16 December 2020

CryptoAssets and the Crypto Economy

The UK Financial Conduct Authority Research Note on Cryptoasset Consumer Research 2020 states 

In October 2018, we published a joint report, alongside the Bank of England and the Government, as part of a UK Domestic Taskforce on Cryptoassets. In the document, we provided an overview of the state of the UK cryptoassets market and committed to several actions. Whilst the Taskforce report identified 3 major risks of harm associated with cryptoassets - to market integrity, of financial crime and to consumers - we also acknowledged the limited amount of detailed, credible evidence on this rapidly-evolving market. 

The FCA commissioned research to gain insight into the size of the market and identify potential harm. In March 2019, we published consumer research into ‘consumer attitudes and awareness of cryptoassets’. Through a nationally representative survey of 2,132 UK consumers and 31 in-depth interviews, this research provided invaluable insights into the size of the market and where potential harms could be found. It concluded that the size of the market was relatively small with 3% of consumers having ever bought cryptoassets, spending on average £200. It also showed that awareness of cryptoassets among the general population was low. 

Whilst these results were informative and taught us much about consumers’ attitudes and motivations in relation to cryptoassets, both aspects of the research had certain limitations. The qualitative research was exploratory and reached a sample of 31. The nationally representative survey started with 2,132 participants, but the specific follow- up questions related to cryptocurrency ownership were only applicable to a small sub-set of 51 adults, as the remaining individuals in the overall study population had not purchased cryptocurrencies. 

A year on, we commissioned follow-up quantitative research among a larger sample of cryptoasset owners, to ensure our understanding of consumer behaviour and areas of potential harm remain accurate. This research was designed to help us build on the previously gained insight into how consumers interact with the cryptoassets market. 

Through a longer survey and larger sample sizes, we have been able to understand whether and how the market has changed over the past year. Thirteen current or former cryptocurrency owners also provided video interviews to help us gain deeper insights from the consumer perspective. This research relates to cryptoassets that are, generally, outside of the regulatory perimeter. They are unregulated transferable cryptoasset tokens including well-known tokens such as Bitcoin, Ether and Ripple. As they are unregulated, we do not otherwise hold significant relevant data about them. The market sizing data, insight into consumer profiles and attitudes towards cryptoassets in the UK included in this research is otherwise unavailable. 

... To note, we chose to use the term ‘cryptocurrency’ throughout the questionnaire. This term is more widely used in public domain than the broader ‘cryptoasset’ term we tend to prefer. We also use ‘exchange’ to represent ‘cryptoasset trading platforms’, given ‘exchange’ is widely understood and used by consumers.

The FCA's Key findings are - 

We estimate 3.86% of the general population currently own cryptocurrencies. This amounts to approximately 1.9 million adults with the UK population (over 18) taken to be approximately 50 million. 

• 75% of consumers who own cryptocurrencies hold under £1,000. 

• Technical knowledge appears high among most cryptocurrencies owners. Most consumers seem to understand the risks associated with the lack of protections, the high volatility of the product and have some understanding of the underlying technology. 

• Nevertheless, the lack of such knowledge among some presents potential consumer harm to consumers. 11% of current and previous cryptocurrency owners thought they were protected. This amounts to approximately 300,000 adults. 

• The most popular reason for consumers buying cryptocurrencies was as ‘as a gamble that could make or lose money’, acknowledging that prices are volatile. 

• Cryptocurrency exchanges are a key market participant and most consumers used non-UK based exchanges. 

• Adverts are important components of the consumer journey with the ability to influence consumer sentiment. Other mediums such as traditional media and online news also impact consumer behaviour. 

• 45% of all current and previous cryptocurrency owners said they had seen a cryptocurrency related advert. Of these, 35% or approximately 400,000 adults, stated it made the purchase more likely. 16% of current and previous cryptocurrency owners were influenced by an advert. 

Year on year differences 

• The research findings highlight a statistically significant increase from 3% in the 2019 FCA Consumer Research to 5.35% this year in those who hold or held cryptocurrencies. This represents an increase of 2.35 percentage points, from approximately 1.5 million people to 2.6 million people. 

• This year 27% had never heard of cryptocurrencies, compared with 58% in our survey last year. This represents a statistically significant increase in the percentage of those being aware of cryptocurrencies from 42% to 73% of adults. 

• The media’s role in raising consumer awareness about cryptocurrencies has risen.

'The Size of the Crypto Economy: Calculating Market Shares of Cryptoassets, Exchanges and Mining Pools' by Konstantinos Stylianou and Nic Carter in (2020) 16(4) Journal of Competition Law & Economics 511–551 comments 

Cryptoassets and related actors such as crypto exchanges and mining pools are now fully integrated into mainstream economic activity. A necessary corollary is that they have attracted heightened regulatory and investor scrutiny. Although some rules and obligations apply uniformly across all economic actors in a given sector, many others, such as antitrust laws and some financial regulations as well as investor decisions are informed by actors’ relative economic size—meaning that those with larger market shares can become more attractive regulatory or investing targets. It is therefore a foundational issue to properly measure the economic footprint of economic actors in the crypto economy, for otherwise regulatory oversight and investor decisions risk being misled. This has proven a remarkably difficult exercise for multiple reasons including unfamiliarity with the underlying technology and role of involved actors, lack of understanding of the applicable metrics’ economic significance, and the unreliability of self-reported statistics, partly enabled by lack of regulation. Acknowledging the centrality of cryptoasset size in a number of regulatory and policymaking areas and the fact that previous attempts have been incomplete, simplistic, or even plainly wrong, this paper presents the first systematic examination of the economic footprint of cryptoassets and their constituent actors—mining pools and crypto exchanges. We aim to achieve a number of objectives: to introduce, identify, and organize all relevant and meaningful metrics of crypto economic actors market share calculation; to develop associations between metrics, and to explain their meaning, application, and limitations so that it becomes obvious in which context metrics can be useful or not, and what the potential caveats are; and to present rich, curated, and vetted data to illustrate metrics and their use in measuring the shares of crypto economic actors in their respective markets. The result is a comprehensive guidance into the size of the crypto economy.

'Regulating Libra' by Dirk A Zetzsche, Ross P Buckley and Douglas W Arner in (2020) Oxford Journal of Legal Studies comments 

Libra is the first private cryptocurrency with the potential to change the landscape of global payment and monetary systems. Due to the scale and reach provided by its affiliation with Facebook, the question is not whether, but how, to regulate it. This article introduces the Libra project and analyses the potential responses open to regulators worldwide. We conclude that perhaps the greatest impact will come not from Libra itself, but rather from reactions to it, particularly by other BigTechs, incumbent financial institutions and governments around the world.