Written evidence submitted by Blockchain.com

Summary

Crypto assets, blockchain technology and decentralised finance (DeFi) hold great potential for consumers, business, and government as the foundation of a more inclusive, socially just, and innovative financial system. The UK has a time-limited window to develop a regulatory framework and business environment to make this potential a reality and realise the UK’s ambitions as a global digital finance hub.

UK policymakers and regulators should partner with the crypto asset industry to:

●       Develop and implement a permanent regulatory framework for crypto assets that is proportionate, well-balanced, future-oriented, and internationally attractive and competitive.

●       Create a simplified taxation framework for crypto assets that provides tax neutrality and certainty to retail and institutional crypto asset users to incentivise the adoption of crypto assets, including as a means of payment.

●       Nurture a business environment that enables the digital economy by encouraging capital investment and providing access to domestic and international skills and talent.

A balanced, attractive, and competitive regulatory regime and simplified tax framework that is underpinned by an ‘enabling’ business environment should encourage reputable participants in the crypto ecosystem to onshore in the UK. Enabling the industry to draw on a deep talent pool and to access capital, and giving crypto users the confidence to transact, will drive onshore growth – generating tax revenue, creating jobs, and supporting UK professional services.

UK policymakers and regulators should develop a coherent vision, strategy, plan, and timetable for the delivery of reforms. Blockchain.com – a UK-founded and now global cryptocurrency platform – looks forward to working with the UK parliament, government, and regulators to support the ongoing development of the UK’s crypto asset industry.

Opportunities and risks of Crypto assets

The UK Government acknowledged the transformative nature of digital technology in its digital strategy. Crypto assets, blockchain technology and DeFi hold great potential for UK consumers, business, and government as the foundation of a more inclusive, socially just, and innovative financial system.

Use cases for crypto assets include investment, payments (e.g., stablecoins) – the foundation of a decentralised financial system – and application platforms (e.g., Web 3.) Innovations such as personal digital wallets democratise money management by providing users with full and exclusive ownership and control of their assets.

Crypto assets can pose similar inherent risks to those of traditional financial services – requiring risk control through effective management and a proportionate and well-balanced regulatory regime. The inherent features of crypto assets and blockchain technology can introduce new risks for users (e.g., cyber security) but reduce other risks (e.g., blockchain immutability can aid in fighting financial crime.) Inherent risks from crypto should be managed and regulated in a proportionate, tailored manner – enabling a spectrum of crypto asset and blockchain technology use cases to flourish and spurring innovation – maximising the potential of crypto assets for consumers, business, and government.

Regulation

Well-designed and effectively implemented regulation will provide certainty to the crypto market and its users – giving firms the confidence to grow in the UK and crypto users the confidence to transact. The UK should develop a regulatory regime for crypto assets with the following three design characteristics:

●        Permanent: a well-developed permanent regime – authorisation, supervision, and enforcement – that is proportionate and, where appropriate for digital use cases, builds on and tailors existing regulatory approaches.

●        Balanced and future-oriented: a dynamic, outcomes-focused, technology neutral regime that addresses risk – consumer security and protection, market integrity and systemic stability, and financial crime – while spurring innovation.

●        International: a competitive and globally consistent regime – enhancing the UK’s attractiveness as a crypto location and reducing cross-border regulatory costs and frictions for firms with global operating platforms.

The effective implementation of a regulatory regime for crypto assets is as critical as its design characteristics, if not more so. Implementing a new crypto asset regime in a timely manner will require policy coherence and commitment among policymakers and regulators – as acknowledged by the outgoing FCA chair – and a strong partnership with industry (e.g., building on FCA CryptoSprints.)

The advancement of permanent regulatory frameworks in other jurisdictions (e.g., the EU) adds urgency for the UK to develop a regulatory framework for crypto if it is to realise its ambitions as a global hub. UK policymakers and regulators should develop a single coherent vision, strategy, plan, and timetable for delivery – building on existing digital finance related work streams and outline plans.

Permanent

A well-designed and appropriately implemented permanent regulatory regime should provide certainty and confidence to the crypto market and its users. The recent Financial Services and Markets Bill – which proposes to make certain types of stablecoins a regulated form of payment – is an important first step in bringing aspects of the UK’s crypto industry into the scope of regulation. UK policymakers should, however, move forward with a more pervasive permanent regulatory framework for crypto.

