Written evidence submitted by Kemp
Burdensome regulation stifles innovation, creates barriers to entry and ensures that only far bigger and better funded organisations, with expensive legal and compliance departments, can benefit (and grab the lion’s share) from new and innovative crypto and NFT technologies.
Light touch regulation enables entrepreneurial development of crypto-related technologies by individuals and smaller, more nimble firms within the marketplace, and fosters a potentially wider spread and better understanding and adoption of associated technologies by “passengers on the Clapham Omnibus”.
In a developing arena of global competition, lighter touch regulation will help the UK to carve out its own niche within a multi-trillion-dollar industry. As adoption accelerates, it is crucial that the UK can support and maintain an early-mover advantage by welcoming this new industry through light-touch regulation and favourable taxation. Higher levels of regulation and taxation will only encourage market participants to seek more competitive jurisdictions. AML procedures are already clearly established and ramping up regulation is likely to be non-productive if the UK wishes to make crypto-assets a major part of its economy and resultant tax-take.
The current regulatory system is prone to gold-plate regulation at the expense of its members. Light-touch, principles-based legislation gives the relevant industry the best opportunity to flourish globally, and the regulatory creep within the UK is likely to damage longer term NFT success against global peers.
Similarly, and especially with nascent technologies, the government should refrain from nannyism. People should be empowered to take more responsibility for their own financial decisions and regulators should accept this, otherwise all normal people/investors will be subject to the lowest common denominator, which severely restricts their freedom of choice and leaves the wealth (derived from speculation) to be collected by only an incredibly small and select percentage of the population.
The UK government and it’s financial regulatory framework should work with equivalent international bodies to agree a suitable benchmark standard of regulation and compliance. This will enable a successfully growing industry to continue to establish itself in the future. It is imperative that the government and its regulatory bodies should not be ingratiating themselves to the vested interests of the existing orthodox financial system. So far, regulation has been broadly appropriate, but far more consideration should be given to the incentivisation and self-government of decentralised, autonomous blockchains over the existing preponderance of centralised bodies.
Vulnerable people are subject to harm via numerous avenues, whether that be alcohol, drugs, gambling or telephone and door-to-door cold calling for example. The fact that NFT speculation is substantially more technical to execute than other avenues is, in itself, a moderately preventative measure and should therefore be less likely than other alternatives to harm vulnerable people.
Nevertheless, NFT speculation is arguably no different but far less accessible than addictive activities such as National Lottery, or participation in post-code lotteries and scratch cards. There is little reason to suggest that NFT speculation will harm vulnerable people to the same extent as other (current) forms of harm.
It can be argued that the immutable record of blockchains offer substantially more trackability of transactions than almost any other form of criminal transaction and in some respects the developing forensic on-chain analysis providers offer better potential for protection and restitution to investors than the otherwise arbitrary compensation limits provided by the UK regulator and paid for by the financial services industry. The diverse and global nature of crypto-assets and blockchains suggest that regulations and taxation needs to be uniform internationally to prevent arbitrage between jurisdictions and to provide some level playing field in the equitable responsibilities and inevitable investor compensation schemes (as a result of crypto regulation) around the world.
Speculation itself is not a modern phenomena. It creates market efficiency through liquidity, particularly in higher risk ventures that traditional capital markets may not touch. Whether NFTs represent artistic work, the tokenisation of assets or some yet to be discovered mechanism, it is likely that NFTs will provide a far more effective and transparent market with much lower cost (if intermediation is involved, or preferably avoiding intermediation altogether through smart contracts), whilst at the same time leaving a permanent record of the transaction.
Whilst the savings through revolutionary technology may well completely disrupt many traditional industries, it will benefit individual wealth, benefit society and strengthen the economy whilst creating many new industries and associated supply chain employment for the future. The early adopting countries with the more entrepreneurial populations will be in a stronger position to increase their slice of global GDP bringing above average wealth, employment and subsequent economic benefits and advancement to both the country and its population.