CAI0026

Written evidence submitted by Binance

About Binance

Binance is the world's largest crypto-currency exchange and blockchain infrastructure provider. Founded in 2017, we have 1.4 million users in the UK. We have also developed pioneering blockchain technology, with our Smart Chain and Binance Payment technology promising huge benefits for the UK’s world-leading financial services sector. Our own crypto-currency, Binance Coin (BNB), is the third-biggest globally by market size.

Executive summary

●        We do not expect crypto-currencies to replace traditional currencies, rather, we see Central Bank Digital Currencies (CBDC) and stablecoins coexisting to realise the full benefits of digitalisation and innovation for society and the economy.

●        CBDCs present a number of opportunities and benefits and have the potential to significantly alter the payments landscape and we strongly support the Bank of England’s work on CBDCs.

●        Crypto-assets have the potential to create a significant impact on both social and financial inclusion.

●        Providing appropriate support and resources where sensible, and by seeking expertise from industry will be crucial in the future if the UK is to become a global hub for crypto-assets and blockchain adoption.

●        There are a large number of opportunities associated with the usage of crypto-assets, but also some risks.

●        There are a number of applications for DLT within the financial sector, namely making payments faster and more efficient, enhancing data collection and storage, record keeping and security, and tackling financial crime.

●        More can be done to ensure a holistic strategy for crypto-assets and its associated infrastructure to support responsible innovation for the benefit of society in the UK.

●        The tax system needs to be proportionate and support innovation.

●        The most effective tool for regulators to meet their consumer protection and financial crime objectives is to provide a clear regulatory framework for crypto-assets built on global principles that foster a safe, secure and sustainable crypto-asset ecosystem.

●        Despite the FCA rightly celebrating its support for innovative firms, it must also understand the need for the right resourcing and expertise in order to effectively continue this support for innovation.

●        A well-designed, proportionate and efficiently administered regulatory regime can play a critical role in delivering improved social and economic outcomes.

●        Improving consumer confidence in crypto-products and enhancing the resilience of crypto-assets service firms is paramount to building trust.

●        The ability to adapt existing regulatory frameworks in a comprehensive and timely manner to cover crypto-assets is a key lesson from other countries.

●        Crypto-asset mining can be energy intensive but there are a number of developments that could help to remedy this including ‘proof-of-stake’ consensus, which utilises significantly less energy.

Questions

Q1. To what extent are crypto-assets when used as digital currencies (such as Stablecoin) likely to replace traditional currencies?

●        Although it is too early to forecast the trajectory for digital currencies, given the multitude of unresolved design factors still in play, we do not see crypto-currencies replacing traditional currencies. Rather, we see Central Bank Digital Currencies (CBDC) and stablecoins coexisting to realise the full benefits of digitalisation and innovation for society and the economy.

●        Fundamental to this is how rapidly countries pursue the regulation of stablecoins, whether they issue CBDCs, and what types of CBDCs they issue. For example, stablecoin regulation is already evolving and being coordinated globally. In addition, many countries that have worked on CBDC design currently favour wholesale CBDCs and are not available to the public. As such, stablecoins, particularly those used as a form of payment, or within the wider digital asset ecosystem, are unlikely to compete directly with CBDCs being considered for real use.

●        What is more important to consider is the contribution stablecoins can make from a digital utility, consumer protection, market integrity and financial stability perspective. Stablecoins are integral to the wider digital-asset ecosystem and are often described as a bridge between fiat and crypto-assets. They are necessary to enable the full realisation of digital innovation across many digital sectors (ease of use and low cost) and well-regulated and designed stablecoins can provide unique benefits. Not all stablecoins are alike so sensible regulation of stablecoins can support their benefits whilst mitigating associated risks. Stablecoin issuers should also be required to disclose bank account statements and proof-of-reserves.

●        Any regulatory regime that the UK Government designs around stablecoins requires issuers to meet similarly high standards comparable with those applied to reserve banking, third-party auditing, direct regulatory supervision for systemically important stablecoins, and the ability for consumers to access direct purchase and redemption.

