How the UK can lead the way on crypto regulation

The Payments Association submitted its response to the Treasury’s future financial services regulatory regime for cryptoassets consultation and call for evidence at the end of April.

The consultation is important not just for our members, but the payments sector too, especially if the UK wants to be a cryptoassets hub on the global stage. It is why we support HMT’s view of: “Taking proactive steps to harness the opportunities of new financial technologies…[to] strengthen our position as a world-leader in fintech, unlock growth and boost innovation.”

For this to be achieved, “clear, effective, timely regulation and proactive engagement with industry” is required.

We cannot forget that the above is important in order to fulfil the treasury’s four overarching policy objectives of: a) Encouraging growth, innovation and competition; b) Enabling consumers to make well informed decisions; c) Protecting UK financial stability; and d) Protecting UK market integrity. This is well reflected in the treasury’s current approach when it highlights how the future financial services regulation on cryptoassets will have to work around some core design principles such as ‘same risk, same regulatory outcome’, be ‘proportionate and focused’, as well as ‘agile and flexible’.

This is a welcome step towards establishing regulatory clarity for cryptoassets in the UK. The rapid innovation taking place across the cryptoasset ecosystem is creating exciting opportunities, but it also involves serious risks.

Crypto-asset businesses would generally benefit from regulation, as their growth and safety depend on clearer standards.

Thoughtfully applied, these frameworks will accelerate the adoption of socially beneficial innovation, while reducing both criminal and financial risks.

In addition, with a more holistic view of the regulation on a global perspective, it is necessary to look at harmonisation with other regulatory regimes. Hence, any legislative proposal directed towards cryptoassets should specifically take into account the inter-linked economics between the UK and EU through many years of working together.

Therefore, many companies are either already operating both in the UK and EU markets; or it would be both in the interest of the EU and UK to want them to operate on both markets due to the economic value generated.

Any legislative proposals should also consider the regulatory landscape where the companies are operating as well as other territories such as the US, South America, Asia-Pacific, Africa and the Middle East.

Considering the economic impact and possibilities around the UK’s proposal for the financial services’ regulatory regime for cryptoassets, it would make sense for the regulatory regime to harmonise, to the extent reasonably possible, to allow as seamless cross-jurisdictional operation as possible.

Impact of MiCA

Although the UK proposals have a significant overlap with the EU’s Markets in Crypotassets Regulation (MiCA), there are also important differences between the two regimes, which clearly makes it difficult for affected companies to work in both regulatory environments.

Companies that provide affected cryptoasset services in the UK and EU will need to evaluate and analyse differences between the UK proposal and the requirements of MiCA and figure out how to satisfy both.

For example, the UK’s proposal differs in its approach to lending activities (cryptoasset lending platforms) and NFTs; whereby MiCA does not address those and it falls outside of its scope.

Also, fundamental effects can come from the approach to regulatory oversight and licensing. MiCA allows certain authorised companies, such as credit institutions, to conduct cryptoasset activities based on existing licenses.

However, under the UK’s proposal, companies that are already authorised, would need to apply for a variation of their license and the authorisation is not granted automatically. Therefore, aligning around fundamentals would benefit both the EU and the UK businesses.

Having said that, a similar approach would be sensible with other regulatory regimes to the extent that businesses are operating between those territories and the core regulatory approaches are similar.

Finally, but certainly not least, the UK needs to look at providing ‘best of breed’ regulation for the world to follow and stand us apart to create that fertile bed for businesses to thrive and grow.

We can learn from those that have gone before us and avoid unintended consequences learning from the development and pitfalls from the e-money and payment services regimes that build some of the best fintech businesses in the UK.

What’s next?

The UK seems to have fallen asleep a bit on its ambition of leading the fintech revolution, which was announced by David Cameron, when he was prime minister. Nonetheless, throughout Brexit, the industry has kept working hard, despite the difficulties related to a new relationship with the EU and a lack of attention from the government to push forward the industry demands.

In 2020 though, HMT had commissioned the Kalifa Review, to revitalise the sector. The review, published in 2021, highlights how the UK should have become a global hub for crypto and explored CBDCs.

The government seems now committed to deliver on the Kalifa Review’s suggestions. Despite being a second mover after the EU, it has the ability to be agile and flexible enough to accelerate this by creating secondary legislation as soon as the Financial Services and Markets Bill is approved, most likely over summer.

If this happens, the UK will be able to capitalise on MiCA, by going beyond that and making the most of its ability to craft a future ecosystem where alignment with relevant jurisdictions (and not just simply the EU), can coexist with some regulatory arbitrage.

Christine Lagarde said a few months ago that MiCA will need a MiCA 2 quite soon; but MiCA will only come into force next year, and it took three years to be approved. The hope is that the UK could have its own rules in place, combining MiCA 1 and 2 much sooner.