U.K. Crypto Regulators Turn to Fintech Playbook for Inspiration

(Bloomberg) --

Britain’s prior approach to regulating financial technology has been held up as the de-facto bar, industry executives told Bloomberg – but on crypto, its more risk-averse outlook has stymied the sector’s growth. 

The Financial Conduct Authority and the Bank of England have issued multiple consumer warnings about investing in crypto since token prices picked up in 2020, while efforts to assess the underlying blockchain technology’s suitability for updating traditional market infrastructures only began in earnest last year. Only 34 crypto firms surpassed the FCA’s bar for registration under anti-money laundering rules, with more than 100 companies left in limbo.

“There was the perception that the U.K. wasn’t welcoming because the registration process was so challenging,” said Huong Hauduc, general counsel at Maltese-regulated crypto exchange Bequant, which holds a limited presence in London. However, she said the Treasury’s pledge to ask the Law Commission to evaluate the legal status of decentralized autonomous organizations (DAOs) was a step in the right direction. 

Adam Jackson, policy director at Innovate Finance, said the fintech industry body was “seriously concerned” that there may soon be a period of time where crypto firms cannot get their marketing promotions authorized while they remain outside of the U.K.’s regulatory perimeter. Some of the U.K.’s largest crypto businesses have moved key parts of their operations offshore to hotspots in the U.S., Croatia and Switzerland, causing concern that regulators’ ability to monitor the sector effectively is diminishing.

The Treasury launched a first look at its strategy to be a “global hub” for crypto this month, promising to bring stablecoins — digital tokens tied to the value of fiat currency — into existing e-money payments legislation, while the FCA said it would draft a new set of regulations for the sector. A separate government consultation to regulate other types of cryptoassets will follow, alongside a nonfungible token issued by the Royal Mint. 

The U.K.’s e-money regime has allowed fintech companies to prosper, providing a path for startups to garner millions in early customers so long as their funds were safeguarded by a fully-licensed bank. This is how many of the country’s top firms like Monzo Bank Ltd. and Revolut Ltd. got an early start, and now the Treasury intends to bring stablecoin issuers under that same umbrella.

“When the Treasury comes out with a proposal that digital assets is going to be important for the future of the country, it’s very hard to classify it as not a positive move,” said Dmitry Tokarev, chief executive of crypto custodian Copper, which remains in dialog with the FCA regarding its own registration. 

“Timing is everything, and the whole sector agrees that it was a bit mushed,” he said. Blockchain should be considered part of fintech, Tokarev added, rather than separating the two concepts. “Those things should not be segregated. There’s very much interdependence.”

The U.K.’s Economic Secretary to the Treasury John Glen, who has taken the lead on the new strategy to date, said in an interview that there remains a challenge for crypto firms to overcome in seeking “to enter a world of high-quality regulation in the U.K.”.

“I’m always having to balance and think about the relationship between consumer protection, systemic stability and enabling innovation,” Glen said. “For some people it won’t go fast enough, but for others it will mean clarity.”

Funding

Clear policies that prioritized innovation and competition helped make the U.K. second only to the U.S. globally as a fintech hub – with the sector in Britain taking in more than $14 billion in venture capital funding last year, according to PitchBook data. By contrast, “the regulation and the direction of travel on crypto hasn’t kept up with what the market is and what the market demands, and that is the disappointing part,” said Julian Sawyer, chief executive of crypto exchange Bitstamp and a co-founder of Starling Bank, a top U.K. fintech firm.

“It’s fair to say that how the FCA approached fintech was really about how do you try and maximize innovation that’s in the interest of consumers,” added Christopher Woolard, a former executive director for strategy at the FCA and now a partner at EY. “What you can observe playing out over the last couple of years is regulators in the U.K. and other jurisdictions thinking about are they regulating out or are they regulating in. What the Treasury has said is, ‘Okay, here’s a pathway’.”

The FCA did not respond to multiple requests for comment.

The flow of venture capital cash invested in London’s digital asset businesses trended in the opposite direction to global behavior as the U.K.’s regulatory mood music shifted. Data collated by PitchBook show crypto companies in the U.K. capital recorded $176.3 million in VC deals in 2022’s first quarter — falling almost 70% compared to the same quarter a year earlier — while global deals more than doubled to $4.7 billion.

“It’s hard to change the culture in a large organization overnight, but that’s probably what we need to do at the FCA,” said Ian Taylor, head of industry trade association CryptoUK. “It’s just at this point a bit of lip service. It’s going to take a while to turn that around.”

Seized Opportunity

Some executives said the U.K.’s focus on stablecoin regulation indicated a willingness to get ahead of international rivals, seeking out somewhere it could lead other rulemakers who have stayed quiet on specific proposals for fiat-pegged tokens to date. Mikkel Morch, executive director at cryptocurrency hedge fund ARK36, said crypto had become a site of power dynamics for geopolitics in the wake of Brexit.

“What we’re seeing here is really a very well-timed response to stand out,” said Morch, noting that turmoil surrounding the U.K.’s exit from the European Union could provide officials with a prime opportunity to get ahead of the bloc. 

Glen, however, dismissed that suggestion, adding: “We do not seek to diverge for the sake of it.”

©2022 Bloomberg L.P.