CAI0051
Written evidence submitted by Block Inc
Dear Sir/Madam,
Block, Inc. (“Block” formerly known as Square, Inc.) is a global technology company that was founded in 2009 to expand economic access for individuals and businesses that are underserved by the existing financial system. Since then millions of entrepreneurs and individuals have used our tools to run their businesses, manage their finances, and grow in the economy.
Block is headquartered in San Francisco, California and operates in the US, UK, Canada, Australia, Spain, Ireland and Japan. Block comprises Square, Cash App, Clearpay/Afterpay, Spiral, TIDAL, and TBD. United by our shared purpose of economic empowerment, we’re creating tools to help expand access to the economy across the globe. With Square we provide a wide range of tools for small businesses including payments software and hardware, small business loans, and payroll services. We also serve consumers with Cash App, a peer-to-peer cash transfer service. In the US, Cash App features include a physical cash card, bitcoin trading and fractional share investing.
One of our core principles is that people should have easy and fair access to financial services. No one should be left out because the barriers are too high, the cost is too great, or the technology too complex. Because we believe that bitcoin can help deliver on this vision, Block has invested in the health of its ecosystem from a product, leadership, innovation, and legal perspective. This includes initiatives such as Spiral, an independent team dedicated to contributing to and improving the open source ecosystem, our Bitcoin Clean Energy Initiative focused on establishing a clean energy future for bitcoin, and the Cryptocurrency Open Patent Alliance (COPA), a US non-profit with the purpose of encouraging the adoption and advancement of cryptocurrency technologies and removing patents as a barrier to growth and innovation. We also recently launched the Bitcoin Academy in the US which provides free classes to educate and empower communities with the necessary knowledge to use bitcoin as a tool for financial freedom.
We welcome the Treasury Select Committee’s inquiry into the UK’s crypto-asset industry and stand ready to work with you as you continue to evaluate this industry. Please see below our response.
Question 1: To what extent are crypto-assets when used as digital currencies (such as Stablecoin) likely to replace traditional currencies?
In the UK, we do not expect crypto-asset and digital currency (including Central Bank Digital Currencies (CBDCs)) adoption to fundamentally change retail consumers’ use of traditional currencies over the short- or medium-term. We believe that crypto-assets and digital currencies will, instead, gradually serve to increase payment optionality for consumers.
Based on recent research, crypto-assets provide certain benefits that traditional currencies may not, especially in geographies where there are high levels of volatility or significant inflation. Earlier this year, we partnered with Wakefield Research to investigate common misconceptions surrounding bitcoin. We surveyed over 9,500 respondents across the globe. The study found that people in countries with lower GDP per capita and higher shares of income saw the most value in transacting with bitcoin due to the ease and low cost of buying and selling with bitcoin and sending payments - especially when compared with the slow or expensive banking and payments infrastructure in their home countries.
Question 2: What opportunities and risks would the introduction of a Bank of England Digital Currency bring?
While it has been suggested that CBDCs could deliver a number of opportunities, we believe the risks to households, businesses and the broader financial system outweigh the potential benefits of a CBDC.
It has been suggested that CBDCs could:
● spur innovation in payments and enhance efficiency
● offer enhanced resilience
● counter the risk of private money creation
● improve availability and useability of central bank money
● increase access to central bank money
However, there are a number of risks.
● Destabilisation of existing financial services: The private sector plays an important role in commercial banking and the provision of non-bank payment services. As recently highlighted by Dr Joachim Nagel (President of the Deutsche Bundesbank) in his speech on the opportunities and risks of a digital euro, an incorrectly designed CBDC could effectively undermine the use of the private sector, drawing private sector deposits to the central bank or create market runs on privately held money in times of economic stress, further destabilising the private sector in times of economic uncertainty.
● Scalability and cyber security: A public sector body would need to design a highly available and fast payment platform that is also highly secure. This would be a novel venture for a central bank.
● Privacy: There has been a growth in concerns raised that a CBDC would not facilitate meaningful privacy but could be used by authorities to monitor, or even control, how individuals spend their money.
