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This article is a foreword to a joint response written by Ollie Blears together with Dermot O’Riordan, a partner at Eden Block, in respect of a consultation paper published by HM Treasury on 7 January 2021 entitled ‘UK regulatory approach to cryptoassets and stablecoins‘. The full response submitted to HMT is available for download at the foot of this page.
Unless you happen to be a Vanuatuan1, the pace of technological change that has unfolded over the last eighteen months is self-evident. In no small part necessitated by the COVID-19 pandemic, the world has raced through a process of digital transformation to reach a state which was otherwise anticipated to take a further two years2. At some point since the beginning of last year, most of us have no doubt reflected that, had the pandemic struck just ten years earlier, we would have been plunged into a world of fragmented darkness and economically maimed far worse than even the current toll taken on the global economy.
In the UK, cash has all but disappeared from daily life. Scenes from not-so-old movies where the protagonists pull out wallets stuffed with banknotes suddenly look oddly archaic. As the Treasury rightly acknowledges in the Paper, the United Kingdom has been a world leader in financial technology and specifically the adoption of digital (often mobile) payment solutions. In 2019, our value of cashless transactions as a multiple of GDP was second only to China and far superior to other Western economies3.
Evolving rapidly alongside ‘traditional’ payment solutions has been the cryptoasset market, one of the major applications of blockchain technology in finance.
Judged in 2018 by the cross-authority Cryptoassets Taskforce as being at an “immature stage of development [with] limited evidence…of…delivering benefits”4, the Treasury now recognises in the Paper that the landscape is markedly different than it was in 2018. The Treasury correctly identifies stable tokens and their potential to lock, store and transfer value at low cost (including cross-border) and without the volatility that has become synonymous with popular exchange-traded tokens as a prospective game-changer for the way that public and private institutions and the general public view and interact with cryptoassets.
The digital information age has been with us for some time now. The advent of broadband internet and 4G mobile technologies has ushered in over the last decade a global communication hub accessible 24 hours a day, seven days a week for almost everyone living in an urban area. Fibre broadband and 5G is set to expand the connectivity even further and even faster. We can collectively wipe our brow as to just how well-timed this new technology is given the upending of traditional office environments in favour of a likely irreversible shift to remote-working for many and the increased demands on home connectivity.
The digital economic age is now in its ascendancy. Much-advanced technological solutions both on and off blockchain are creating a new web-based value layer to sit alongside, and as a complement to, the existing information layer. The crypto-economy, developing and iterating in plain view of market onlookers and regulators, is increasingly at the forefront of this transformation. With the promise of stable tokens, the sandbox of smart contract creativity in Ethereum and DeFi protocols5, and the growing popularity of non-fungible tokens (“NFTs”) as digital collectables, we are beginning to witness bold new ways to transact, raise capital, invest and save ‘on-chain’. In the case of NFTs in particular, creators (musicians, artists etc) are also beginning to earn through the direct sale of digital representations of their assets, some of them significantly so6.
The approach set out in the Paper as to how the UK should harness this technology is impressive in its sensible rationale that applying too much regulation and in areas where there is little evidence (yet) of consumer and systemic risk would stymy continued innovation within our borders, and should be avoided if at all possible.
We note that this stance is in contrast to the European Union’s recent policy proposal in the form of the ‘Markets in Crypto-assets Regulation’ (“MiCA”)7, where the intention is to bring the use (and associated activities) of all cryptoassets within a widened regulatory perimeter. Instead, the Paper is highly commendable in proposing that we, the UK, focus on where risk is most acute and phase in our own legislative change. The first proposal being that stable tokens used as a means of payment are brought within the national regulatory perimeter.
Classification of cryptoassets and a defined nomenclature consistent with our neighbours (and globally if possible) is crucial for the technology to be more widely understood and not be prone to misinterpretation and/or ‘gamed’ for cross-border regulatory arbitrage.
However a camel is a horse designed by committee and, now that we are free from the EU’s three-headed decision-maker (involving the Commission, the Parliament and the Council, and years of deliberations), the UK has a pivotal opportunity to capitalise on its newfound agility and to design a more thoughtful framework for supportive cryptoasset regulation, not behind closed doors and between technocrats, but through open cooperation between the Treasury, our two financial regulators and highly engaged market participants.
