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The challenge for jurisdictions, such as the United Kingdom, that are keen to grow their digital assets sectors is to develop a regulatory framework that supports this growth while ensuring sufficient protections are in place for investors—particularly retail investors. Developing such a regime takes time and careful consideration from the regulators, but no jurisdiction can afford to stand still—particularly while the American question remains unanswered.
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As the world’s largest economy, it should be no surprise that the US is a key—if not the key—market for the cryptocurrency industry. Indeed, it is estimated that as many as 93 million adults from the US already own cryptocurrency, with a majority hoping to extend their crypto holdings. However, the regulatory landscape across the US is currently fragmented.
To some extent, this reflects the federal system, as well as the difficulties of passing new legislation in a space that is so politically contested. However, it also reflects radically different views amongst regulators and courts as to the interpretation of the laws and regulations that exist. The SEC and CFTC have taken successful enforcement action in the space, but the SEC, in particular, has faced pushback from the courts.
However, newly elected president Donald Trump intends to change this fragmented picture. Having once been a vocal skeptic about digital assets, Trump now seems to be determined to prove that there is no zeal greater than a convert’s. He pledged to make the United States Bitcoin (BTC) “superpower of the world’ over the summer and recently has been enthusiastically promoting crypto on social media.
Is the UK at a standstill?
Following Trump’s return to the Oval Office, we can expect to see cryptocurrency businesses receive a warmer welcome in the US. Indeed, Bitcoin jumped to a record high of $75,060 in response to Trump’s win and his promise to end the industry’s ‘persecution.’ This should serve as a wake-up call to the UK regulators and government that it is time to turn the roadmap for new crypto regulations announced at the beginning of this year into a concrete regime.
One need only look to the EU for evidence of the advantages of doing so. While there are justified criticisms of some provisions of the Markets in Crypto-Assets Regulation, this is outweighed by the substantial benefits offered by regulatory certainty. In the UK, the direction of travel can be seen, but the final legislation to turn it into a reality has not yet been delivered. For example, the new fiat-backed stablecoins regime was expected 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 hurt the UK’s ambitions of establishing itself as a digital assets hub and prevent users of stablecoins from having the level of regulatory protection they might expect. Following Trump’s winning the US presidential election, if steps are not taken to develop the UK’s regulatory regime, achieving those ambitions will only become more difficult still.
Regulatory progress
It should be noted that there are positive aspects to the UK’s current regulatory landscape, with the FCA deserving credit for its practical approach to enforcing its rules. There are also a number of steps that the UK can take in the short term to help address these issues.
As a priority, the UK should complete and introduce the new fiat-backed stablecoins regime. The consultations suggested a well-thought-through regime, save that there appeared to be some uncertainty and confusion in the Treasury paper regarding the territorial scope of the regime. This was troubling, and it is hoped that the Treasury will define the territorial scope of regulation consistently with existing regulations. Any attempt to do otherwise risks throwing away the benefits the UK has the potential to accrue through basing the regime on the existing financial services regime.
The UK should ensure there are sufficient staff working on crypto approvals in the FCA to ensure that the lengthy delays that businesses currently face are cut down, especially as the scope of regulation is increased. Data obtained this year revealed that it takes an average of 459 days to process a crypto firm’s AML registration—that is simply too long. Increasing staffing levels may not be a silver bullet, but it does stand to make a meaningful difference.
Finally, the UK needs to make a decision regarding a CBDC. While stablecoins are hugely prevalent onchain, the UK banking sector appears to have made limited progress on tokenized deposits. One wonders if the uncertainty as to whether the Bank of England will launch a CBDC is slowing them down: it is no good to UK plc if the Bank of England and the banks are waiting on each other.
The right form of regulation
Digital assets are an innovative area of finance. Technology moves quickly, and regulators must remain on the front foot as a result. The UK has laid out a sensible roadmap, but it needs to show more progress in putting it into action; otherwise, it risks failing to keep pace with other jurisdictions.
That is not a call for the UK to introduce regulations recklessly, but for more effort and resources to fulfill the roadmap that has already been laid out. Regulation has a vital role to play in protecting retail consumers, but it must also leave scope for innovation, particularly in wholesale markets, which are home to more sophisticated operators that are better able to factor in risks. It may not be possible to develop a regime that achieves that balance overnight, but that should not be taken as an excuse to give up entirely.
The UK still has much to offer for digital asset investors, including the beginnings of an effective and proportionate regulatory regime. However, time is not on the UK’s side, and it can cause further delays. After all, competitor jurisdictions will not wait for the UK to catch up. Accordingly, developing and rolling out a comprehensive regulatory framework for digital assets should be a top priority for both the government and the regulators. The alternative risks the UK being left behind.
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Author: Brett Hillis
Brett Hillis is a partner and member of On Chain, Reed Smith’s dedicated cryptocurrency and digital assets group. His practice in this area includes tokenization structures, regulatory structuring, digital asset derivatives, and the development and structuring of ETNs and investment products based on digital assets.
