Phil Hall, AAT Head of Public Affairs & Public Policy considers the approach of British regulators to the increasingly popular trend of cryptocurrency investment and usage.
Cryptocurrencies have been around for more than a decade, with the best known, “Bitcoin” first introduced in 2008 and many others entering the market since. As recent articles on AAT Comment have highlighted, they can’t simply be dismissed as a passing fad but instead as a sector of limited but growing importance.
In recent years, regulators have taken an increasingly tough stance on cryptocurrencies – for good reason.
In 2019, a report from the G7 on stablecoins found that they pose a serious threat to a range of public policy areas, including “challenges to fair competition, financial stability, monetary policy and, in the extreme, the international monetary system”.
Here in the UK, back In January 2021, the FCA starkly warned that cryptocurrencies are such a high-risk investment that, if consumers invest in these types of product, they should be prepared to lose all their money. There can be no stronger warning than that but is anyone taking any notice?
According to research published by the Financial Conduct Authority (FCA) in June, over 2 million adults in the UK own digital currencies, an increase of 400,000 on last year.
Rather worryingly, the same report found that 14% of cryptocurrency investors used some form of borrowing to invest.
Ban for Binance
The FCA’s tough line on cryptocurrencies is now extending to action. Just a few weeks ago it banned Binance, the world’s biggest cryptocurrency exchange, from conducting any “regulated activity” in the UK.
However, the action is not quite as far-reaching as it first appears. Although it means people in the UK are no longer permitted to use Binance’s services to bet on whether the price of a cryptocurrency like Bitcoin will go up or down, there remains nothing to legally prevent people from using the Binance exchange to buy and sell crypto-currencies because doing so is not a regulated activity.
With regulatory warnings increasing in frequency, tone and severity, it seems rather contradictory that the Bank of England should continue to toy with the idea of introducing its own digital currency – a Central Bank Digital Currency (CBDC).
Back in 2018, the Bank of England confirmed that its Financial Policy Committee had assessed crypto assets and concluded that they do not currently pose a risk to monetary or financial stability in the UK but that they do pose risks to investors and like the FCA, warned that anyone buying crypto assets should be prepared to lose all their money.
In March 2020, the Bank then launched a discussion paper on the subject of creating a CBDC, and an update provided just a few weeks ago confirmed that the Bank of England and HM Treasury have created a CBDC Taskforce to co-ordinate the exploration of a potential UK CBDC and that research is ongoing.
The Bank is keen to stress that a CBDC would be fundamentally different to cryptocurrencies or crypto assets because cryptocurrencies like Bitcoin and Ethereum are privately issued rather than issued by a central bank. A £5 CBDC would be worth £5, ensuring the intrinsic value of the currency in a way that private issuers cannot.
Although I would heed the Bank of England and FCA’s oft-repeated warnings about cryptocurrencies, I’d certainly be more relaxed about using a digital currency issued from a central bank. This would not only avoid the energy usage concerns associated with Bitcoin and others but would also provide the confidence and stability associated with major central banks. As Bank of England Fintech Director, Tom Mutton, recently stated, “…let’s not throw the blockchain baby out with the Bitcoin bathwater.”
Phil Hall is AAT's Head of Public Affairs and Public Policy.