How can the UK become a crypto powerhouse?

The cryptocurrency sector has attracted renewed interest of late, following recent price spikes which saw bitcoin hit an all time high on the 14th of March this year. This increase in price was in no small part influenced by the US Securities and Exchange Commission’s decision to approve, for the first time, spot bitcoin ETF’s (Exchange Traded Funds) for trading over regulated exchanges, including the New York stock exchange and Nasdaq.

These funds have also been launched by some of the biggest asset management companies in the world, including the biggest, Blackrock, lending still more legitimacy to the cryptocurrency market in the US. Naturally these developments attracted significant investment from individuals and institutions that were previously unwilling to, or restricted from, entrusting their money to unregulated crypto trading platforms, some of which had proven to have insufficient investor protections in place.

Unfortunately, none of these products are accessible to UK investors, and this has led to an outcry, both from investors and those within the crypto industry in the UK, for regulators on this side of the pond to follow suit and allow crypto-assets to be traded on the London Stock Exchange.

To discuss this issue, and, more broadly, how the UK can live up to its claims to be a crypto powerhouse, SEC Newgate hosted a roundtable event this week, bringing together a wide variety of industry leaders, policy makers, investors, bankers and other stakeholders. The event was very well attended, the debate lively, and the observations salient, all of which highlighted the importance of the matters at hand.

It was agreed that the attitude of UK politicians toward the crypto-asset sector was becoming increasingly favourable. The Conservative government has already expressed its desire to establish the UK as a global hub for crypto-asset technologies, despite struggling to date to make this a reality. The government also recognised that central to achieving this ambition was revision of the listing rules to accommodate crypto companies. 

Contrary to the government's stance, however, and by far the biggest hurdle cited by roundtable participants, was the Financial Conduct Authority’s (FCA) reserved approach towards crypto-assets. The FCA maintains a cautious stance, rooted in its statutory duty for consumer protection and accentuated by concerns over potential scandals impacting UK consumers and retail investors. However, current regulations were seen as draconian and counter-productive, forcing the very people they are meant to protect onto highly risky, unregulated exchanges.

Alongside lost investment resulting from the FCA’s restrictions on listing crypto-asset based businesses, it was felt that the FCA’s restrictive and ambiguous rules regarding the marketing of crypto-assets was paralysing innovation and driving talent abroad. Systemic issues such as banking restrictions were also problematic, as well as an unfavourable media environment.

While there have been indications of regulatory easing, exemplified by the FCA's decision to permit crypto-related Exchange Traded Notes (ETNs) for professional investors, this adjustment arrives belatedly compared to similar initiatives in other jurisdictions and is not open to the wider investment community.

Encouragingly, it was noted that HM Treasury have been actively engaged in these issues, putting pressure on the FCA to catalyse regulatory change. HM Treasury’s proactive approach could mean potential revisions in crypto-asset regulations, with an anticipated timeline for new rules to be finalised by this summer, ahead of any general election.

Looking ahead, the trajectory of crypto-asset regulation in the UK may encounter further shifts under a future Labour government. While the Labour Party has not been seen as a natural supporter of the crypto-asset sector, recent indications suggest a softening of their stance, with key figures acknowledging the imperative of supporting technological innovation in the sector. Labour appears sensible enough to recognise that anything that can improve the economy in these straitened times deserves attention. 

Highlighting the necessity for regulatory change, investment managers present at the roundtable, cited increasing pressure from their clients to invest in crypto-assets who were questioning why it was that a proportion of their funds wasn’t invested in the best performing asset class of recent years. However, in the absence of a clear regulatory framework they too will not invest, particularly not in unregulated exchanges given the systemic risk. Industry participants too wanted appropriate regulation to provide legitimacy and move them away from associations with recent industry scandals.

Essentially, the tensions within UK policymaking regarding crypto-asset regulation reflects a delicate balancing act between fostering innovation and safeguarding consumer interests. Whilst yesterday’s roundtable participants felt UK regulators had this balance wrong, with an outdated and overly cautious approach, what came out of the debate, beyond a sense of real urgency, was significant optimism.  

It was felt that the need to address the issues under discussion was becoming increasingly recognised as essential by the government, investors and industry participants. As such, there was almost an inevitability to this optimism. The issues would be overcome, if only because they had to be.