CAI0073

Written evidence submitted by CoinShares

Coinshares is headquartered in Jersey and has significant operations in the United Kingdom. CoinShares is Europe’s largest, longest standing and leading digital asset investment and trading group, managing £1.66bn of assets on behalf of a global client base. CoinShares is listed on Sweden’s Nasdaq First North Growth Market (Ticker: CS).

As background, CoinShares have already been actively involved in the U.K.’s law enforcement landscape when Komainu, our joint venture with Nomura, entered into a framework service agreement with Derbyshire Constabulary on behalf of the National Police Chiefs' Council Cybercrime Programme in early 2021. This collaboration of services provided UK policing with the infrastructure needed to ensure the efficient handling of criminal cases that involve cryptocurrencies.

Referencing this inquiry, CoinShares strongly believes that our sector should be regulated. We are regulated in Jersey by the Jersey Financial Services Commission; in the US, where we have a FINRA broker-dealer license; in France where we are regulated by the AMF for our Alternative Investment Fund Management licence; and in the UK as an appointed representative of Strata Global Limited which is authorised and regulated by the FCA. Additionally, our exchange traded products (ETPs) are listed on the following exchanges: Nasdaq Sweden, Swiss SIX, Xetra, Börse Stuttgart, Euronext Paris and Euronext Amsterdam. Our ETPs are also passported in the EU under the Prospectus Regulation.

Regulatory oversight

CoinShares believes that strong regulation is critical to the proper functioning of capital markets which is not possible without close dialogue between the industry and regulators. Digital assets should be no different and we believe that innovation must not come at the cost of market integrity.

It is inevitable that digital assets will play an increasingly important role in global capital markets. For that to happen safely, it is imperative that all participants in these new markets are regulated, enabling them to operate and compete on a level playing field. Regulation would also improve transparency in the sector whilst providing greater protection and reassurance to investors.

In particular, we believe that stablecoins have the potential to streamline and stabilise markets, both traditional and crypto – but only under the proper regulatory conditions, with significant industry engagement, and with the committed support of the Treasury.

CoinShares believes that distributed ledger technologies (DLT) and blockchain networks are landmark innovations that will fundamentally reshape the global financial system. This encompasses the evolution of new market structures, new tokenised investments, as well as trade and settlement lifecycles.

Takeaways from other markets

From our experience working with various regulators across global markets, we believe that there are lessons that the UK can learn from other countries. For example, Switzerland and Germany had documented national strategies setting out how they intended to harness maximum benefit from these new technologies. Another recent example of the prioritisation of blockchain and digital asset innovation can be seen in the recent French Presidency of the EU, which completed the political negotiations of the Markets in Crypto-Assets Regulation (MiCA) prior to 30 June 2022. Therefore, we believe that it is the role of the Government to set the agenda for adoption of digital assets (i.e. to generate new investment, create new jobs and additional tax revenue). It should not be the role of civil servants or regulators to direct or micromanage the market; instead they should create the framework for a fair and effective market.

Given the fast moving and global nature of blockchain and digital assets, there needs to be consideration of whether the Government and regulators are suitably equipped to grasp the opportunities, whilst at the same time mitigating against the risks. Currently, compared to some other European regulators, the UK’s timeline from application to regulatory approval or authorisation takes too long. Another related concern is that, if the various types of digital assets will be carved up between different regulators, knowledge is likely to be spread equally across the regulators. Therefore, in this scenario, we are likely to result with a widespread superficial understanding rather than in-depth knowledge which would be fostered – and necessitated – by a specialist team. We propose the establishment of a specialist cross regulatory team devoted to digital assets.

The UK needs to move faster than it is presently to develop a comprehensive framework for both products and services related to digital assets in order for it to achieve its aspirations of being a global crypto hub. An indicative timeline to complete this task would be 2024 when MiCA is scheduled to become operational (possibly earlier for stablecoins). MiCA, given the range of topics it covers, also provides guidance on the themes required to be addressed.

Retail investors and Exchange traded products (ETPs)

We believe that the ban on retail investors transacting in crypto ETPs should be removed. It is difficult to view that the UK is “open for business” when no other major European country has such a ban on ETPs. CoinShares, as well as 97% of respondents to CP19/22, had opposed this ban. In its submission to CP19/22, CoinShares noted that crypto ETPs were well regulated stating, “issuers are required to offer securities pursuant to the Prospectus Directive and provide investor protection information and such Key Information Documents under MiFID. ETN disclosure provides a wide range of information to investors, including important information such as fees and risks. They are freely transferable and available for sale in the jurisdictions in which they have been admitted to trading or passported. CoinShares' ETNs are listed on a number of EU regulated exchanges and are able to be purchased and sold like a listed share through a regulated broker. They have been passported under the Prospectus Directive.”

Simply put, if a ban on retail investors trading ETPs is insisted upon, it risks the buying or trading of unregulated products, thereby creating a far greater hazard in terms of consumer protection.

Proposed regulatory amendments

We think that the rules and infrastructure related to the London Stock Exchange (LSE) need to be amended to (1) allow crypto ETPs to be listed in the UK; and (2) promote clarity around settlement of digital asset securities. The LSE is the only major exchange in Europe which does not have any crypto ETPs listed. For comparison, the Swiss SIX Exchange has 160 crypto ETPs listed (August 2022).

Bitcoin and the environment

It would be remiss not to comment on a topic which generates significant controversy: the environmental impact of bitcoin and proof-of-work blockchains. For instance, CoinShares’ public research highlights that crypto mining companies have a significant reliance on renewable energy sources. We propose that the environmental aspects of bitcoin and digital assets be considered within the wider framework of ESG (i.e. environmental, social and governance factors. The mining, storing and transporting of cryptocurrency is less resource-intensive than gold, for example.

Finally, I would be delighted to appear during the inquiry’s evidence gathering, should you wish to call on me. With our deep experience of digital assets including cryptocurrencies and our belief that digital assets will become a significant asset class, I hope we can offer useful perspectives and insights around the regulatory landscape, and on the importance of consumer protection and education.

September 2022