In April 2022, the UK Government and then Chancellor Rishi Sunak first stated the ambition “to turn the UK into a global hub for crypto asset technology and investment.” This marked the digital asset industry as an essential pillar of the vision for growth. However, since April, there has been little progress towards this goal, while other jurisdictions such as Singapore and the EU have acted quickly to establish their intentions and clarify their positions.
The last few months of 2022 show that the wheels of the UK government are turning from ambition to action. In October, there were a series of digital asset-related additions to the Financial Services and Markets Bill (FSM Bill). If this becomes law as expected, it will grant the FCA powers to regulate stablecoins and certain types of digital assets which are currently unregulated. In mid-November, the Autumn Statement showed the new Chancellor’s commitment to supporting tech sectors with the most growth potential. And in December, the Edinburgh Reforms reiterated this commitment, listing specific digital asset workstreams that the Government is pursuing as part of its plans for financial services reform.
We encourage the UK government to build on this momentum, to act quickly and decisively to make good on its ambition, taking concrete steps towards becoming a global hub.
Why act now?
The latest Chainalysis Geography of Cryptocurrency Report shows that the UK is the 17th largest country in retail user adoption of digital assets and a global leader in DeFi activity. It is also the largest digital asset sector in Western Europe by transaction volume ($233 billion between July 2021 and June 2022). In addition, the UK benefits from a wealth of talent, diverse funding sources as an international financial centre, a globally respected legal and regulatory framework, and a heritage of designing complex financial regulations. This puts the UK in a unique position, with all the ingredients to influence how risks are addressed globally and become an international hub for the digital asset industry.
However, the UK is not alone in its ambition. Others have acted quicker, making clear their approach and frameworks as they have recognised the value of becoming a hub and, in particular, the investment, innovation, and jobs that digital asset firms bring. Despite this, the UK can still capitalise on its foundations and learn from first-movers to become a global leader. To this end, we look forward to the imminent launch of the FCA and HM Treasury consultation for a clear, proportionate framework for digital assets that mitigates potential harm and delivers consumer protection while keeping the door open for innovation.
Recent events (as observed in May and November 2022) highlight the negative impact of unscrupulous actors in the sector and underline that now is the time to deliver a framework that brings a higher set of standards and builds on the fundamental transparency of the blockchain.
We have three key recommendations for the UK government’s approach to the digital asset sector, which can help foster high-quality, sustainable growth.
1. Deliver a proportionate regulatory framework underpinned by clear priorities
The digital asset industry has long asked the UK government for regulatory clarity. The UK should embrace these calls and move quickly to design, agree, and deliver a clear framework that manages digital assets’ potential conduct, financial crime, prudential, and financial stability risks and leverages the unique attributes of the underlying blockchain technology and the potential of tokenisation, smart contracts, and atomic settlement.
A valuable first step would be establishing three simple priorities that can underpin a proportionate regulatory framework. We believe these should focus on the following:
- Protecting UK consumers.
- Ensuring the integrity and stability of UK markets through a data-first approach.
- Delivering growth that maximises sustainable innovation and value for the UK economy.
A framework designed on these priorities would help bring trust that consumers are sufficiently protected, that markets are transparent and fair and that digital asset firms can operate in the UK under transparent and predictable rules.
2. Build government expertise in digital assets through collaboration with firms and the use of all available data and tools
The UK’s success in creating fintech innovation came when the UK government and regulators adopted a new approach to disruptive technologies and business models. This led them to focus not only on the unknowns and potential risks of disruption but also on the potential benefits for consumers and markets.
This focus, combined with a collaborative approach with the digital asset industry, will help build expertise in the UK government and develop their understanding of the capabilities, tools, data, and resources available to assist them in understanding and monitoring the sector. For example, blockchain analytics tools are available that use the transparency of the underlying blockchain to provide unprecedented access to information for governments, regulators, and policymakers.
3. Prioritise international collaboration
With these first two elements as the foundation, there is an opportunity for the UK to become a leading voice in advocating for a consistent global regulatory approach that supports global resilience and sustainable innovation. Engaging with other countries and institutions, such as the Financial Action Task Force (FATF), the International Monetary Fund (IMF), and the International Organisation of Securities Commissions (IOSCO), the UK can bring much-needed stewardship and global standards with the most potential for suitability, support, and sustainability to an industry that is borderless and 24/7 by default.
The UK is at an inflexion point and must take action now to realise its ambition to become a digital asset hub. By delivering clarity, building understanding, and pursuing collaboration at all levels, the UK can make a decisive move from ambition to action and deliver a framework for digital assets that enables sustainable economic growth and brings trust and safety for consumers and investors.
About the author:
Jordan Wain is Chainalysis Policy Lead for the UK, supporting public and private sectors in understanding the latest developments of digital assets and their interactions with regulatory trends and requirements. Before joining Chainalysis, he was a policy maker at the UK FCA, designing approaches to capital markets and emergent technology and leading the Regulatory Sandbox.
The views and opinions expressed in this thought piece are those of the author in his personal capacity and do not reflect the views and opinions of Chainalysis, Inc. This material is for informational purposes only, and is not intended to provide legal, tax, financial, or investment advice. The author makes no representations as to the accuracy or completeness of the information herein.