Question

Gemini Response

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

Crypto-assets, similarly to other new methods of payment, are unlikely to replace traditional currencies. Rather, crypto-assets, as a new asset class and technology, can operate in tandem and support more traditional currencies. The overstatement of this risk could lead to the unnecessary stifling of innovation. While there is some overlap between the use cases of traditional currencies and crypto-assets (e.g. stablecoins), crypto-assets have many more distinct use cases (as do other financial instruments) and can serve different purposes alongside traditional currencies, and traditional currencies will continue to serve their purpose distinct from crypto-assets.

Through crypto-asset regulation which is both proportional and focussed on consumer protection, the UK will be able to support this new industry while also maintaining the integrity of the existing financial system and traditional currencies.

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

Current payment systems do not offer universal access to financial services for a big proportion of the world’s population. Even if people do have accounts, current forms of cross-border retail payments like remittances can be slow, expensive and opaque. Gemini was founded based on the conviction that crypto-assets can help solve key policy challenges, including with respect to social inclusion. By leveraging the internet, mobile, and blockchain technology, crypto-assets represent a new financial services infrastructure that can better reach and serve historically underrepresented populations excluded by the traditional financial system.

In particular, stablecoins have the potential to improve the operation of crypto-asset markets as well as payments systems by increasing access and efficiency. This can result in lower costs for merchants and consumers, as well as broadening the availability of digital payment solutions (including for individuals who may not readily have access to the more traditional financial payment systems).

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 crypto-asset market is dynamic and complex, requiring a depth of understanding and a forward leaning approach from policymakers. This has proved challenging, as it has for regulators globally, as they have looked to tackle these new technologies and products.

We applaud the Government’s ambition of pro-innovation and creating a UK crypto-asset hub, and believe this can only become a reality when supported by a holistic approach from regulators. In order to support this outcome, meaningful engagement with industry is crucial. We recommend partnering with industry to bolster regulatory knowledge in the field. Engagement going forward should be formalised, focused in scope and discussion and on a regular cadence. By leaning on industry partners to provide appropriate insights, the FCA could minimise the number of in-house SMEs whilst still providing strong policy outcomes.

We believe this would allow the FCA to develop an informed approach to crypto and digital assets which would be supported by the industry and more effectively tackle harms whilst protecting consumers.

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?

In April 2022, the UK government announced plans to become a “global hub” for crypto investment. Gemini has been encouraged by this announcement, which reflects an understanding that the potential benefits and opportunities of crypto-assets far outweigh any risks inherent to all of the financial services industry. For example, the opportunities include, among others, the below:

Opportunities

●        Bolstering of the economy

○        By supporting innovation and fostering a tech-friendly, crypto-friendly approach to legislation and regulation, the UK can encourage more crypto businesses to set up in the UK, thereby bringing jobs and tax revenue.

○        By encouraging alternative forms of financial services, investment opportunities for the market will be diversified.

●        A wider variety of technology and crypto-asset businesses in the UK will promote effective competition within the industry.

●        Many firms who have moved their crypto-asset businesses offshore may return to the UK. This is particularly true because crypto-asset firms want to operate in jurisdictions where there are clear rules and requirements as to how such a firm can bring to market the products the customer base wants in a safe and regulatorily compliant manner.

●        The UK will have the opportunity to educate the general public and ensure that the British public have a strong understanding of traditional vs. alternative financial products.

●        With regards to NFTs, the UK has the opportunity to lead on allowing UK companies to innovate when it comes to the many positive application cases of NFTs (e.g. title keeping, proof of authenticity, etc.).

Risks

●        Consumer protection

○        The crypto-asset market is built on a technology with significant distinctions from that of the traditional financial markets, and any regulatory framework that fails to properly account for such distinctions can harm innovation. It is critical for any such framework to balance consumer protection with the need to bring the market innovative and regulatory-compliant crypto-asset products. Failure to do so and frameworks focused on harming innovation can actually have the inverse effect of the goal on consumer protection–that is, instead of protecting UK customers, unnecessarily prohibitive regulations may drive such UK customers to unregulated exchanges located offshore, diminishing the goal of consumer protection.

●        Inconsistent regulation

○        Inconsistent approach and stance to crypto between the UK Parliament and regulators will hinder progress towards effective regulation and create confusion within the industry, particularly if the UK has the absence of a progressing regulatory regime in comparison to other jurisdictions.

●        NFTs

○        As NFTs are also unique in terms of their attributes, managing any potential illicit activity and/or price manipulation risk should be considered to best protect customers. However we believe that this risk, which is also inherent in other more traditional forms of financial products, does not currently outweigh the benefits that could be brought about by NFTs.

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

There are numerous use cases for the application of distributed ledger technology (DLT) within the financial services sector, including but not limited to the below:

●        Quicker and more cost effective cross-border payments and peer-to-peer payments which reduce settlement periods.

●        Capital markets

○        DLT is ideally suited to performing a range of capital market functions due to its transparency, speed and digital nature.

●        Bank finance

○        Trade finance, insurance, and other products could benefit from the transparency and digitalisation of DLT which could make these processes more operationally efficient.

