Update on the UK Digital Currencies Inquiry
What is the purpose and status of the inquiry?
The inquiry began in February 2018 and is looking at the role of digital currencies and distributed ledger technology in the UK including the opportunities and risks that crypto-assets may bring to consumers, businesses and the UK government. MPs are interested in understanding how consumers and Britain's financial infrastructure might be better protected, without stifling innovation.
On 22 May the Committee published the written evidence it has received including the FCA and Bank of England responses. Whilst the FCA identified three key benefits and several risks, the Bank of England was more muted regarding the opportunities and confirmed that it has no current plan to issue a central bank digital currency.
What where the points of interest from the FCA's response?
- Regulatory reach: In its submission, the FCA sets out how different forms of crypto-assets may fit within its perimeter. Consistent with its previous comments on this topic, it reiterates that whether a crypto-asset (including those issued as part of an initial coin offering) can fall within the UK regulatory perimeter ultimately depends on the facts. For example, crypto-assets as a medium of exchange and utility tokens will not generally be regulated in the UK whereas dealing in derivatives referencing crypto-assets is likely to require authorisation.
- FCA regulatory sandbox: Of the 60 firms that have participated in the FCA’s regulatory sandbox, around a third have used a crypto-asset or distributed ledger technology making it the most popular technology employed in the sandbox to date. The main use cases it has seen relate to international money remittance, issuance and settling of financial instruments, listing of private companies' shares, and charitable donations and e-money.
- Benefits and risks of crypto-assets: The FCA has identified three primary benefits to crypto-assets:
- improving operational resilience;
- improving transparency using distributed ledgers; and
- reducing transaction cost and time.
However, the FCA also recognises several risks deriving from crypto-assets including price volatility, market manipulation, crypto-asset derivatives and money laundering. It is unclear to the FCA whether the distributed ledger technology will be adopted broadly across securities markets or remain limited to niche use cases.
- Regulatory reporting of mortgage transaction data: The FCA also refers to its RegTech initiative and its work with the R3 consortium and two major banks to develop a prototype for regulatory reporting of mortgage transaction data using the Corda platform.
What were the key points of interest from the Bank of England's response?
- Unlikely to replace usual payment systems: Picking up on some of the themes from Mark Carney’s 2 March 2018 speech on the future of money, the Bank of England outlines in its submission to the Treasury Committee why it believes that crypto-assets are very unlikely to replace commonly used payment systems. In its view, the current generation of crypto-assets are failing to act as a store of value or a means of payment and as a result they are not being used as a unit of account.
- No material threat to financial stability: The Bank of England confirms its view that crypto-assets do not currently pose a material threat to financial stability. However, its Financial Policy Committee will continue to closely monitor developments for signs that crypto-assets are becoming more widely used in payments and settlement, and whether systemic firms are taking on significant or leveraged exposures to crypto-assets.
- Prudential regulation: The PRA is assessing how prudential regulations should apply if crypto-assets are held by banks or financial institutions, including whether additional requirements are necessary to cover associated risks, such as the extreme levels of volatility that they exhibit.
- Central bank digital currency: While the Bank of England remains open to the eventual development of a central bank digital currency, it does not plan to issue one in the medium term. In terms of policy actions, the Bank is currently focused on measures that will deliver more immediate improvements to payments, such as the programme to rebuild its Real Time Gross Settlement system.
What will happen next?
- Inquiry ongoing: The inquiry is still open and the Committee is expected to publish its findings later this year.
- New crypto-assets taskforce: Meanwhile, a new crypto-assets taskforce met for the first time on 21 May 2018. This taskforce comprises HM Treasury, the Bank of England and the FCA and will explore further the risks of crypto-assets and the potential benefits of distributed ledger technology. This taskforce will host a roundtable in July 2018 and expects to publish a report in Q3 2018.