learnings in order for these stakeholders to incorporate into their decisions around the Stablecoin and CBDC ecosystem in the UK. We encourage the Government, and regulators to fully engage with the output of the pilot in a transparent and meaningful way.

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?

The FCA has been active in the Consumer Protection space. It has issued warnings to consumers about the risks of investing in crypto assets, including NFTs, since 2011, confirming there is no regulatory oversight of the firms involved and there are no consumer protections for those who buy or invest in such products. However, this both highlights the gap in the regulatory framework, and the uncertainty and rapid change within the financial system.

Pre-Brexit EU regulation brought the requirement to register firms providing virtual asset services for AML reasons. This is welcome but is notably a “halfway house” as it is registration not authorisation. While the Government has utilised existing frameworks to address some of the risks and uncertainty. The consumers and industry providers need a clear path forward, meaning a clear, and appropriate regulatory framework for Crypto assets, including NFTs, that allows both providers and customers to know exactly what licensing and ongoing regulatory requirements apply and what protections customers can enjoy. The EU, US, Singapore, and many others are circling the question, and some are even seeking industry opinion on draft regulation. First mover among regulators may end up setting the framework and establishing a leader for others to follow.

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

The crypto asset industry is fairly nascent and yet will become a significant part of financial markets going forward. It is helpful and important for regulators to develop frameworks to responsibly monitor and guide cryptocurrency activity in their jurisdictions, understand the use cases and the risks they present. It is not simple to consider the implications for fair market conduct, market competition, the application and enforcement of tax rules, and consumer protection within the parameters of the assets’ unique properties, while nurturing the growth of a lucrative cryptocurrency-based economy. Cryptocurrencies are also cross-jurisdictional and require regulators to work towards cross-jurisdictional regulatory standards in order to create regulatory clarity, close loopholes and mitigate regulatory arbitrage, while ensuring equitable inclusion of all users. The openness of the authorities to engage the innovators and industry will contribute to bringing about an appropriate way to balance out these objectives - as outlined above.

Nevertheless, there is a lot of uncertainty in terms of which, if any, regulations apply to the services and providers of services in the crypto asset industry, including NFTs. It is important that this is addressed sooner rather than later to both prevent a risk bubble and facilitate responsible innovation.  

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

Regulatory uncertainty is always a hurdle for start-ups and navigating existing laws that do not necessarily accommodate new business models. At the same time, regulation improves consumer trust and provides legal clarity, and hence is welcomed by legitimate crypto providers. Regulation does not have to be onerous. An adaptive regulatory environment for cryptocurrencies would lay a foundation for sustainable innovation, competition and transparency, and allow customers and businesses to safely realise the benefits they may offer. It may take the form of regulators clearly stating that they are monitoring the industry, placing some consumer safeguards until a bespoke regulation can be in place, hence allowing the industry to grow while providing consumers with peace of mind.

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

Europe:

Recent regulatory advances, including the release of the Markets in Crypto-Assets (MiCA) provisional agreement in the EU.

The Council Presidency and the European Parliament reached a provisional agreement on the MiCA proposal which covers issuers of unbacked crypto assets, and stablecoins, as well as the trading venues and wallets where crypto assets are held. This regulatory framework is intended to protect investors and preserve financial stability while allowing innovation and fostering the attractiveness of the crypto asset sector.

At a high level, the MiCA acknowledges that most crypto assets fall outside of the scope of current EU legislation of financial services and that there are no rules for services related to crypto assets, including the exchange of crypto assets against national currencies or custody of crypto assets. It focuses on services related to crypto assets for the operation of a trading platform for crypto assets, including custody and administration and services related to the placement, trading and provision of advice on crypto assets.

United Arab Emirates/Dubai:

The UAE enacted the virtual assets law (VAL), a new piece of legislation intended to regulate cryptocurrencies and all transactions of other virtual assets within the Emirate. It also established the Dubai Virtual Assets Regulatory Authority (VARA) and provides a legal framework with which to protect investors and businesses trading in virtual assets in Dubai. The supervised activities include:

●       Operating and managing virtual assets platforms services;

●       Exchange services between virtual assets and currencies, whether national or foreign;

●       Exchange services between one or more forms of virtual assets;

●       Virtual asset transfer services;

●       Virtual asset custody and management services;

●       Services related to the virtual asset portfolio; and

●       Services related to the offering and trading of virtual tokens.

United States of America

Since 2013, cryptocurrency exchanges and administrators operating in the U.S. have been subject to the Bank Secrecy Act (BSA) and required to register with FinCEN as money service businesses (MSBs), comply with AML and KYC regulations and file SARs.

More recently, the Commodity Futures Trading Commission (CFTC) and Security and Exchange Commission (SEC) have been active in investigation and enforcement against digital assets trading as commodities and securities respectively. Several states in the U.S. have also passed legislation creating regulatory schemes specific to cryptocurrencies and other digital assets, resulting in a patchwork regulatory landscape.

Recognizing the dramatic growth in digital asset markets in the United States and globally, and the potential implications for consumer protection, financial stability and national security, in March 2022, President Biden issued an executive order tasking multiple U.S. departments and agencies to study and issue reports and recommendations related to potential legislative and regulatory changes to” ensure responsible development of digital assets.” The various reports are due beginning in July 2022 with the bulk expected in September 2022.

Singapore:

Depending on the characteristics and use cases of cryptocurrencies, they may either be regulated by the Monetary Authority of Singapore (“MAS”) as digital payment tokens under the Payment Services Act (“PS Act”) or as securities under the Securities and Futures Act (“SFA”). Cryptocurrencies or digital assets that do not fall under the scope of either the PS Act or SFA would be unregulated.

A cryptocurrency that falls within the definition of a “digital payment token” as prescribed under the PS Act would be regulated and any entity dealing with them, specifically in the buying or selling of digital payment tokens in exchange for money or any other digital payment token, would be required to obtain a license from the MAS. The PS Act puts in place AML/CFT controls to mitigate the risks of digital payment tokens being used for illicit and illegal purposes.

Under the SFA, cryptocurrencies that have similar features as capital markets products, such as securities, collective investment schemes, etc. would be regulated. Specifically, a person who, whether as a principal or agent, carries on a business in making or offering cryptocurrencies that constitute securities or securities-base derivatives contracts would need to prepare and lodge a prospectus with the MAS.

The environmental and resource intensity of using crypto-asset technology.

Meta recognizes the concerns that many people have about the carbon footprint of crypto assets and NFTs. That is why we are taking steps to reduce the emissions impact of digital collectibles.

○        Meta will help reduce the emissions impact that might be associated with the display of digital collectibles on Instagram by purchasing renewable energy. Learn more about our commitment to sustainability at Meta here.

○        We developed an initial greenhouse gas (GHG) emissions accounting methodology that estimates the aggregate impact of the transactions conducted by digital wallets connected through our product.

○        To reduce the environmental impact of digital collectibles, we calculated how much energy is required to support digital collectibles on Instagram, and we will bring an equivalent amount of clean energy online through our renewable energy program through 2023.