Q2. What opportunities and risks would the introduction of a Bank of England Digital Currency bring?

●        CBDCs present a number of opportunities and benefits and have the potential to significantly alter the payments landscape and we strongly support the Bank of England’s work on CBDCs.

●        The nature, design, and underlying technology upon which CBDCs are built allow for faster, cheaper, and more secure transactions, making payments more efficient. They can boost financial inclusion, allowing financially under-served portions of society to be included. They are easy to track and monitor, minimising the risk of fraud, illicit activities, and other financial crimes. The most efficient CBDCs and retail fast payment systems (FPS) are well placed to serve the public interest through greater convenience and lower costs while maintaining integrity in the payment system.

●        Furthermore, CBDCs can play an important role in the aid sector as they offer a fast, safe, fraud-proof way to send money to people without access to traditional banking, and can provide a similarly secure and accessible means of making economic remittances, where CBDCs support cash flows to developing countries.

●        The stable nature of CBDCs is another benefit. Stablecoins aim to address price volatility by maintaining a stable value relative to an established currency or asset, but the effectiveness of the stability mechanism varies significantly between models and issuers, which may lead to significant losses for unsuspecting users who wrongly perceive them as safe and liquid payment instruments. CBDCs, meanwhile, offer the safety and efficiency of government-backed money.

●        As a result, CBDCs are likely to be more readily accepted and adopted by both consumers and businesses, as they are backed and managed by governments. This could distinguish them, particularly from private digital currencies, including stablecoins.

●        CBDCs do also present a number of risks. Technology failure, as well as cyber-attacks and concentration risk, would present  significant issues, particularly given the systemic, country-wide risk they would present.

●        There may also need to be a significant investment by financial institutions, particularly to develop the infrastructure to allow CBDCs to be used as a medium of payment and the interoperability required between CBDCs and traditional currencies. Financial institutions could be reluctant to invest in the additional infrastructure required for CBDC.

●        That said, it is important that there are appropriate frameworks in place around any CBDC to ensure user privacy is protected, and it is important that Government and regulators work closely to ensure these are proportionate and effective.

Q3. What impact could the use of crypto-assets have on social inclusion?

●        Crypto-assets have the potential to create a significant impact on both social and financial inclusion. Crypto-assets have broadened both the delivery and usage of digital finance, providing access to useful and affordable financial products and services such as payments, savings, credit, and insurance.

●        They allow unbanked and under-banked portions of society to participate in the financial system, removing the requirements for bank accounts and other hurdles. They also allow community and peer-driven financial inclusion efforts to flourish, with open-source technology developments that have society-wide benefits, alongside public blockchain protocols and networks allowing for the creation of an open and financially inclusive financial system. Crypto-assets help to create a new class of economic opportunities, which in itself provides funding, jobs, and wide opportunities for self-learning and development alongside potential financial and societal progression.  

Q4. 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 the regulators have undertaken some positive steps when it comes to the crypto-asset sector. These include the introduction of an FCA registration regime, alongside upcoming legislation allowing stablecoins to be treated as a means of payment in the UK. Recent announcements have also outlined the intent to develop the UK as a global hub for crypto-assets.

●        Any regulatory framework needs to balance opportunities with minimising all potential risks. Getting this balance right is not easy and often it appears that the FCA is too focused on the risks. The FCA rightly celebrates its support for innovative firms, but it must also understand the need for the right resourcing and expertise in order to effectively continue this support for innovation.

●        Without greater capacity to deliver its ambitions on support for innovation, there is a risk that future potential unicorn firms will not receive the correct support from the regulator at the point of application, which is not in the long-term interest of the UK economy.

