CAI0048

Written evidence submitted by Luno

Introduction

1. Luno welcomes the opportunity to respond to the Treasury Select Committee’s Call for Evidence as part of its inquiry into the crypto-asset industry.

2. Luno is a leading global cryptocurrency company on a mission to put the power of crypto in everyone’s hands. Since its founding in 2013, Luno has pioneered responsible crypto education and investment, introducing over 10 million people to crypto in more than 40 countries across the UK, Europe, US, Africa, Asia and Australia.
    
3. Luno is proudly headquartered in the UK, where it employs over 150 people.

Executive summary

4. Over the course of the last decade the UK has emerged as a leader in fintech, topping the list of destinations for inward investment and the number of new unicorns. After Brexit, the UK has the opportunity to build on this position and become a world leader in cryptocurrency.

5. Allowing the crypto sector to flourish would boost economic growth and demonstrate levelling up in action. It would create thousands of new highly skilled jobs across the country, attract substantial inward investment and generate significant tax revenues for the Exchequer.

6. Luno is firmly of the view that a holistic regulatory framework is an essential prerequisite for the success of the UK crypto industry. Comprehensive regulation would protect consumers and enable businesses to attract investment and create more jobs.

7. Multiple jurisdictions across the world have implemented comprehensive regulatory regimes, with Singapore’s becoming law in early 2019. Meanwhile, the UK has repeatedly delayed taking action. In Spring 2020, the Government said it would “consult later in 2020” on “the broader regulatory approach to cryptoassets”[1]. Two years later, the Government announced in April 2022 that it would consult “later this year” on “regulating a broader set of crypto activities” including “trading of tokens like Bitcoin”[2].
    
8. Luno strongly believes that there is an urgent need to design and implement a holistic regulatory framework in the UK. A failure to tackle this issue at pace increases the risk of consumer harm and reduces the chances of the UK retaining its position as a world leading fintech hub.
   

Question 1) To what extent are crypto-assets when used as digital currencies (such as Stablecoin) likely to replace traditional currencies?

9. While Luno strongly believes in the long term viability of digital currencies, we do not believe they are likely to replace traditional fiat currencies in the near to medium future.

10. The most likely scenario is that the digital currencies and fiat currencies (including cash) will coexist, with consumers using both for different purposes to suit their individual circumstances and preferences.

Question 2) What opportunities and risks would the introduction of a Bank of England Digital Currency bring?

11. Central Bank Digital Currencies (CBDCs) could provide businesses and individuals with cheaper, faster, more secure and more inclusive access to money.

12. Luno, therefore, welcomes the work undertaken by regulators and the Government to date on CBDCs, and looks forward to engaging with the various upcoming consultations on the case for a UK CBDC.

Question 3) What impact could the use of crypto-assets have on social inclusion?

13. Luno believes that crypto offers the opportunity for greater freedom and more inclusive economic growth across the globe.
     
14. Crypto is likely to have the most significant impacts in countries where access to the traditional banking system is more limited. For example, 45% of people in Sub-Saharan Africa do not have access to a bank account or mobile money[3].

Question 4) Are the Government and regulators suitably equipped to grasp the opportunities presented by crypto-assets, whilst at the same time mitigating against the risks?
 

15. The resourcing of regulators is a matter for the UK Government and regulators themselves.
     
16. Notwithstanding, Luno would note that its regulators in overseas jurisdictions tend to have specific units or departments entirely dedicated to regulating the crypto sector. That is why Luno welcomed the March 2022 announcement[4] that the Financial Conduct Authority (FCA) would create a new Digital Assets Department, and the statement in July that the FCA had recruited an additional 500 staff across the organisation since the start of the year[5].

17. The stand-alone crypto departments that exist within international regulators tend to have been established several years ago, allowing them to build up a significant understanding of the underlying technologies that underpin the crypto sector. Additionally, these departments tend to be well resourced financially which ensures they can retain the best talent.

Question 5) 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?

18. As a new, largely unregulated, asset class, there are risks associated with cryptoassets. Luno warns its customers about these risks prominently in its app and on its website.
     
19. Luno’s full Risk Warning page can be accessed via the following link - https://www.luno.com/en/legal/risks
     
20. Luno does not provide access to Non-Fungible Tokens through its app.

Question 6) How can distributed ledger technology be applied in the financial services sector?

21. Access to a more inclusive financial system will enable people everywhere to think of new and better ways of exchanging value, and cryptocurrencies can play a key part.

22. The decentralised nature of the blockchain technology that underpins cryptocurrency not only means everyone can access the same ledger account in real-time no matter who or where they are, but also that money can easily be easily transferred between parties without significant lag times and exorbitant fees.

Question 7) 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?

23. Luno welcomes the Government’s public support for the sector and its steps to create engagement forums, but calls on the Government to move faster on designing and implementing a holistic regulatory framework for the crypto sector. 

