The recent call from HM treasury to make the UK “a global cryptoasset technology hub” has sent ripples throughout the financial technology (fintech) industry. However, the Chancellor’s aspirational ‘sales pitch’ for the UK is out of step with the more cautious views expressed by figures from the Financial Conduct Authority (FCA) and the Bank of England. As the body responsible for authorising and regulating the firms that the Treasury is keen to attract, the FCA’s response will be of particular interest for firms looking to set up in the UK. New and existing crypto firms will likely have to tread a fine line between the Treasury’s warm welcome and the FCA’s increasingly high bar for authorisation.
Industry Actions
The UK Government is trying to “ensure the UK financial services sector remains at the cutting edge of technology, [by] attracting investment, jobs and widening consumer choice”. Their promised activities include closer collaboration with the industry, producing an NFT with the Royal Mint, and creating a ‘financial market infrastructure sandbox’ to promote innovation. Current low levels of regulation of the crypto industry did not go unmentioned. Alongside their effort to attract and grow new businesses and innovation, the Treasury acknowledged the need for “financial stability and high regulatory standards so that these new technologies can ultimately be used both reliably and safely.” This was reinforced by Chancellor of the Exchequer Rishi Sunak, who said: “We want to see the businesses of tomorrow – and the jobs they create – here in the UK, and by regulating effectively we can give them the confidence they need to think and invest long-term.”
Other industry figures have been more measured and cautious than the Treasury in their responses to the growth of crypto. At a recent conference, Bank of England governor Andrew Bailey said that “Cryptocurrency is the new front line for scammers”—a sharp contrast to the Treasury’s encouraging tones. This came after the Bank of England’s Financial Policy Committee (which Bailey is a member of) shared their view that “enhanced regulatory and law enforcement frameworks” are necessary to cope with the volatility and rapid growth of cryptoassets and decentralised finance (DeFi), and the risks they pose to the UK’s financial system.
The FCA offers another voice of caution. A recent speech from their Chief Data, Information and Intelligence Officer, Jessica Rusu, highlighted the great importance of digital regulation—especially with the fast-growing pace of innovation and technology within the financial services sector. Her speech also mentioned the FCA’s upcoming CryptoSprint, “engaging with the industry to seek their ideas” so that the FCA can create better-informed policies related to the crypto industry. However, despite the FCA’s pro-digital stance, Rusu stressed the risk that cryptoassets pose to consumers, particularly as FCA research has found that “over 2 million people in the UK are invested in cryptoassets.” Separately, the FCA’s recently-published Strategy for 2022-25 emphasises that it is enforcing increasingly high standards for firms applying for authorisation to operate in the UK. This has already led to one in seven authorisation applications being refused, rejected, or withdrawn, up from one in thirteen. These developments have created an intriguing and possibly challenging landscape for cryptoasset firms looking to register and grow in the UK market.
The contrasting views of the UK’s supervisory bodies seem to have focused the attention of unregulated crypto firms, who have been appointing figures with high-profile regulatory backgrounds. One such firm is Binance, the largest cryptocurrency exchange in the world: it recently appointed former FCA official Steven McWhirter as its Global Director of Regulatory Policy. This is not the first acquisition of a high-level ex-regulatory official by a crypto-asset provider—the Bank of England’s fintech chief Varun Paul, former FCA official Matthias Bauer-Langgartner, and ex-UK chancellor Philip Hammond have all joined forces with different cryptocurrency firms. It appears that, however welcoming a market the Treasury wants to create, firms sense looming new regulations and high barriers to entry and are readying themselves accordingly.
Why are regulators so concerned?
The core issue with cryptoassets is that they carry a certain level of mystery due to a rapid rise in popularity that has not been paired with general consumer awareness and confidence. The following high-level risks can be associated to the world of cryptoassets:
- Volatility: volatile assets are of higher risk as their price is expected to be less predictable
- Lack of existing regulation: this makes the crypto market a hub for illicit activity and terrorist organization funding
- Susceptibility to error and hacking: the digital nature of crypto-assets means that have an increased threat sensitivity; potential hazards include hacking, money-laundering, ransomware and more.
- Influences from third factors: the stock market, government, US dollar index, news, media, and Black Swan events play a detrimental role in influencing the price movement of cryptoassets.
- Impact of discontinuation: out of the 18,000 different types of cryptocurrencies at time of writing, less than 1% has an actual real value and purpose.
Given the risks posed by the crypto market, and the Chancellor’s call to grow this market in the UK, regulating cryptoasset providers will become ever more important. Cryptoassets will likely move even higher on the regulator’s agenda in light of the FCA’s principles for business and 2022 – 2025 Strategy. The Strategy outlines various goals grouped into the following three categories which may directly affect the growing crypto industry:
- “Reducing and preventing serious harm”
- “Setting and testing higher standards”
- “[P]romoting competition and positive change”
Following the Chancellor’s announcement, we can all expect to see and hear much more news relating to crypto firms and cryptoasset providers. Firms will be particularly interested in and watchful for the actions and reactions of the government and regulatory bodies— especially as they may well clash over the extent of regulation that they want imposed on crypto asset providers. It is clear that the FCA will not make it easy for firms looking to establish themselves in the UK market, but despite the Treasury agreeing with the need for robust regulation, the two bodies are not aligned in their messages to firms. Currently, the doors to the UK market are being held open by one body while the other holds a “no entry” sign.
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