CAI0061

Written evidence submitted by TSB Bank

 

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

Based on our experience, our view is that they are very unlikely to be adequate replacements for fiat/traditional currencies in the near to mid-term, particularly because of volatility in crypto markets.

Whilst their decentralised nature makes it appear as though crypto-assets are more “democratic” and accessible, in practice they are not suitable for the vast majority of UK consumers. During the period when TSB allowed transfers in and out of crypto-currency wallets, we saw a fraud rate 13 times higher than for transfers involving traditional currencies. In our experience the driver of this was criminals exploiting the fact that most consumers “investing” in this way did not have a thorough understanding of the risks involved and the steps required to keep their assets safe and under their own control. It is our view that crypto currencies are an asset class which would only be suitable for those with a qualified background in financial technology looking for a past time and, even then, should only be used in relation to small sums of money that they can afford to lose.

 

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

TSB have no comments to make.

 

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

As stated above, whilst their decentralised nature enables crypto-assets to be positioned as more “democratic” and accessible, Crypto assets are likely to have a negative impact on social inclusion.

Their promotion by influencers and appeal as offering a route to finance unconstrained by existing barriers means they may offer great appeal to those who have previously encountered exclusion from mainstream financial services companies. However, based on our experience when TSB allowed transfers in and out of crypto-currency wallets, we saw an incredibly high fraud rate and the reality is that most users of crypto-assets are likely to only become poorer (or lose everything) through their use. As such, we do not believe they are a tool to improve social inclusion.

Furthermore, if one of the reasons for financial exclusion is reported as being the fact that one in five adults in the UK have “low financial capability” or poor digital skills, it cannot be reasonably expected that the crypto assets (being a relatively complex instrument) would be suitable financial instruments.

 

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 regulatory and legislative approach to cryptocurrencies would be suitable for a nascent sector so as to encourage innovation. However, the crypto-asset sector is now anything but and considerable harm is and has been caused by products and services which have been sold, in large volumes, to UK consumers.

The FCA have issued numerous warnings around the dangers of volatility, scams and absence of consumer protections. These appear to have had little impact on consumer demand for the products. The absence of meaningful regulatory powers in respect of product design, dispute resolution, asset protection, conduct of business, liquidity management and many other areas mean that UK regulators can really only continue to issue warnings from the side-lines in their efforts to protect consumers from significant harm.

At the same time, it remains to be established how consumers – for whom crypto assets are barely suitable in the majority of cases - will be suitably protected from the risks of economic crime (eg crypto platforms being used for social engineering scams) and the risk should crypto platforms go out of business, since there are currently no provisions in place equivalent to the Financial Services Compensation Scheme.

 

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

TSB have no comments to make.

 

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?

TSB have no comments to make.

 

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

TSB have no comments to make.

 

 

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?

We note that it is the UK Government’s commitment for the UK’s financial services industry to be at the forefront of the development of the crypto assets industry. It is our view that only with suitable and effective regulation on a level playing with other firms that we will see the development of products and services which actually benefit UK consumers.

For the opportunities and benefits to be fully realised, effective steps must be prioritised and taken to manage a number of risks that currently exist including:

          Consumer risksincluding the risk that crypto assets may be unsuitable for the majority of UK consumers who may not possess the required knowledge/expertise to understand the risks associated with crypto assets, let alone keep them safe. There is also the risk of potential losses to be borne by consumers due to lack of protection from almost all crypto exchanges to those who lose life savings to crypto scams. Indeed, whilst major banks are often criticised for their “low” refund rate on authorised push payment scams payment scams (UK Finance data reports that 47% of monies stolen to fraud of this type are refunded, on average, across their members) this is 47% more than crypto currencies appear to refund. In our experience, it is unlikely that crypto-asset platforms will show any interest in engaging with cases where customers have lost money, let alone considering refunding any of the money lost. There are also the additional potential losses due to lack of compensation provisions should crypto platforms go out of business (for example the Financial Services Compensation Scheme).

 

 

 

 

 

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?

TSB have no comments to make.

 

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

TSB have no comments to make.

 

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

Yes – subject to measures listed under Q4.

 

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

TSB have no comments to make.

 

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

TSB have no comments to make.

 

September 2022