●        An example is the aforementioned FCA crypto-asset registration regime. Crypto-asset businesses based in the UK are required to seek registration prior to conducting business, and the announcement of this regime was met with positivity in the sector, with many believing it was a sign of growing adoption. However, recent data disclosed by the FCA revealed that of the 273 applications for registration the FCA received, only 35 were approved, with an 87% rejection rate. Alongside this, many applicant firms were made to wait up to two years before receiving a decision and were subsequently rejected without substantial explanation or an opportunity to rectify any gaps or omissions. As a result, many firms abandoned seeking registration in the UK and instead focused on other jurisdictions.

●        Providing appropriate support and resources where sensible supported by seeking expertise from industry will be crucial in the future if the UK is to become a global hub for crypto-assets and blockchain adoption.

Q5. What opportunities and risks could the use of crypto-assets - including Non-Fungible Tokens (NFTs) - pose for individuals, the economy, and the workings of both the public and private sectors?

●        There are a large number of opportunities associated with the usage of crypto-assets, but also some risks, as outlined in our answers to Questions 2 and 3. NFTs have generated a large number of use cases across different sectors of the economy, for example, art, music, gaming and finance. NFTs allow artists for instance to monetise their work to international audiences which have not been possible using fiat currencies.

●        Benefits and opportunities include allowing digital art creators to benefit from their work directly, and subsequently, earn ongoing commissions each and every time their creation exchanges hands. Alongside this, an NFT is immutable. Due to their nature, NFTs could be containers for metadata or even other assets acting as a time-locked vault, for example.

●        The metadata can never be altered, erased, misplaced, or removed from the blockchain, providing security and creating value through an asset that essentially can last forever. The blockchains that host NFTs are also decentralised, with the data hosted in different nodes around the world and an identical record of the database at each and every node. of the nodes. This technology provides assurance that no matter what happens to the blockchain itself, there are always operational nodes running, keeping the data secure.

●        NFTs also present an innovative solution to copyright and ownership issues, with an irrefutable claim on the asset, and the potential to licence assets to allow them to generate revenue without giving up the copyright.

●        There are a number of risks and issues associated with NFTs. One of the main issues is valuation – which often remains subjective and hard to quantify, creating the potential for price manipulation.

●        There is also a potential for scams and fraud in the NFT sector – an individual may invest in, or purchase an NFT which is fake, due to difficulties in verification. Given the nature of transactions on the blockchain is irreversible, the buyer has no recourse to funds.

●        Finally, NFTs can be highly volatile. The price of NFTs can vary exponentially, with the potential to rapidly decrease significantly below the purchase price. Alongside this, they can be extremely illiquid – an NFT cannot be sold unless there is a specific buyer prepared to purchase it.

●        Taking a step back, proportionate regulation is crucial to mitigating many of these risks and preventing consumer harm. Binance supports this and is eager to work closely with the UK Government and regulators to design and implement such a framework.

Q6. How can distributed ledger technology (DLT) be applied in the financial services sector?

●        There are a number of applications for DLT within the financial services sector:

• Making payments faster and more efficient. This is particularly relevant to settlement and clearance mechanisms alongside international remittances, which are often expensive and cumbersome, involving multiple parties and a variety of financial systems. Utilising DLT, the need for these intermediaries is redundant, with instantaneous transactions which are processed as soon as they are initiated, providing significant operational efficiency for both the financial services sector and customers, alongside lower transaction costs.
• Enhancement of data collection and storage. DLT provides opportunities to enhance customer experience in a number of ways, particularly in terms of data. Processes such as customer onboarding and KYC can be optimised significantly through storing customer data on decentralised networks, eliminating repetitions, and allowing simultaneous information sharing for open banking and open finance purposes.
• Record keeping and security. As above, DLT presents unique opportunities to ensure data storage is efficient, there is a reduced cost of centralised data storage and data is secure for institutions such as banks. It prevents the need for paper records and computer systems, particularly for customer data, which may be vulnerable to damage and other such issues. It also optimises data retention and recall, with the potential to recall required information from safe, ‘deep’ storage almost immediately.
• Tackling financial crime. DLT can help the UK tackle financial crime, such as money laundering and terrorist financing, by providing more transparent and accurate records of payments. 