● Competitive cross-border payments: CBDCs, instead of enhancing inclusive cross-border payments, could entrench the intermediation in cross-border payments, making international payments and remittances slower and more expensive for consumers. We have not yet seen a genuinely global cross-border CBDC test or a nationally developed CBDC that can serve as a tool for global cross-border payments, in the same way that crypto-assets (e.g. bitcoin) can. Instead, small groups of like-minded central banks have cooperated in tests. Central banks typically (in most, but not all jurisdictions) work closely within their banking system and do not have much direct interaction with consumers (e.g. the Bank of England has indicated that it does not wish to directly interface with UK consumers).
Conclusion: We believe that the risks posed by CBDCs currently outweigh the benefits. We encourage regulators and policymakers to continue their important work to explore these risks and ensure that there is a clear use case for a UK CBDC. As such, we support the House of Lords’ Economic Affairs Committee’s conclusion that “Parliamentary scrutiny should be an essential part of assessing the case for a CBDC and if the Government decides to proceed, Parliament should have the opportunity to vote on any final decision, along with the governance arrangements for any such system”.
Question 3: What impact could the use of crypto-assets have on social inclusion?
The core benefit from a social inclusion perspective is the ability of crypto-assets to decentralise today’s intermediated financial services industry. Today’s money has been commoditised: in order to access financial services, consumers and other businesses must be accepted by banks which is often not possible for lower income individuals and innovative businesses.
Using bitcoin can mitigate these problems and enable more individuals to participate in the economy. For example, in our recent study, those with a lower income saw the utility of bitcoin as a means of transacting business globally - as well as sending money globally without remittance fees.
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?
Technological progress is extremely fast-paced and the crypto-asset market is complex and dynamic. Additionally, crypto-assets in their own right do not pose a single set of opportunities or risks. The risk profile of a particular crypto-asset depends on its individual nature, the function it has been designed to perform, and how it is used by its stakeholders (which may be different to its intended use or original function). Some crypto-assets function as a means of data storage, others as a payment system, a payment service, a record of ownership of particular assets, or representing an asset in their own right as a Non-Fungible Token (NFT).
This means that it is essential for Government and regulators to invest in hiring subject-matter experts, alongside maintaining open dialogue and ongoing engagement with crypto-asset experts in industry. Regulation should be cognisant of the dynamic nature of the sector.
Recent initiatives to meaningfully engage with the crypto-asset industry are also important. For example, we welcomed the FCA’s recent CryptoSprint and other more well established initiatives such as the FCA’s Regulatory Sandbox, a part of the FCA’s successful Innovation Hub, which has provided crypto and DLT firms with a platform to test their innovative propositions in the UK market. Despite this engagement, we unfortunately continue to see Government forums focused on the crypto sector, without any crypto asset businesses present. We would encourage regulators and policymakers to be mindful of the composition of industry engagement forums.
Whilst the Government has publicly announced its intention to make the UK a ‘crypto hub’, there is a need for a more unified approach by Government and regulators to unlock the opportunities presented by crypto-assets. Due to the range of types of crypto-assets (referenced above), we often see different parts of the Government and different policy makers focusing on different types of crypto-assets. However, in doing so, there is a risk that greater uncertainty is created in the market - especially to innovators and the smallest of businesses. Coordination amongst UK regulators will be critical to establishing the UK as a ‘crypto hub’. This is also important in the international policy context since crypto-assets transcend geographic borders. The UK’s leadership in the Global Financial Innovation Network and within international standard setting bodies working on crypto-assets will be essential to advancing the UK’s policy positions in this space.
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?
Block is investing in technologies that lower the barriers to entry, reduce the cost, and improve the utility of bitcoin. We prioritise these investments because we believe bitcoin is for everyone; no matter who you are, where you live, your financial situation, or your credit history. With a borderless, internet-enabled monetary system, financial information can move quickly with low costs, open to all. Bitcoin is an instrument of economic empowerment, providing a way for anyone to participate in a global monetary system through more efficient, cost-effective remittance payments and greater access to financial tools. It is global, decentralised and secure.
One of the opportunities for bitcoin is within the technological infrastructure itself. Bitcoin relies on proof of work (POW), a model in which complex cryptographic mathematical equations must be solved for transactions to be processed. The system is open source and can be operated without dependence on any central authority. Within the POW environment, DLT can also be used to record ownership of assets. By recording ownership records on the blockchain, businesses and governments alike can create tamper-proof, transparent and immutable records.
DLT can be used to address unwanted trade practices. For example, in 2018, Starbucks introduced a new blockchain-based tool to trace the ownership details of the coffee beans they sourced from fields in Columbia, Costa Rica and Rwanda all the way to their individual stores.
