Crypto proposals further weaken UK’s financial standing
Sold as an attempt to increase oversight of the digital market, the UK's crypto regulation will actually serve the interests of an inherently risky industry
The UK government this week released its final proposals for how it intends to regulate crypto assets, bringing much of the sector into the purview of mainstream financial services for the first time. At first glance, the proposals seem to align the UK with the EU — which has its own set of digital regulations in the Markets in Crypto Assets Regulation (Mica). Yet, in reality, they are the latest dangerous move to loosen rules to attract more business as the country tries to undo the damage caused by Brexit.
The influence of Prime Minister Sunak — who is keen to make the country a hub for the asset class — is clear in the proposals.
“The proposals seek to deliver on the ambition to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation, and create the conditions for cryptoasset service providers to operate and grow in the UK,” reads the description of the consultation, adding that it intends to do this “whilst managing potential consumer and stability risks”.
This is a conceptual contradiction. Fifteen years ago, on Tuesday, the Satoshi white paper for bitcoin was released, introducing a blueprint for a peer-to-peer electronic cash system that bypassed traditional finance using a blockchain. The landscape has since evolved remarkably, to the point where crypto is almost unrecognisable from this original concept.
It is very tempting to make the argument that shunning the regulation of cryptocurrency should be an a priori assumption of any true savant. Under this logic, the idea that the UK would introduce regulation in an effort to actually encourage adoption would be baffling.
Roll up, roll up
But the world has moved on, and traditional finance has become so enmeshed in crypto that it is simply not the case any more that regulation is at odds with the concept
Instead, a closer look at the proposals shows that they are distinctly pro-crypto, albeit a little confused. Rather than regulate to protect investors, or to prevent escalations like the collapse of FTX, the rules almost encourage risk taking — despite the attestations of the government to the contrary.
Focusing largely on stablecoins, they exclude controversial air drops, ignore NFTs, have little to say on DeFi, or decentralised finance, and seem to ignore the overall dangers that crypto trading can bring. Instead they want every crypto company and their dogs to come to the UK and set up shop.
The UK government itself admits that the industry is extremely fast moving, which by definition makes it all the more difficult to regulate, but that has not put it off attempting to do so. It should learn from its predecessors.
The US Securities and Exchange Commission (SEC) was several years ahead of most of its peers in its attempts to curb the industry in the US. Yet it has failed abjectly to gain control and get in front of the curve, despite its manifold regulatory measures, demonstrating exactly how hard it is to police this sector. Chair Gensler has introduced an unprecedented number of rules and proposals, but things have barely changed because it is so very hard to keep up. This summer, the DC Circuit found the SEC to have been “arbitrary and capricious” in its denial of a bitcoin spot ETF. Introducing weak rules will only serve to make things easier to manipulate.
Although the UK’s 82-page document is clear, and outlines the steps it thinks need to be taken, the joyous response of the crypto community online should serve as a warning. In an attempt to pry away investors, infrastructure companies and startups, Sunak is essentially trying to underregulate an industry the US has deemed to be risky. Although the initial hype of the movement is long gone, regulators continue to play catch up — and are nowhere near having a handle on the matter.
Quite simply, the industry moves too quickly for the regulators, and the UK is hardly known for its evasive and swift regulatory prowess.
These regulatory suggestions are vague and loose, and putting them into place will be easier said than done. The matter also asks the question of whether the FCA has the resources or enough knowledge to properly control the sector. Does encouraging a crypto exodus to the UK with loose rules not simply run the risk of forming a new wild west, in which in-house lawyers with far more experience of the industry can keep their companies several steps ahead of the rules?
There are real parallels with the equity capital markets, which are undergoing their own potential loosening of rules in the UK. The London Stock Exchange is leading the charge to ease the highly regulated listing process for companies in the City, as a means of encouraging new business. This follows two years of diminishing ECM activity that have seen London become something of a wasteland for IPOs.
But, as one senior ECM banker at a bulge bracket bank in London told GlobalCapital this month, regulators would do well to remember that it was the strength, reliability and resilience of London that made it an attractive place to list in the first place. Undoing all of that as a way of trying to reverse some of the Brexit damage might be counterintuitive: does anyone really want to come to London because there are weaker rules, or should the City not try to maintain and make the most of its reputation?
These crypto regulations can be looked at in the same way. Is it wise for the UK's regulatory agenda to encourage activity that the US has been working to prevent, just for the sake of a quick buck? Probably not.
Instead, if it wants to attract investment, the UK should instead encourage its growing fintech sector to continue to innovate in the capital markets, and look for ways to apply digital technology to the regulated markets.