Britain's previous approach to financial technology regulation has been held up as the de facto benchmark, but its more risk-averse stance has stifled the sector's expansion in crypto, according to industry crypto regulators.
Investors have been warned by the Financial Conduct Authority and the Bank of England several times since token prices started rising in 2020, but crypto regulation in the U.K. is only just now beginning to investigate if blockchain technology can update established market infrastructures. More than a hundred crypto regulators in the U.K. have not met the FCA's registration bar because of the agency's strict anti-money laundering rules and regulations.
"There was a notion that the United Kingdom was unwelcome due to the registration procedure," said Huong Hauduc, general counsel of Maltese-regulated cryptocurrency exchange Bequant, a modest presence in London. She did, however, praise the Treasury's vow to urge the Law Commission to evaluate the legal status of decentralized autonomous organizations (DAOs).
According to Adam Jackson, policy director at Innovate Finance, the fintech industry association is "extremely worried" that there will soon be a period in which crypto businesses would be unable to obtain marketing authorization while operating outside the U.K. crypto regulation perimeter. Some of the top crypto firms in the United Kingdom have shifted significant portions of their operations abroad to hotspots in the United States, Croatia, and Switzerland, raising concerns that authorities' capacity to regulate the sector adequately is dwindling.
This month, the Treasury unveiled the first phase of its strategy to become a "global hub" for crypto, promising to incorporate stablecoins — digital tokens pegged to the worth of fiat currency — into existing U.K. regulation on cryptocurrency, while the FCA announced it would draft new crypto regulations. Separate government consultations on additional forms of crypto assets will follow, as will the launch of a nonfungible coin by the Royal Mint.
The United Kingdom's e-money regime has facilitated the growth of fintech businesses by allowing startups to acquire millions of early consumers as long as a fully regulated bank secures their monies. This is how a number of the country's leading companies, including Monzo Bank Ltd. and Revolut Ltd., got their start, and the Treasury now aims to include stable coin issuers under the same umbrella.
"When the Treasury proposes that digital assets will be critical to the country's future, it's difficult to dismiss it as a negative step," said Dmitry Tokarev, chief executive of crypto custodial Copper, which is still in discussion with the FCA on its crypto regulators.
Clear regulations that promote innovation and competition have helped position the United Kingdom as the world's second-largest fintech hub, trailing only the United States — with the industry raising more than $14 billion in venture capital financing last year, according to PitchBook statistics. By comparison, "the crypto regulators and direction of travel on crypto have not kept up with what the marketplace is and what the market requires," said Julian Sawyer, CEO of crypto exchange Bitstamp and co-founder of Starling Bank, a leading fintech startup in the United Kingdom.