Q7. 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?

●        The initial work undertaken through the Crypto-assets Taskforce by Government and regulators was published in July 2018 and set out the UK’s approach to crypto-assets and DLT in financial services. This work was well coordinated, balanced, and forward-looking, setting out the forward path with respect to UK regulation.

●        Subsequently, the UK Authorities have been very focused on two of the five commitments of the Taskforce, namely the protection of consumers and guarding against threats to financial stability that could emerge in the future. Focus so far has been less focused on maintaining the UK’s international reputation as a safe and transparent place to do business in financial services. This is especially so when viewed alongside other international financial centres and the UK Authorities' excellent track record, where they have historically engaged the industry around encouraging shifts in behaviour, for example encouraging the industry to transition away from using LIBOR.

●        More can be done to ensure a holistic strategy for crypto-assets and its associated infrastructure to support responsible innovation for the benefit of society in the UK. The UK Government recognises that digital technology is integral to its future success and its Digital Strategy recognises the significance of digital technology to the country both nationally and internationally. However, the strategy does not explicitly reference crypto-assets, or the associated infrastructure such as distributed ledger technology that supports it. In many respects crypto-assets has been championed through financial services channels, including the UK Strategic Fintech Review.[1]

●        The Law Commission's July 2022 consultation paper on digital assets presents provisional law reform proposals, with clear and valuable analysis of how the law in the UK can seek to recognise and protect digital assets.

●        The paper examines how existing personal property laws do, and should, apply to digital assets and proposes that the law must go further to acknowledge the unique features attributed to digital assets. Binance agrees with the Law Commission’s view that wider recognition and legal protections for digital assets will in turn provide a strong legal foundation for the digital assets industry and for users.

●        If implemented correctly, this is likely to help achieve the Government’s goal for the UK to become a global hub for digital assets.

Q8. How might the Government’s processes – for instance, the tax system - adapt should crypto-assets be adopted more widely?

●        The accommodation of crypto-assets within the UK’s tax system will be crucial if the sector is to grow and mature in the UK. The tax system needs to be proportionate and support innovation.

●        It is important that the implementation of IFRS in the UK includes clear guidance on the accounting treatment derived from crypto-assets. Accounting guidance creates the certainty needed by taxpayers willing to use, or invest in crypto-assets.

●        The UK’s current approach to crypto-asset taxation could potentially make it a less attractive place to do business, particularly considering that the current rules for example create situations where transactions are treated as “disposals”, despite the effective economic ownership of the crypto-assets being retained. This creates a tax liability despite no gain being realised.

●        The approach to tax in the UK also creates significant administrative burdens, with the requirement to record every single transaction (as opposed to net gains and losses), alongside the need to determine and record the market value of assets at each step in the transaction.

●        Some jurisdictions have benefited from introducing a favourable crypto-asset tax framework for individuals. Portugal treats all proceeds from individual (non-professional) crypto-asset transactions as exempt from capital gains tax, income tax, and VAT. Belgium, similarly, does not tax capital gains recognised by individuals who do not trade professionally. Countries such as Switzerland, Hong Kong, or Singapore do not tax capital gains broadly - including the ones derived from transactions with crypto-assets. Germany is different but recently introduced an exemption for gains derived from crypto-assets held for periods longer than 1 year (i.e. long-term investment tax exemption). In Italy taxes only apply above a EUR 51,000 threshold, and France does not tax crypto-to-crypto transactions.

●        Those jurisdictions that successfully adapt their tax system to accommodate crypto will likely introduce a custom-built tax framework for crypto-assets, designed to incorporate the variety of activities and transaction types that may occur in this sector. Jurisdictions need to also ensure it is proportionate and does not create an administrative burden for Tax Authorities, customers and firms as well as a barrier to undertaking business. The same should apply to any reporting obligations introduced for either consumers or service providers of the industry.