In the entertainment and arts sector, non-fungible tokens (NFTs) representing unique or quantity-limited digital items on the DLT, can help artists manage the digital rights to their works. Artists can use smart contracts in NFTs to automate the payment of royalties from secondary market transactions.
In the public sector, Sweden and Poland have improved the land registration process through the use of DLT, speeding up transactions, eliminating paperwork, reducing fraudulent activities and saving costs and time. Australia is building the ASX’s new clearing house registration system using DLT.
Question 6: How can distributed ledger technology be applied in the financial services sector?
In addition to the examples shared above, DLT could be used as a means to securely, immutably and distributedly store data. It could be used to deliver the function of a payment system, for back office settlement (internally or externally) or to deliver regulated payment services. Because DLT and crypto-assets are just a form of technology, their application can be broad.
Payment mechanisms built on DLT (including stablecoins as well as other crypto-assets) can be used in P2P payments, to facilitate lending and investment services and new types of platforms are emerging where crypto products can be traded without the use of intermediaries, which can be expensive and less efficient. Blockchain’s transparency naturally lends itself to identifying, tracing and preventing illicit activities in the financial services sector. By design, bitcoin offers the potential for greater transparency and traceability than many forms of fiat currency. This and other features could also be immensely useful as regulatory tools for financial regulators.
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?
We would encourage the Government to enhance cross-sectoral coordination between UK regulators and Government. The UK’s Crypto-asset Taskforce (made up of the FCA, BoE and HMT) is an excellent start, but does not include the breadth of perspectives and interests that is necessary to form a balanced view of the sector. We would also encourage the Government to seek more engagement with the private sector, so that Government subject-matter experts can better keep abreast of this ever-changing industry’s developments and emerging use-cases for crypto-assets. Engagement should also include consumer groups, and consumers themselves, to help understand the interests and needs of UK citizens.
Question 11: Could regulation benefit crypto-asset start-ups by improving consumer trust and resilience?
To help innovators benefit from the opportunities that crypto-assets can provide, we recommend that the Government works towards implementing a legislative and regulatory framework that provides certainty and promotes innovation while also putting in place appropriate protections for consumers and investors. Any regulatory framework should be principles-based, technology neutral and foster a diverse crypto-asset ecosystem. It should be based on the function crypto-assets perform and how they are being used.
Alongside regulation that promotes innovation, the Government should work closely with industry to educate consumers about how to safely use crypto-assets. Blanket warnings, as seen to-date, are not effective. By increasing access to and awareness of reliable information on crypto-assets and educating on crypto-assets as a whole, the Government will help consumers make more responsible and informed choices about whether to transact or invest in crypto-assets.
Question 13: The environmental and resource intensity of using crypto-asset technology.
We believe there can be a positive relationship between bitcoin and energy efficiency. Bitcoin is already a natural, early adopter of renewable energy. Estimates show that more than 50% of the energy used for bitcoin mining is clean. By comparison, approximately 29% of global electricity is clean. Bitcoin computational centres are uniquely positioned in addition to utility-scale storage solutions, to help smooth the inherent supply/demand mismatches of clean, intermittent energy (when the sun isn’t shining or the wind isn’t blowing) thus creating a more profitable price floor, in turn helping subsidise renewable energy infrastructure in a way previously unavailable. Bitcoin-focused computational centres are location agnostic (require no transmission of power), interruptible (can be curtailed on very short notice,) and time agnostic and thus can function as a synergistic buyer of energy to help level the peaks and valleys of both over supply and high demand periods.
Bitcoin miners are economically motivated and are incentivised to minimise their operating costs by seeking energy sources with the lowest possible margin cost. For this reason, bitcoin miners are some of the most active supporters of transitioning power grids to renewable energy which is the least expensive energy in the world on a Levelized Cost of Energy (LCOE) basis. Block is focused on investing in renewable resources and is in the process of funding a solar-powered mining facility in the US. Through Block’s Bitcoin Clean Energy Initiative, we are launching later this year a 100% solar-powered bitcoin-focused computational centre in West Texas to serve as a proof of concept on how bitcoin can accelerate the payback period for renewable energy infrastructure. The project will feature an open-source, publicly available dashboard to share the ongoing performance metrics of the facility.
September 2022