The crypto-asset industry – call for evidence
The crypto-asset industry – call for evidence
We welcome the opportunity to respond to the call for evidence (CfE) and welcome the UK taking a positive and proactive step towards greater understanding of this nascent sector and asset class.
Andersen LLP is part of the global Andersen family and a wide range of tax services to private clients and businesses. Andersen LLP has a dedicated and experienced specialist crypto team.
The UK stated it’s ambition to be a global cryptoasset hub at the announcement on 4 April 2022 by the former Economic Secretary to the Treasury (EST) on behalf of the former Chancellor (CX). This statement provided a clear indication of the stance for the UK towards cryptoassets, which was helpful for industry. We congratulate both the Rt. Hon. Kwasi Kwarteng and Richard Fuller on their appointments and welcome an updated statement. This would be helpful to the sector if the current EST or CX would provide an update to this address. Not only would it aid the industry it would provide a wider steer to Government Departments such as HM Treasury and HM Revenue and Customs.
The fintech sector is fast moving and development in the cryptoasset industry truly sets a breakneck pace. Some have argued that cryptoassets, and by extension blockchain technology, represents the future of financial services. We agree that cryptoassets could have the potential to revolutionise financial services and any development needs to be undertaken in a cautious and considered manner. The UK is not operating in a vacuum and other jurisdictions are seeking to maximise their first mover advantage. In recent years offshore financial centres such as the Cayman Islands and traditional financial services centres such as Switzerland and Singapore have been quicker and more responsive in support for the development of their cryptoasset industry.
To what extent are crypto-assets when used as digital currencies (such as Stablecoin) likely to replace traditional currencies?
The evolutionary aspects of cryptoassets makes it difficult to make predictions, with any confidence, as to how developments may impact on the industry. In 2019 Facebook (now Meta announced its intention to release its own private monetary system called “Libra” (then renamed to Diem) which was intended to be based on a basket of currencies. However despite considerable attention from industry and Governments worldwide this did not come to fruition. For a stablecoin to become a replacement for fiat currency it requires the ability to scale rapidly which requires significant support. On that basis it would appear unlikely the current versions of stablecoins available will replace fiat currencies in the near to medium term1.
We note that the use of fiat backed stabled coins are increasing in popularity post Terra UST crash and we believe that the ‘stablecoins’ will operate alongside traditional currencies for a number of years. We also think that stablecoins have a key part to play and over time will be part of the cryptoasset adoption journey.
What opportunities and risks would the introduction of a Bank of England Digital Currency bring?
A UK Central Bank Digital Currency (CBDC) is a very different product to cryptoassets and, arguably, should not be considered to be a cryptoasset. There are a number of opportunities that could be presented by a CBDC including quicker settlement with a lower cost per transaction (including for cross border remittances), which could reduce friction for smaller payments on both consumers and retailers. The declining use of physical currency, a trend already being noted by the Bank of England before the Coronavius pandemic, presents an opportunity to reduce the ongoing costs on business for the handling of physical cash. Coupled with the reduction in the use of physical cash there is a benefit to the Royal Mint in the ongoing battle against counterfeit currency.
How can distributed ledger technology be applied in the financial services sector?
Distributed Ledger Technology (DLT) has the potential ability to revolutionise the financial service industry both in terms around its infrastructure and how investment may be undertaken. It also has the potential to enhance economic connectivity across international borders. However organisations such as the OECD have identified that such efforts require the need for both technical interoperability and policy interoperability.
We consider it suffice to say that the UK with its global relationship and a strong global financial sector is in a strong position to use that as foundation to increase international agreement.
What impact could the use of crypto-assets have on social inclusion?
Gathering information of the size of the industry, both in terms of the number of businesses engaging in crytpoasset business and for individuals that own them is challenging. Andersen does not conduct market research however the recently published research from HMRC2 provides some insight:
- cryptoasset ownership was higher in BAME groups compared to the general population
- the majority of cryptoasset owners were employed individuals with an income between £12,500 to £49,999
- nearly 60% of owners do not have a degree or higher qualification
Other studies, which we will not expand on here, have also shown that cryptoassets are not the preserve of high net worth individuals.
Are the Government and regulators suitably equipped to grasp the opportunities presented by crypto-assets, whilst at the same time mitigating against the risks?
The regulatory response to cryptoassets has created a challenging environment in the UK for firms wishing to engage in this sector. Few parties, and certainly not Andersen, disagree with the need for regulation.
Our view, based on conversations with clients, is that businesses and platforms want to be able to do business in the UK. However it is concerns such as regulations that are creating barriers from being able to be based in the UK. For example the much commented on difficulties for firms to obtain regulatory permissions under the 5th Money Laundering Directive from the FCA. It is unclear how some other jurisdictions have been able to meet their money laundering requirements without stifling industry. This has put considerable pressure on the competitiveness of the UK.
We understand that the FCA has recently increased the staffing levels and hope that this will result in a much reduced timeline for authorisation. However, if this is not the case then a review of the root cause of the issue should be undertaken and addressed.
We, and industry, would welcome greater engagement from the FCA during the registration process.