●        This would remedy the current issues in crypto-asset taxation, in particular around treating transactions where economic right is retained as a ‘disposal’. It would also allow for a tax framework that is forward-looking and future-proof, taking into account the growth of the crypto-asset sector as a whole recognising the opportunities it has. It could also go some way to making the UK a better place to do business, both for platforms and individuals, and to help achieve the Government’s vision to make the UK a global hub for crypto-assets.

Q9. 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 most effective tool for regulators to meet their consumer protection and financial crime objectives is to provide a clear regulatory framework for crypto-assets built on global principles that foster a safe, secure and sustainable crypto-asset ecosystem. Current challenges for the industry stem from inconsistent approaches to implementing financial crime measures by regulators globally e.g. the FATF recommendations, as well as a delay in clear and cohesive regulation for the industry that would help the industry in delivering better consumer protection for regulators.

●        In relation to money laundering, the Government updated the Money Laundering Regulations, introducing a new registration regime for crypto-asset service providers. While the legislation itself is effective and proportionate, outlining responsibilities and requirements for firms to counter the threat of money laundering and terrorist finance, the registration regime has presented challenges, as outlined in our answer to Question 4. As noted above, it is crucial that regulators have access to the right resources and expertise to deliver their new responsibilities in a timely manner which supports adoption and growth.

●        We also have a particular concern regarding the planned approach to advertising and crypto-asset financial promotions in particular. We are supportive of a financial promotion regime for crypto-assets, to ensure they are advertised in the correct manner, and the sector as a whole upholds a high standard.

●        Despite this, the planned approach to make financial promotions subject to third-party sign-off, specifically parties who may not have the requisite knowledge and understanding about the crypto-asset sector, is neither logical nor proportionate.

●        Both registered and unregistered crypto-asset firms will be required to contract with FCA-authorised firms. Only FSMA Part 4A authorised firms, or firms awaiting authorisation, will be able to approve crypto-asset financial promotions, subject to approval under a new, dedicated FCA gateway. This also creates concerns around scarcity – there may only be a small number of potential ‘approver’ firms who are in a position to seek approval and able to exhibit the necessary expertise to be deemed capable by the FCA to approve crypto-asset financial promotions. Alongside this, there are capacity concerns (will the small number of approver firms be able to handle the review of promotions for so many potential crypto-asset firms seeking to promote in the UK), competition concerns (the small number of approvers may create a monopoly where these firms can essentially set whatever price they want and be selective in who they work with) and liability concerns (approval firms may not see approvals as commercially viable) due to legal risks meaning UK advertising of crypto-assets is effectively constrained by firms who may not actually offer the products.

●        We would urge a reconsideration of this planned approach which has the potential to create a significant negative effect on the crypto-asset sector in the UK.

Q10. Is the Government striking the right balance between regulating crypto-assets to provide adequate protection for consumers and businesses and not stifling innovation?

●        Any regulatory framework needs to balance opportunities with potential risks. The objectives the Government has set UK regulators for achieving consumer protection and the promotion of innovation should enable the right balance to be struck. However, as detailed in our answer to Question 4, the evidence seems to support the view that despite the FCA rightly celebrates its support for innovative firms, the reality is that the proportion of staff the FCA deploys to support innovation as a proportion of its total headcount is insufficient.

●        Without greater capacity to deliver its ambitions on support for innovation, there is a risk that future potential unicorn firms will not receive the correct support from the regulator at the point of application, which is not in the long-term interest of the UK economy regarding innovation, competitiveness and economic growth.

Q11. Could regulation benefit crypto-asset start-ups by improving consumer trust and resilience?

●        A well-designed, proportionate and efficiently administered regulatory regime can play a critical role in delivering improved social and economic outcomes. Improving consumer confidence in crypto-products and enhancing the resilience of crypto-assets service firms is paramount to building trust.

