On 4 April 2022, Rishi Sunak announced the government’s ambition to turn the UK into “a global hub for crypto asset technology” as part of the Treasury’s plan to create a new crypto regulatory package.
The government’s headline proposal is to integrate stablecoins (cryptocurrencies linked to traditional currencies or assets) into the payments system, enabling people to use them like conventional currency. The government is also looking to explore ways to catalyse a domestic crypto asset market by making the UK tax system more “competitive”. The Financial Conduct Authority (FCA) plans to conduct an industry-wide consultation in May this year.
Speaking at a financial technology conference on 4 April, the Economic Secretary to the Treasury, John Glenn, said that the government is “going to prioritise” blockchain technology, and could even issue debt and borrow money using the approach. He pointed to the UK having fewer regulators than the EU and US which would enable the UK government to “move very nimbly” in achieving its goal.
However, the government’s renewed focus on crypto may come too little, too late for businesses in the rapidly growing sector, with many having already left for greener regulatory pastures following the FCA’s foray into crypto regulation.
The FCA became the anti-money laundering and counter terrorist financing supervisor for crypto asset firms from 10 January 2020. Firms that were already operating in the UK prior to the date were directed to register with the regulator by 10 January 2021. Many firms were unable to complete the application process in time, which led the FCA to create the Temporary Registrations Regime (TRR). The regime enabled firms to continue trading if their application had commenced before 16 December 2020 and was still undergoing assessment.
From 10 January 2021, the FCA mandated all existing crypto asset businesses in the UK to be registered with the FCA, or in the process of doing so via the TRR, which was due to close in July 2021. However, delays by the regulator in clearing the TRR resulted in the deadline being extended to 31 March 2022, and then extended yet again – for applications of “all but a small number of firms” that still had not been fully processed. The FCA explained that delays in the registration process were a result of the complexity, and often poor standard of applications it receives, while also pointing to the impact of the pandemic in restricting the regulator’s ability to conduct visits to the companies for the earlier delays.
In January this year, Lisa Cameron MP, chair of the UK parliamentary group on crypto and digital assets, criticised the regulator in how “the lack of clarity from (it) has presented huge challenges to firms in terms of business certainty,” with firms “actively leaving the UK as direct result of the FCA’s approach, costing the UK in terms of jobs, talent and revenue.” Recent research from YouGov shows that growing number of companies are moving to other markets “to ensure they can continue offering crypto services to Brits, but from outside of the new UK regulatory regime,” as the FCA rules still allow companies to serve British clients from bases like Luxembourg, Germany, and Switzerland.
Speaking at a City Week 2022 event on 26 April, FCA chief Nikhil Rathi argued that many businesses fell short of the FCA’s standards for provisions to prevent and identify harm. He added that the regulator looks to work with firms to support their efforts towards compliance and that this “should not be interpreted as anti-innovation.” Blair Halliday from Gemini (a crypto exchange given the green light by the FCA), explained how the FCA’s approach “gave firms that really have that desire to seek regulatory approvals something to demonstrate as a key differentiator.”
The FCA announced a three-year strategy focused on improving outcomes for consumers earlier in April this year. The strategy directs the regulator’s Head of Digital Assets to “build and lead a new crypto department that will lead and coordinate the FCA’s regulatory activity in this emerging market” with, for the first time, published outcomes and performance metrics that the regulator will benchmark itself against. The strategy’s stated focus is on the prevention of serious financial harm for consumers, with online fraud and scams increasing in tandem with growing crypto ownership – latest research shows 1 out of every 5 people own some form of cryptocurrency today.
Both policymakers and businesses have been openly critical of the speed and effectiveness of the FCA’s approach and its impact on the sector, with the back-and-forth between the regulator and the industry widely reported in the media as the final deadline for the TRR approached. Several of the UK’s best-known crypto businesses, including payments app Revolut and digital asset custodian Copper, were said to be left in limbo as they awaited the FCA’s verdict on their applications.
Peter Smith of Blockchain.info, one of the UK’s most prominent crypto businesses, welcomed the government’s plans as a “course correction” but lamented how “more than 90% of the sector has left the UK for more progressive countries in Europe.” A similar sentiment was shared by Charles Hayter, of data provider CryptoCompare: “the proof is going to be in the pudding with how the government eases the blockages our industry has faced.”
Investors looking at businesses in the sector should note that while the Chancellor’s announcement may point towards a more flexible, pro-business approach to regulation, it came in stark contrast to the Governor of the Bank of England Andrew Bailey calling crypto the “new front line for scammers” while warning that fraudsters are exploiting digital asset technology, on the same day as Sunak’s announcement, reflecting the emphasis on consumer protection in the FCA’s three-year strategy. Despite the Chancellor confirming that the Treasury will look to work with the industry in developing the future regulatory framework, it is evident that the government must do more to ensure firms can “invest, innovate and scale up in this country.” The new new crypto regulatory package must instill confidence, not confusion, for businesses in the sector if the government’s dreams of a global crypto hub are to come true.