It turns out that the UK still wants to be a “global crypto hub”, which feels like it’s volunteering as a landing zone for the fiery wreckage of a plane crash.
Cryptocoins, crypto hype and crypto bros went down in flames last year. About $2.2tn in the market capitalization of cryptoassets disappeared globally with a 75 percent decrease from the peak of November 2021. There have been many failures, scandals or frauds, including so-called stablecoins such as Terra, lending platforms including Celsius, and of course the collapse of Sam Bankman’s FTX crypto empire -Fried.
One school of thought is to burn everything. The cryptoasset world, when connected to its own ecosystem of believers, can explode without causing aggro for the wider financial system. The message from the regulator is that you can lose all your money on this stuff.
But as this week’s government consultation made clear, crypto will be regulated – and in a broad way. Up to a tenth of UK adults are estimated to have cryptoassets, the government says, a figure that has doubled over the past few years. “By taking a wide range of powers, the UK is trying to future proof itself for a rapidly changing market,” said EY’s Chris Woolard, former interim boss of the Financial Conduct Authority. “The question is whether there are things that need to be done in the short term to protect consumers and make room for the industry to grow.”
Frankly, the drama of the past year has made the UK give policy. The worst of the political salivating for being a world-beating crypto innovator is gone. City minister and enthusiast Andrew Griffiths, while noting at a recent committee hearing that EY had proposed a £60bn opportunity, concluded the process by opening his mind to new technologies. Regulators and politicians, if not the same, apparently read the same book(s).
Perhaps as a result, the framework for regulation in the UK appears to be broader and more difficult than expected. Both the list of assets in the scope of the regulation, which for example includes non-fungible tokens, and wide net casting activities. Geographically, the UK watchdog can also reach a long way: the aim is to monitor the crypto activities provided in or in the UK, with some exceptions.
These proposals do not always correspond to the aspirations of “same risks, same regulatory outcomes”. The UK plans to fit crypto into existing financial services regulation, unlike the EU’s bespoke approach.
This is partly pragmatism: where there is no issuer for a cryptoasset, like bitcoin, the trading board will take responsibility for disclosure, as well as doing due diligence.
Elsewhere it is more doubtful: businesses that have registered with the FCA for anti-money laundering standards will be granted a temporary exemption from crypto marketing restrictions. This may require others to jump through AML hoops. But banks or stockbrokers generally don’t offer a pass on one set of rules because they fill out forms about completely different things.
A country with a new preoccupation to be the first to manage has shown some of the virtues of coming behind. “The UK benefits from a second-mover advantage,” said George Morris, a partner at the law firm Simmons and Simmons. “You have tried to bridge the gap looking at what the EU is doing.” Elements are also front in new ructions, such as the discussion of retention requirements for cryptoassets including restrictions on co-mingling, or the possibility of capital and liquidity requirements for crypto creditors.
This is just a consultation on what will be a long legislative process. But it may also lead to industry failure: to date, 85 percent of crypto companies have failed to comply with the FCA’s anti-money laundering standards. “There is a complete underestimation of what it takes to get regulatory approval,” said Blair Halliday, UK managing director of crypto exchange Kraken. “I don’t think it’s unreasonable to expect the same to happen from this.”
For those who still prefer to leave crypto to burn far outside the remit of regulators, don’t worry: on current evidence, there isn’t much to call for.
helen.thomas@ft.com
@helentbiz