24. The former Economic Secretary to the Treasury said in April that the Government was intent on making the UK “the very best place in the world to start and scale crypto-companies”[6], while the former Chancellor of the Exchequer said that “we're working to make the UK a global cryptoassets hub. We want to see the businesses of tomorrow, and the jobs they create, here in the UK”[7].

25. In the same speech, the former City Minister announced that the Government would establish a “high-level industry” forum called the “Cryptoasset Engagement Group”. The purpose of the group is to “help guide us on the next steps in [the] road ahead”. Luno welcomes this announcement, and urges the Government to move at pace to publish the Group’s terms of reference, finalise its membership and begin meeting.
     
26. In regard to the FCA, the regulator hosted its first ever “CryptoSprint” in May 2022. The Sprint brought together leading crypto companies in order to “increase [the FCA’s] understanding of  emerging cryptoasset market practices and to seek views from the industry on what an appropriate regulatory regime might look like”[8]. Luno attended the CryptoSprint, and would like to thank the FCA for hosting this productive forum. Luno hopes that the regulator will hold further such sprints in due course.

27. Luno also notes the important work that is being conducted by HM Treasury and the FCA on financial promotions, including through its consultation on bringing certain cryptoassets into the scope of the Financial Promotion Order[9]. The increasing adoption of cryptoassets - at pace - has seen a concurrent increase in advertising by the industry. Ensuring advertising adheres to certain standards is an important mechanism to ensure customers are adequately informed and protected. Luno welcomes any additional work being conducted in this area, most notably in the implementation of standards, to ensure firms are able to comply in a timely and transparent manner, while still being able to promote their products in a responsible way.

Question 8) How might the Government’s processes – for instance the tax system - adapt should crypto-assets be adopted more widely?

28. N/A

Question 9) 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?

29. Luno is firmly of the view that a holistic regulatory framework is an essential prerequisite for the success of the UK crypto industry. Comprehensive regulation would protect consumers and enable businesses to attract investment and create more jobs.

30. Multiple jurisdictions across the world have implemented comprehensive regulatory regimes. In Malaysia, the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order came into force on 15 January 2019[10], while in Singapore the Payment Services Act became law in February 2019[11]. Separately, the European Union reached agreement on the detailed Markets in Crypto-Assets regulation in June this year[12].

31. Meanwhile, the UK has repeatedly delayed taking action. In Spring 2020, the Government said it would “consult later in 2020” on “the broader regulatory approach to cryptoassets”. Two years later, the Government announced in April 2022 that it would consult “later this year” on “regulating a broader set of crypto activities” including “trading of tokens like Bitcoin”.
     
32. Luno strongly believes that there is an urgent need to design and implement a holistic regulatory framework in the UK. A failure to tackle this issue at pace increases the risk of consumer harm and reduces the chances of the UK retaining its position as a world leading fintech hub.

33. Luno calls on Parliament, the Government, regulators, academics, think tanks and industry to work together to design and implement this ambitious regulatory framework in the UK.

34. From Luno’s experience of operating in multiple jurisdictions with regulatory regimes for crypto, we believe that the key components of a successful framework include:
1. Strong, bank-like, consumer protection requirements
2. Alignment with international financial crime standards, for example, the Financial Action Task Force (FATF) guidelines
3. Cyber security and data protection rules
4. Clearly defined, robust and timely authorisation processes
5. Well-resourced regulators, with dedicated crypto units
6. Provisions to allow for responsible marketing and advertising of products
7. Guidance on how traditional financial institutions can work with the crypto industry
    
35. Luno would welcome the opportunity to engage further with the Committee, sharing our experiences of operating under various international regulatory regimes. 

Question 10) Is the Government striking the right balance between regulating crypto-assets to provide adequate protection for consumers and businesses and not stifling innovation?

36. Regulation and innovation are not mutually exclusive, particularly in financial services. Luno strongly believes that crypto is a sector which could benefit from appropriate regulation.

37. Regulation would ensure that all companies within the crypto sector operate at the highest possible standards, meaning that customers would be protected. This level of basic protection is a prerequisite for trust, which is an essential requirement for widespread adoption.

38. Moreover, regulation would give businesses a level of certainty about the medium-term operating environment. This would allow British companies to to plan, attract investment and create more jobs in the UK.

39. Luno believes that the Government’s proposed regulatory approach appears to strike a reasonable balance between consumer protection and innovation, but the significant delays to design and implementation are putting this at risk.

Question 11) Could regulation benefit crypto-asset start-ups by improving consumer trust and resilience?

40. Please see the response to question 10. 

Question 12) How are Governments and regulators in other countries approaching crypto-assets, and what lessons can the UK learn from overseas?

41. Please see the response to question 9.

Question 13) The environmental and resource intensity of using crypto-asset technology.

42. N/A

September 2022