The UK has to get its crypto house in order

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The challenge for jurisdictions such as the UK looking to grow their digital asset sectors is to develop a regulatory framework that supports this growth and ensures that adequate protections are in place for investors, particularly retail investors. Developing such a regime would take time and careful thought from regulators, but no jurisdiction can afford to stand still, especially while America’s problem remains unanswered.

As the world’s largest economy, it should come as no surprise that the United States is a key, if not key, market for the cryptocurrency industry. In fact, it is estimated that as many as 93 million adults in the United States already own cryptocurrency, with the majority hoping to expand their crypto holdings. But the regulatory environment across the US is currently fragmented.

To some extent, this reflects the federal system and the difficulties of introducing new legislation in such a politically controversial area. However, it also reflects radically different views between regulators and courts on the interpretation of existing laws and regulations. The SEC and CFTC have taken successful enforcement actions in this area, but the SEC in particular has faced backlash from the courts.

However, newly elected president Donald Trump intends to change this fragmented picture. Once openly skeptical of digital assets, Trump now seems determined to prove that there is no greater zeal than that of the converted. Over the summer, the United States vowed to make its Bitcoin (BTC) the “world’s superpower” and has been enthusiastically promoting the crypto on social media lately.

Has England come to a standstill?

Following Trump’s return to the Oval Office, we can expect to see a warmer welcome for cryptocurrency businesses in the United States. Indeed, Bitcoin jumped to a record high of $75,060 in response to Trump’s win and his promise to end ‘tyranny’ in the industry. This should serve as a wake-up call to UK regulators and government that it is time to turn the roadmap for new crypto regulations announced earlier this year into a concrete regime.

Just look at the EU for evidence of the advantages of doing this. While there is legitimate criticism of some of the provisions of the Markets Crypto Assets Regulation, this criticism is overshadowed by the significant benefits offered by regulatory certainty. The direction of travel in the UK is visible but final legislation to make this a reality has not yet been delivered. For example, the new fiat-backed stablecoin regime was expected to start in the first half of 2024. The general election delayed this but it is now November and the new regulations have not yet emerged.

Market participants could be forgiven for wondering what the UK is doing. The uncertainty could undermine the UK’s bid to establish itself as a digital asset hub and prevent stablecoin users from having the level of regulatory protection they could expect. These goals will become even more difficult to achieve unless steps are taken to improve the UK’s regulatory regime following Trump’s victory in the US presidential election.

Legislative progress

It should be noted that the UK’s current regulatory environment has its positives and the FCA deserves praise for its practical approach to enforcing its rules. There are also a number of steps the UK can take in the short term to help resolve these issues.

First of all, the UK needs to complete and implement the new fiat-backed stablecoin regime. The consultations suggested a well-thought-out regime; however, there was some ambiguity and confusion in the Treasury document regarding the territorial scope of the regime. This was troubling and it is hoped that the Treasury will define the territorial scope of the regulation in a way consistent with existing regulations. Any attempt to do otherwise risks wasting the potential benefits the UK could gain by basing the regime on the existing financial services regime.

The UK should ensure that there are sufficient staff working on crypto approvals at the FCA to ensure the long delays businesses currently face are reduced, particularly as the scope of regulation increases. Data from this year revealed that it takes an average of 459 days to process a crypto firm’s AML record; This is a very long time. Increasing headcount may not be a magic solution, but it will make a meaningful difference.

Finally, the UK needs to make a decision on CBDC. While stablecoins are fairly common on-chain, the UK banking industry appears to be making limited progress on tokenised deposits. One wonders whether the uncertainty over whether the Bank of England will launch a CBDC will slow them down: it does no good for UK plc if the Bank of England and the banks wait for each other.

Correct arrangement

Digital assets are an innovative field of finance. Technology is advancing rapidly and as a result regulators need to stay at the forefront. The UK has set out a sensible roadmap but needs to make further progress in delivering it; otherwise it risks falling out of step with other jurisdictions.

This is not a call for the UK to recklessly enforce regulations, but rather a call for greater effort and resources to deliver on the roadmap that has already been set. Regulation plays a vital role in protecting retail consumers but must also leave room for innovation, particularly in wholesale markets where there are more sophisticated operators who can better account for risks. It may not be possible to develop a regime that achieves this balance overnight, but this should not be seen as an excuse to give up completely.

The UK has much to offer digital asset investors, including the beginnings of an effective and proportionate regulatory regime. But time is not on the UK’s side and could cause further delays. After all, rival jurisdictions won’t be waiting for the UK to catch up. Accordingly, the development and rollout of a comprehensive regulatory framework for digital assets should be a top priority for both government and regulators. The alternative risks Britain falling behind.

Brett Hillis

Brett Hillis is a partner and member of On Chain, Reed Smith’s private cryptocurrency and digital assets group. His practices in this area include tokenization structures, regulatory structuring, digital asset derivatives and the development and structuring of ETNs and investment products based on digital assets.