The competition between the UK and EU to lure crypto business has stepped up a notch after Britain unveiled a slate of new rules for regulating the industry months after Brussels finalised sweeping rules to regulate digital assets.
The UK on Wednesday unveiled sweeping proposals that would pull large swaths of the crypto industry into the type of regulatory regime that applies to traditional financial institutions and assets.
The slate of new rules are one of the clearest signs yet of how the government is keen to bring digital assets business to the City of London, but industry participants and analysts say the ambitions face steep competition from the EU-wide Markets in Crypto-assets (Mica) regulation that was finalised last summer.
“We fear that the UK’s desire to be a global crypto hub will be usurped by another faster acting jurisdiction. The UK is taking baby steps whilst the EU [and US] surge ahead,” said Zoe Wyatt, partner and head of crypto at specialist tax advisory firm Andersen LLP.
A consultation process for the UK government’s proposed rules closes in April and key stages in the implementation process — including the creation of secondary legislation necessary to bring many elements into effect — are subject to change. In contrast Europe’s Mica legislation is expected to make landfall next year.
The UK Treasury told the Financial Times it believes the UK’s approach “is more nimble and proportionate” than the bloc’s Mica regulation because the government is seeking to bring crypto into an established regulatory sphere rather than erect an entirely new approach.
“We are bringing stablecoin and crypto asset activities into the existing financial services framework via secondary legislation. This means that the UK will be able to update regulation as the sector evolves, rather than hard-coding detailed rules in legislation like Mica.”
Although in the eyes of some industry watchers the UK’s proposals have not come early enough to grant London a moniker of Europe’s future hub for digital assets.
“This is typical retro-regulation. Consumer protection rules for crypto are only being introduced after FTX,” said Carol Alexander, professor of finance at Sussex University, referring to last year’s collapse of Sam Bankman-Fried’s digital trading empire.
The UK’s proposals also face a series of political and practical challenges which risk blunting the government’s ambitions.
“The fear that innovation might be stifled, I think that is the fear that becomes more acute without a government that is keen to have the UK as a crypto business sector,” said James Tyler, senior associate at law firm Peters and Peters, adding the proposals are “riding on quite a lot of political effort from the current government.”
The Financial Conduct Authority — which was hit by rising vacancies and falling morale last summer — will also inherit greater oversight of crypto activity under the government’s proposals, placing pressure on the regulator’s resources.
The FCA began forming crypto teams before the summer in preparation for its potential role in regulating the sector, adding that they felt it was well prepared, according to a person familiar with the agency.
Despite coming several month’s after the EU’s Mica plans were finalised, the UK proposals have garnered praise from some in industry for giving Britain a chance to catch up with the bloc’s crypto momentum.
Several major crypto groups including industry heavyweight Binance and US-listed exchange Coinbase have already set up within the EU, planting flags before Mica comes into effect. In contrast, many crypto groups have struggled to meet the FCA’s high standards to registration on the current regime, which examines anti-money laundering measures. More than eight in 10 companies that have applied for the FCA registration have failed.
“We set high standards of anti-money laundering controls for all the financial firms we supervise. Those same standards apply to crypto firms, and are vital in ensuring they are not left open to abuse by criminals,” the FCA said.
The government’s proposals seek to bring crypto lending into the regulatory perimeter, a sector which lay at the heart of last summer’s crisis of confidence, and which has yet to come under an established regulatory framework across the English Channel.
“The UK’s proposals seem to go even further by, for example, also establishing a regime for crypto lending,” said German MEP Markus Ferber, adding the need for caution when it comes to “intermingling the crypto space and the regular financial system too much.”
European lawmakers have previously raised concerns that Mica would not have successfully prevented an FTX-style collapse on the bloc’s shores.
“The UK has a good crypto and blockchain ecosystem, but Europe’s Mica regime presented an existential threat to the UK’s crypto hub ambitions. This now brings us back to a level playing field,” said Ian Taylor, board adviser for CryptoUK, a British crypto lobbying group.
“Greater regulatory clarity for consumers and businesses will in turn be key to making the government’s vision for crypto a reality,” added Lisa Cameron, Scottish National Party MP who serves as Chair of the Crypto and Digital Assets All Party Parliamentary Group in Westminster.
Additional reporting by Siddharth Venkataramakrishnan
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