UK policymakers and regulators should develop a regulatory regime for crypto that builds on and tailors existing regulatory approaches, where these are appropriate and proportionate for digital use cases. By avoiding reinventing the wheel, policymakers can devote greater focus to those aspects of existing approaches which may require tailoring for crypto use cases.

New rules should be developed as a priority with a clear and sufficient timetable for delivery to enable regulators, firms, users, and the market to develop approaches to ensure smooth implementation.

Balanced and Future-Oriented

UK policymakers should develop a dynamic, outcomes-focused, and forward-looking regulatory regime for crypto assets that is able to respond effectively to the rapid pace of crypto market evolution. On the contrary, a static, rule-focused regime may stifle innovation, not achieve intended policy objectives, and may lead to unintended consequences.

Developing a dynamic regulatory regime for crypto will require UK policymakers to strike the right balance between outcomes focused principles in legislation and implementing rules in the regulatory handbook. To ensure coherence in the design and delivery of a regulatory framework, Parliament should set the tone and objectives for the regime at the outset and agree these with regulators before implementation. On an ongoing basis, Parliament and government should monitor whether the regime continues to achieve its objectives and the tone of its delivery is in line with expectations – implementing reforms where necessary to reflect market or other developments.

Given the speed of technological change, UK policymakers and regulators should adopt a technologically neutral approach to the regulation of crypto. Favouring or biassing one technology over another exposes policymakers to the risk of picking winners and stifling innovation. Policymakers should instead develop a regime that enables a wide spectrum of new opportunities for innovation (e.g., digital ID), including tools to manage evolving inherent risks (e.g., financial crime surveillance.)

International

Crypto markets are inherently global in nature. Crypto firms seek to operate a global operating platform to serve their customers – determining the optimal location(s) to organise their operations and run operating platforms. Regulatory factors are an important component of organisational and operating decisions alongside other factors such as the underlying business environment.

Regulations that require firms to split their operations and establish platforms in multiple locations to serve their customers, add costs and present barriers to scaling operations. The UK should develop a regulatory regime for crypto that balances open access to global markets and customers, with a local presence to exercise supervision. UK policymakers and regulators should draw lessons from the regimes that have been developed in other jurisdictions (e.g., EU and Switzerland) and take account of current and emerging global standards and norms. Regulatory regimes with proportionate rules that promote innovation and appropriately balance risk can help to ensure better outcomes for crypto users.

Crypto firms that are internationally active also assess whether misalignment, inconsistency or conflicts between regulatory regimes create frictions or costs when providing cross-border services to their customers. International alignment in crypto regulation and its implementation is critical to reduce cross-border business frictions, engender user confidence and reduce regulatory and jurisdictional arbitrage. Therefore, the UK government and regulators should expand their active engagement in ongoing international efforts to further develop global standards (e.g., anti-money laundering and counter terrorist financing.)

Taxation

Ensuring appropriate tax treatment for crypto assets, including providing certainty as to likely tax liabilities, is an important factor in engendering user confidence and incentivising more widespread adoption of crypto. The UK should develop a taxation framework for crypto assets that:

●       Ensures a level playing field for the taxation of crypto assets compared to other similar economic assets.

●       Provides regulatory certainty while incentivising innovation and enabling new asset classes and technologies to be developed.

●       Eliminates excessive taxable events that are not representative of underlying economic activity.

A reformed tax framework containing simplified rules and supplemented by clear guidance will support retail and institutional crypto asset adoption in the UK. For instance, reforming HMRC’s treatment of crypto assets as property rather than money for tax purposes will support the use of stablecoins as a means of payment as is envisaged under the recent Financial Services and Markets Bill.

The UK should also reform the taxation framework for crypto asset business, including providing greater certainty on the application of VAT where pseudonymity creates challenges for the verification of a customer’s location.

Business Environment

The development of a successful onshore crypto asset industry will require a business environment that enables the digital economy through access to talent and capital.

Crypto asset businesses in the UK need to access the right talent to scale and develop their operations. The government should continue to identify how to best equip domestic talent with the right skills through education and training reforms, including programmes to retrain and upskill existing professionals. Furthermore, the government should assess whether existing visas (Youth Mobility, Scale-Up, High Potential etc.) are achieving the desired outcomes and supporting growth.

Crypto asset businesses also need access to domestic and global investment. The government should move forward with the recommendations from the Kalifa Review, including through the capital market product changes to unlock retail and institutional capital.

Enabling the industry to draw on a deep talent pool and access capital, and giving crypto users the confidence to transact, will drive onshore growth – generating tax revenue, creating jobs, and supporting UK professional services exports.

September 2022

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