We note the similarity between the approach to the regulation of the national crypto-economy and that of the impending regulations being considered for ‘buy now, pay later’ payment services (“BNPL”) following the recent Woolyard Review8. Much like the BNPL market participants, we are aware that the majority of crypto-economy participants would welcome thoughtful regulation of the sector. Regulation confers credibility, and with credibility comes institutional interest; institutions bring with them the capital and the wherewithal to match the ambition of the early entrepreneurs and the technologists.
However, over-regulate, and we risk the analogous situation of the 12mph speed limit on motor cars imposed by the state of Connecticut in the United States in 19019.
Through our combined experience, not just in the cryptoasset sector but in financial services more generally, we often find that it is rarely the use of the underlying asset or technology that requires regulation to combat risk, but instead the derivatives, the schemes and the promotions which are manipulated by the familiar cast of nefarious actors in the wake of every technological breakthrough.
As we recommend in our specific responses to the Paper below, it is, therefore, this ‘second layer’ of activity where we think our national regulation should continue to focus. Through a well-designed framework, we should be able to provide the playbook for a generation of UK-located entrepreneurs to operate efficiently and at low cost, and at the same time provide the rulebook which helps quash the scammers, the schemers and the sharks.
By boxing cleverly, we should be able to honour the “same risk, same regulatory outcome” guiding principle and maintain a level playing field across the regulation of financial services, whether they be tokenised or not. Does a particular area of the cryptoasset market pose either no or minimal risk (e.g. if it is still ‘niche’ or immature)? If the answer is that it does not, then regulatory efforts should be redirected elsewhere.
We are blessed with the gold standard of law and regulation here in the UK and a cross-authority policy unit that took an interest in blockchain technology and its native cryptoassets at an early stage. Scientific progress has historically developed in increments rather than quantum leaps (artificial intelligence came into existence in 1956, for example10), and should the Hemingway Law of Motion (“gradually, then suddenly”)11 also apply to the crypto-economy as is looking incredibly likely, then we would surely cement our recognition as a world-leader in financial technology if we equip ourselves now with a framework fit for the future.
17 March 2021
The full joint response is available for download here: HMT Consultation Paper (Cryptoassets) – EB & RWB Joint Response (Paper)
1 ‘Ten countries kept out of Covid. But did they win?’, Owen Amos writing for BBC News, 24 August 2020 (https://www.bbc.co.uk/news/world-asia-53831063)
2‘2 years of digital transformation in 2 months’, Jared Spataro, Corporate Vice President of Microsoft 365 (https://www.microsoft.com/en-us/microsoft-365/blog/2020/04/30/2-years-digital-transformation-2-months/)
3‘Virtual control: the agenda behind China’s new digital currency’, James Kynge and Sun Yu writing for the Financial Times, 17 February 2021 (https://www.ft.com/content/7511809e-827e-4526-81ad-ae83f405f623)
4‘Cryptoassets Taskforce: final report’, HM Treasury, 30 July 2018 (https://www.gov.uk/government/publications/cryptoassets-taskforce)
5‘Decentralised Finance: On Blockchain- and Smart Contract-Based Financial Markets’, Fabian Schar writing on behalf of the Federal Reserve Bank of St. Louis, 5 February 2021 (https://bit.ly/3rDRfgy)
6‘Beeple collage smashes digital art record with $69.3m sale’, Sara Germano writing for the Financial Times, 11 March 2021 (https://www.ft.com/content/2f28eac6-547a-43f2-b7d3-593da9f46a3d)
7‘Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937, European Commission, 24 September 2020 (https://bit.ly/3kSFOiF)
8“Buy now, pay later – regulate how?”, Diego Zuluaga, 8 February 2021 (https://fingleton.com/news/buy-now-pay-later-regulate-how/)
9‘May 21, 1901: Connecticut Sets First Speed Limit at 12mph’, Randy Alfred writing for WIRED, 21 May, 2008 (https://www.wired.com/2008/05/dayintech-0521/)
10‘What is Artificial Intelligence (AI)?, IBM Cloud Education, 3 June 2020 (https://www.ibm.com/cloud/learn/what-is-artificial-intelligence)
11“The Hemingway Law of Motion: Gradually, then Suddenly’, Timothy Taylor writing in his blog the ‘Conversable Economist’, 17 January 2015 (https://conversableeconomist.blogspot.com/2015/01/the-hemingway-law-of-motion-gradually.html)