What opportunities and risks could the use of crypto-assets – including Non-Fungible Tokens – pose for individuals, the economy, and the workings of both the public and private sectors?
The development of the “metaverse” or “Web3” presents a unique opportunity for the UK to demonstrate leadership and global competitiveness. Many of the large technology firms of today, for example Google or Microsoft, are US firms, however despite the UK having a strong technological sector we were not able to create similar success stories. The UK must learn from the past and encourage and enable the development of these firms and technologies in the UK today. This would present a considerable upside opportunity for the UK economy.
The risk to this technology centres on the ability to both protect the consumer and prevent it being used for illicit purposes. As mentioned previously development must be advanced in a considered manner to prevent their use by bad actors.
How might the Government’s processes – for instance the tax system – adapt should crypto-assets be adopted more widely?
HMRC’s market research has already identified that cryptoasset ownership has continued to rise with 10% of UK adults owning, for have owned, cryptoassets. This was a notable increase based on the FCA research if the overall trend continues it is not difficult to envision cryptoasset ownership to become increasingly mainstream.
The issue here could be reframed as to what process might the Government take where there is an uncertain outcome.
For the broad use of cryptoassets (i.e. that for investment, the tax treatment has been set out by HMRC). This is unlikely to change even if the use of cryptoassets continues to become more common.
However, the challenge comes from the unfettered and rapid evolution of the industry. Since 2017 each year has had developments which have been different. For example, 2018 was the year of the Initial Coin Offering, 2019 was Libra, 2020 was Decentralised Finance and 2021 was Non-Fungible Tokens (NFTs). Each of these presented new and very different challenges that can make it very difficult for the appropriate tax treatment to be identified. For example, NFTs can provide a number of uses some of which may be taxable some not. Currently, the only way to identify their tax liability is to consider each one separately. Whilst this can be achieved on a small scale it can be difficult for advisors to scale up the process for even a small uptake.
To address this concern we need to submit a Non-Statutory Clearance (NSC), which can be a costly process. Ideally we need a method that can create certainty with increased flexibility from HMRC. We note that there are a number of working groups that are continuing to consider the issue of taxation and we welcome continued guidance and engagement from HMRC.
There remains a question if cryptoassets should have their own Act within tax legislation however it is unclear how this could address unforeseen developments. We would like to see detailed consultation in the future on cryptoassets to consider having a carve out in the tax legislation and where the opportunities and risks lie with the aim to provide more clarity in future tax treatment around this complex asset class and to be able to adapt if the UK want to be a hub for crypto users and businesses.
How effective have the regulatory measures introduced by the Government – for instance around advertising and money laundering – been in increasing consumer protection around crypto-assets?
The National Crime Agency (NCA) has been at the forefront in the UK’s response to the use of cryptoassets for illicit purposes such as money laundering and sanction evasion3. Recent successes include a seizure worth £27 million4. However, as previously noted it is difficult to judge the size of the market in the UK and therefore difficult to judge the effectiveness of the measures introduced. Blockchain forensic company Chainalysis recently published 2022 Crypto Crime Report5 has estimated the global share of illicit transactions to be 0.15% of the transaction volume. This has come down each year since 2019 which corresponds with the introduction of the 5th Money Laundering Directive. However, it is not possible to establish if there is a correlation between the introduction of MLD5 and the reduction in illicit use, certainly not at a national level.
Separately, we recommend that wider international developments should be supported where subject to appropriate consultation process. For example the recent announcement from the OECD on the development of the Crypto-Asset Reporting Framework (CARF) could provide greater transparency and reduce the potential for cryptoassets to be used for illicit purposes.
Is the Government striking the right balance between regulating crypto-assets to provide adequate protection for consumers and businesses and not stifling innovation?
Please see our earlier reply.
Could regulation benefit crypto-asset start-ups by improving consumer trust and resilience?
Consumer trust and resilience is key to wider adoption with start-ups also potentially benefiting from additional consumer demand.
To date the main regulatory response from the UK has been focused on MLD5. However we note the continued developments elsewhere, such as Europe’s Markets in Crypto-Assets (MiCA) that is seeking to provide a much more detailed and wide ranging response. MiCA has been introduced to provide greater certainty and protection. We await further information from the Government if similar regulation will follow in the UK.This needs to be balanced with regulation needing to be both clear and proportionate to avoid stifling innovation and creating further administrative delays (i.e. FCA time delays)
Education remains the most influenceable issue that the Government more broadly should be considering. Many of the scams that have been identified by regulators and published in the media could have been mitigated against by greater public understanding.
How are Governments and regulators in other countries approaching crypto-assets, and what lessons can the UK learn from overseas?
From a taxation perspective we are aware of differing approaches being taken by other jurisdictions for example by France, Switzerland and Portugal. However, by and large, the approach being taken internationally has been fairly consistent with jurisdictions continuing to apply existing legislation.
1 Note that the term ‘stablecoin’ is an umbrella term with differing methodologies being used to provide stability. A stablecoin that can be suitability scaled to be widely used for payments is termed a ‘systemic stablecoin’.
3 https://www.nationalcrimeagency.gov.uk/who-we-are/publications/606-national-crime-agency-annual-report- 2021-2022/file