●        AML/KYC checks

○        DLT could greatly further efforts to move towards digital identity through more efficient storing customer data and facilitation of information sharing.

●        Tokenisation (NFTs)

○        Tokenisation of NFTs using DLT could greatly enhance numerous financial services products by providing a new means of representing physical assets digitally.

●        Embedded supervision

○        DLT could lead to more data-led supervision by regulators and real-time reporting and monitoring of firms utilising DLT.

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?

Government and regulators have issued a number of papers to the industry to gain knowledge and insight into crypto-assets, and to propose policy interventions. However, without a coherent overarching UK strategy for crypto-assets, some of these papers may offer solutions which are not fit for particular purpose as they do not align to the broader strategy.

As mentioned previously, further cross-organisational collaboration and engagement could be sought to bring private sector, public sector (including the FCA, HM Treasury, HMRC and Bank of England) experts together in order to educate regulators and policymakers. This engagement going forward should be formalised, focused in scope and discussion and on a regular cadence.

If the aim of the UK government is to become a “global hub” for the crypto-asset industry, then further thought should be given to develop a considered and cohesive approach to achieve this while balancing consumer protection and other regulatory obligations without stifling innovation. A clear mandate, as well as appropriate powers where relevant, should be given by the Government to regulators to ensure alignment.

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?

Gemini believes that current AML/CTF controls required of UK-based firms are effective and further enhancements to the Economic Crime Act will improve regulator and law enforcement capabilities with regards to illicit finance. However, those controls must also be proportionate and transparent, otherwise firms will choose to establish themselves outside the UK which is inconsistent with the Government’s aim and may be incongruous with broader consumer protection.

With regards to consumer protection, currently it appears that regulators have taken a harsher stance towards some crypto and digital asset products than other products of similar risk levels, e.g. commodities trading, crypto spot trading and FX trading. Gemini considers the risks posed to consumers by crypto and digital assets to be similar to these product offerings.

On financial promotions (CP22/2) for example, we consider the proposed advertising regulatory measures to be disproportionate to the actual risks of the crypto industry. Gemini believes it is important for any required risk warning or measure to clearly identify the risks specific to a crypto-asset and be communicated in an easily understood manner to the consumer. Any such advertising rule (or restriction) needs to take into consideration the potential effect it may have on continued commercial viabilities and innovation for UK firms and balance that with whether or not such a rule would be unduly burdensome to comply with, with no real commensurate consumer protection benefit. 

Without such an analysis, an unintended consequence could be the migration of firms offshore, who may otherwise have set up business in the UK. Gemini’s concern here is that current rules around advertising and financial promotions may be more onerous for crypto than for other products. This creates inconsistency and can stifle innovation.

In order to ensure consumer protection, Gemini would recommend that in order to be most effective, regulators focus on consistent and proportionate regulation which will best balance consumer protection and innovation.

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

The Government has taken positive steps to articulate its crypto-asset strategy and the policy outcomes it seeks to achieve, for example through the work of the Cryptoasset Taskforce. We believe this kind of collaborative working is essential to ensure competing priorities are appropriately balanced. As we have outlined elsewhere in our response, we encourage the Government to continue in this vein, incorporating regular and meaningful engagement with industry, to ensure the most effective policy outcomes.

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

Gemini would advise that the FCA continue to move towards an approach which, rather than fitting distinct and separate elements of crypto-assets into existing regulation, takes a holistic overview of the entire crypto regulatory framework. This would be most beneficial to crypto-asset startups as regulation would work in harmony with the product and technology whilst also being proportionate. Gemini believes that regulation which allows the industry to innovate in a safe and compliant manner will in turn improve consumer trust and consumer protection.

Following the FCA’s successful CryptoSprint, one consideration would be to establish a sandbox program for crypto-asset start-ups. This would allow crypto-asset start-ups to better partner with regulators to understand how to best improve consumer trust, while allowing such start-ups a clear avenue to innovate, mature, and bring to market the products it wants to in a safe and compliant manner. 

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

When considering an approach for crypto-assets, the UK must take a number of aspects into account, including objectives of the Government, mandates of the regulators, expectations of business and the cultural and societal norms of British people. While no one aspect alone is truly unique to the UK, the combination of factors require an approach that cannot be copied from another jurisdiction. We encourage the Government to continue to build on existing progress and in due course consider specific elements from other jurisdictions, for example the USA when thinking about monetary sovereignty or the EU when considering consumer protection. Gemini believes that the UK, with its centralised government and commitment to innovation, can lead when it comes to a thoughtful and cohesive crypto-asset regulatory framework.

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

Whilst mining through the “proof of work” consensus mechanism is resource-intensive, there are many other protocols which are less resource intensive. With the Ethereum Merge as an example, it is clear that many blockchains are moving towards a much more environmentally friendly protocol “proof of stake”. Other protocols include but are not limited to:

●        Delegated proof of stake

●        Proof of burn

●        Proof of authority

These protocols reduce the environmental impact and can result in faster transaction speeds however they are less widespread at the moment and less developed. Nevertheless, as the industry matures, there will undoubtedly be more of a migration to the above protocols.