The UK government is following up on prime minister Rishi Sunak’s stated ambition of turning the country into “a global cryptoasset technology hub”. The right regulatory environment is seen as key to turning that goal into reality and work is ongoing on that front.
The aim is a “Goldilocks” regulatory structure for cryptocurrencies and other digital asset classes and infrastructure that protects users and the financial system from the risks inherent in the volatile sector. While simultaneously offer market participants the freedom to take a level of risk on, establishing London and the UK as a global centre of crypto activity.
It’s been a turbulent couple of years for the UK economy and government and the crypto sector
A lot has happened in both the UK, global economy and crypto sector since Sunak stated his ambitions for the UK as a global leader in “the business of tomorrow”, in April 2022.
By summer of 2022, Sunak had resigned from Johnson’s government – a significant catalyst in his eventual fall from power after riding out a strong of controversies that would have been expected to bring down other leaders. Under Johnson’s short-lived successor Liz Trust, who defeated Sunak in a leadership contest, a misjudged autumn budget announcement led to a leap in the UK’s cost of borrowing that cost the national budget £65 billion.
The UK’s economic growth has also stalled amidst a global struggle with inflation and rising interest rates that have caused a cost of living crisis.
The crypto sector has also had a tumultuous time of it, even by its own volatile standards. After reaching an all time high of over $64,000 in November 2021, bitcoin was trading at just over $16,352 a year later. The rest of the market similarly plunged in value as a pricing bubble that had also blown up around growth stocks burst.
Plunging crypto valuations dragged down a number of major companies in the sector including the crypto lender Celsius, hedge fun Three Arrows Capital and, amid a fraud scandal, the crypto exchange FTX and its sister company and trading arm Alameda Research. Silicon Valley Bank’s mismanagement and over-exposure to the sector saw it collapse as well, with another 3 mid-sized U.S. banks, First Republic, Signature Bank and Silvergate Bank going the same way.
Credit Suisse was forced into a hurried sale to Swiss peer UBS by the country’s government, saving it from a similar fate.
A lot has changed for Sunak himself too.
At the time he stated his ambition for the UK to become a global cryptoasset technology crypto hub, he was Chancellor of the Exchequer in Boris Johnson’s Conservative government. Now he’s the main man, having stepped into the breach left by Truss blowing up international confidence in the UK’s finances.
2023 has been a positive year for cryptoassets despite a regulatory crackdown in the USA
Confidence inflation levels and interest rate hikes may have already peaked, or be close to doing so, has resulted in a return to form for major cryptocurrencies too. The decks have been cleared of multiple minor ‘alt coins’ that offered no clear value or competitive advantage but cryptocurrencies have far from disappeared, as many sceptics predicted.
Bitcoin price chart – 12 months
Bitcoin is again trading at over $30,000 and is up over 80% for 2023 so far. The other major cryptocurrencies including ether, the Binance exchange’s BNB and Ripple’s XRP have enjoyed comparable gains.
Many of the giants among the mainstream financial institutions are investing in cryptoasset infrastructure and services, such as holding facilities and several bitcoin ETF proposals have been lodged with the SEC, including from Blackrock and Fidelity.
However, at the same time, U.S. regulators have been making life extremely difficult for crypto-sector companies operating in the world’s biggest economy, or providing services to U.S. citizens. Many believe the SEC and other regulators including the CFTC (for commodities) are intent on driving the sector out of the country entirely. At least as an unregulated financial market.
U.S. crackdown on crypto sector seen as an opportunity for the UK
U.S. regulators are less focused on cryptocurrencies like bitcoin themselves, which are reportedly viewed as in a similar category to commodities like gold. Their primary target is crypto firms that have or plan to issue cryptocurrencies as a means of raising capital.
These cryptoassets are seen as securities, which fall under the oversight of the SEC, which is also targeting exchanges that facilitate their trade. The main criticism of exchanges like Binance and Coinbase is, like the collapsed FTX, they do not separate operations like holding customer funds, executing trades and their own trading activity cleanly enough.
That resulted in recent legal action by the SEC against both Binance and Coinbase, the two largest cryptoexchanges left after the demise of FTX.
In June, the SEC chairman Gary Gensler damned the crypto industry with:
“Hucksters. Fraudsters. Scam artists. Ponzi schemes. The public left in line at the bankruptcy court.”
Since the legal action started, Binance has been forced to stop accepting U.S. dollars after U.S. banks refused to work with it. U.S. citizens have also pulled billions in funds from the two exchanges.
The sector accuses the SEC of an overly-aggressive position that is ignoring efforts from the crypto sector to reform and offer assurances. Quoted by the BBC, Bill Hughes, senior counsel of Consensys, a Texas-based software company that uses crypto’s blockchain technology, puts it even more bluntly:
“The SEC has essentially determined that on its watch crypto shouldn’t exist in the United States anymore.”
The same BBC article goes on to conclude that while many in the U.S. crypto sector are still hoping the country’s courts will judge the SEC has overstepped, others are preparing for a future abroad.
Andrew Durgee, managing director of the tech investment vehicle Republic, says that only one in ten of its new investments in the crypto sector are now companies based in the USA. Three years ago the majority were.
The UK under Rishi Sunak plans to fill the vacuum left by the USA’s apparent decision to boycott the cryptoassets sector and stifle it at home, keeping it at the edges of mainstream finance.
In early June, the Silicon Valley VC giant Andreesen Horowitz announced the opening of a London office for its crypto and blockchain investment unit, the company’s first international expansion. The announcement was greeted by Sunak reiterating his ambition to “turn the UK into the world’s Web3 center.”
So how big is the crypto opportunity for the City of London? There are still scant details on the “Goldilocks” regulatory framework the UK has promised the sector. That’s potentially worrying, especially considering the April publication of the EU’s Market in Crypto Assets (MiCA) regime.
While it is the first to cover almost all crypto-related activity, the sector sees one requirement as problematic. MiCA requires companies in the crypto space to establish legal entities with registered HQs and a clear leadership structure.
The EU’s position is that is required for accountability in the event of rules breaches. The crypto sector argues it limits a model inherent to blockchain technology – decentralisation.
The UK is so far taking a piecemeal approach to the proposed regulatory framework. The Financial Conduct Authority (FCA), the main financial services industry regulator, has gradually seen its authority over the crypto sector extended.
In 2020 it was given responsibility for overseeing crypto companies stick to rules designed to prevent money laundering. Last year regulating the marketing of cryptocurrencies was added to the FCA’s list. As of late June, the FCA is also responsible for stablecoins – cryptocurrencies whose values are designed to mirror an underlying fiscal currency. These digital currencies are also supposed to be backed up by reserves of the traditional currencies they are pegged to.
However, there is a long way to go before the UK can claim to have a full regulatory policy on the same level of detail as the EU’s.
That could be an advantage with the second mover position, allowing the eventual regulatory regime to represent solutions to problems the sector raises with the EU’s system.
Critics are worried that political ambition to encourage a high “growth sector” to the UK’s economy and financial markets could lead to a loose regulatory environment that exposes consumers, and the wider financial system. The USA is not known for shying away from either technological innovation or risk but currently sees the crypto sector as too risky to allow to flourish.
Should that be a warning for the UK?
If Sunak gets his wish, and efforts are being made to ensure more companies and capital seeking exposure to the crypto sector follow Andreesen Horowitz to London, we may well find out.