Mixed messaging won’t help the UK’s crypto play
If the UK is to become an international crypto hub, it must focus on bringing regulatory certainty to the industry and the banks that back it.
The UK’s Treasury Select Committee published a report last week calling on the government to abandon plans to regulate cryptocurrencies such as Bitcoin and Ether as financial instruments. It said they should treat such investments as gambling instead.
The report is in opposition to the government’s line on cryptoassets so far. Prime minister Rishi Sunak has been promoting London as a crypto hub since he was made Chancellor in 2020.
While it is important to make sure regulators get digital finance rules right and that consumers aren’t misled, this continuing uncertainty won’t help the UK’s chances of becoming a post-Brexit digital finance leader.
Since the collapse of FTX in November 2022, there have been concerted efforts around the world to introduce better crypto regulation. The UK government recently closed a consultation on what the rules for cryptoassets should look like that proposed that the Financial Services and Markets Act should cover higher risk cryptoasset firms, while a Designated Activities Regime would cover the rest of the industry.
UK regulatory certainty still seems, however, far away.
There have been questions over how well-aligned the government’s and the so far less enthusiastic FCA’s approaches to cryptoassets have been
The timing of the Treasury Select Committee’s report was unfortunate, coming as it did so soon after the EU’s comprehensive and much-lauded Markets in Cryptoassets Regulation (Mica) was adopted.
Mica will come into effect in 2024, and includes anti-money laundering (AML), prudential and consumer-protection regulations for cryptocurrencies.
In Paris, the Autorité des marchés financiers (AMF) has gone one step further, telling US crypto firms looking for regulatory certainty that they would be welcome in France. The French regulators already have crypto regulations in place that mirror those of Mica.
And it is not just Europe making progress on creating a robust and regulated crypto landscape. In the UAE, regulators in Dubai and Abu Dhabi – including the Virtual Assets Regulatory Authority (Vara), the world’s first dedicated crypto regulator – have introduced pilot regulations for the industry to position the emirates as crypto hubs.
Meanwhile in Asia, Hong Kong has set itself apart from China by repositioning its approach to crypto and encouraging banks to open accounts for virtual asset service providers (Vasps). The Hong Kong Monetary Authority’s licensing regime is expected to launch this month and will open the door for retail access to crypto trading.
This isn’t the first time the UK’s approach to cryptoasset regulation has hit obstacles. There have been questions over how well-aligned the government’s and the so far less enthusiastic FCA’s approaches to cryptoassets have been.
At the beginning of last year, the FCA’s financial promotions regime proposed treating cryptocurrency investments as high-risk, meaning that any firm looking to promote crypto products would need approval from a regulated third party in order to advertise to the general public.
This would have put crypto firms established in the UK at a serious disadvantage to those servicing UK consumers from abroad. It also created concern that this would drive firms to set up elsewhere for just this reason. The plan has since been put on hold.
On the AML side, only 15% of crypto firms that have so far applied have been approved by the FCA’s registration scheme, with the vast majority told to improve safeguards that were deemed substandard.
It is not only cryptoasset service providers (Casps) that regulation would help. Getting banked has long been a challenge for them as traditional financial services have been wary of the unregulated sector. And since the collapse of crypto exchange FTX and Silicon Valley Bank (one of crypto’s biggest backers), it will only be more difficult for crypto firms to find banks willing to work with them. Regulating the industry should help by making crypto firms more palatable for traditional financial services providers.