●        From a consumer perspective, increased trust and reliance encourage greater adoption and participation, with the likelihood of financial protection and legal recourse to funds in case of insolvency or other types of firm failure. It provides a high degree of assurance, with the knowledge that firms are regulated and supervised by financial authorities and subject to governance and oversight.

●        Key to improving trust and resilience is a well-designed regulatory framework providing clarity and certainty, ensuring firms are fully aware of their compliance obligations and responsibilities. Regulation should be designed to: provide clarity and certainty for affected parties, recognising that different groups may be affected differently and avoid duplication or conflict with other existing or proposed regulations.

●        The current approach to regulating enabling technology, and the categorisation of related crypto-asset activities and services based on legacy regulatory frameworks, risks regulatory duplication, fragments responsibilities, and stifles innovation.

Q12. How are Governments and regulators in other countries approaching crypto-assets, and what lessons can the UK learn from overseas?

●        Governments and regulators across much of the World have varying degrees of knowledge and understanding of crypto-assets and to some degree, those who have built positive ties with industry have been crucial to enhancing knowledge and understanding of the crypto-asset industry.

●        The United Arab Emirates (UAE) has recently established itself as a jurisdiction of great importance for crypto-assets, with an openness to digital assets as a whole and a desire to establish itself as the destination of choice for crypto-asset firms. Key to the success of the UAE in managing crypto-assets has been the cooperation and partnership between Government, financial service regulators and industry.

●        We welcome the steps that HMT has taken to date to help build positive ties with industry - close interaction between HMT, regulators and industry will be crucial if the UK is to deliver on its intentions for the crypto-asset industry.

●        Recent initiatives in the UAE include the launch of a regulatory framework for virtual assets including cryptocurrencies, alongside the establishment of the world’s first dedicated regulatory authority for crypto-assets, Dubai’s Virtual Assets Regulation Authority (VARA). The cross-industry nature of the developments taking place can be illustrated by Emirates Airlines which recently announced plans to accept payment in crypto-assets. The government has also committed to utilising the benefits of DLT in the provision of a range of public and governmental services, including the Dubai Metaverse Strategy[2], an initiative intended to support 40,000 virtual jobs and add $4 billion to the emirate’s economy in five years.

●        The ability to adapt existing regulatory frameworks in a comprehensive and timely manner to cover crypto-assets is another key lesson. Ever since Gibraltar introduced a regulatory framework for crypto-businesses in 2018, Gibraltar has cemented itself as a leading jurisdiction for crypto-asset firms. Importantly Gibraltar also revamped its authorisation and supervisory process in tandem to introduce its regulatory framework for crypto-assets.

●        France is also opening itself up to the digital asset industry, establishing itself as the Euro-zone’s crypto-asset hub. The French government has taken a strict but fair approach to the regulation of crypto-assets giving firms a chance to prove themselves within the sector.

Q13. The environmental and resource intensity of using crypto-asset technology?

●        Crypto-asset technology has developed a reputation for being detrimental to the environment, particularly due to proof-of-work cryptocurrencies requiring extensive amounts of energy. Crypto-asset mining can be energy intensive, with dependency on the computational power of hundreds of thousands of mining machines to maintain the security of blockchains utilising proof-of-work consensus.

●        Despite this, there are a number of developments that could help to remedy this. Chief amongst these is the pivot to a ‘proof-of-stake’ consensus, which utilises significantly less energy, and Ethereum, the second-largest crypto-asset network in the world, is set to make this switch in the near future.

●        Alongside this, a number of environmentally friendly and energy-efficient protocols have emerged, such as Cardano and Nano. There remains a huge appetite and a desire for the industry as a whole to become more efficient, and future developments will continue to minimise the adverse environmental impact crypto-assets may have, including the sources of energy used to power the sector e.g. wind, solar and hydro.

●        Additionally, there remains fierce debate as to the relative impact of the crypto-asset industry when compared to the carbon footprint of incumbent industries such as financial services[3].

September 2022

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