Consultation on future UK regulatory regime proves promise to make good on UK crypto hub ambitions, writes Zumo CEO Nick Jones
Sometimes things happen slowly, then all of a sudden. So seems the case of ‘crypto hub UK’: first unveiled in April 2022; delayed through successive parliamentary reshuffles; and now reaching active consultation and engagement on an umbrella of overlapping initiatives ranging from financial promotions to digital settlement assets, distributed ledger technology in financial markets infrastructure, and a renewed attention around the digital pound.
Enter the future financial services regulatory regime for cryptoassets, announced by HM Treasury in early February and designed to bring many of the strands together in the form of a clear and proportionate framework to govern the activities of cryptoasset businesses operating in the UK market.
Amidst the host of proposed rules – which include bugbears of 2022 such as crypto borrowing and lending, and form part of a larger phased approach that will dictate direction of travel in the industry for many years to come – one thing stands out above all: the first broad strokes of a comprehensive cryptoasset regulatory regime to include cryptoassets within the existing financial services regulatory framework established by the UK’s Financial Services and Markets Act (FSMA), to be updated by the Financial Services and Markets Bill.
For those who have followed the evolution of cryptoassets in recent years, it is a watershed moment towards a future in which digital assets are an integrated part of the financial services landscape. And perhaps the biggest signal we’ve had yet of cryptoassets being brought into the regulatory fold, and an A to B path towards regulatory integration and future adoption at scale.
It is, I believe, also reflective of the evolving nature of the industry in which we operate. Institutional adoption of digital assets continues to grow rapidly, with recent gauges of professional investor sentiment suggesting the greater part expects institutional investors to quickly outpace retail investors as majority holders of digital assets over the coming years. And after a punishing year in 2022, there are signs that retail customer bases may embrace solutions from financial services providers with existing brand reputations and a footprint in the country of their customer base over crypto-first centralised (and often offshore) equivalents.
Having a cryptoasset regulatory regime that draws on and interfaces with existing financial services supervision in the form of new FSMA authorisations for designated cryptoasset activities isn’t just a way to ensure more protection and stability for all market participants; this incremental ‘financial-services-isation’ of digital assets also provides new clarity on the regulatory pathways required for participation – and especially for regulated financial players already familiar with and undertaking other regulated financial activities under the FSMA framework.
The resulting opportunity for digital assets in UK financial services is on an incredibly wide scale, and is clearly being thought about as such in UK regulatory planning, which encompasses not only provision of digital asset services, but also other strands of related activity including the use of distributed ledger technology in financial market infrastructure, (sovereign) debt issuance, and international trade.
As an enterprise-focused digital asset infrastructure provider, we therefore see a huge amount of opportunity at present, in the UK specifically, for financial institutions that wish to start exploring their options and potential use of digital asset technology, be that internally with regard to their own operations, or externally with regard to solutions for retail, institutional or brand/merchant customer bases. This is particularly so given the contrast with ‘enforcement-based’ approaches being taken elsewhere, notably in the U.S.
For this to realise its full potential, however, we see three guiding principles that should be kept in mind as the (still far off) proposed regulatory framework makes its way through industry consultation:
For all the benefits of a clear and comprehensive regulatory framework, the path to offering innovative digital assets products should remain as smooth and unencumbered as possible. This applies in a logistical sense (for those who remember the delays and backlogs of the rollout of the current MLR-based registration regime for cryptoasset businesses) and also, critically, in the agility of business models. In the same way that banks don’t run, say, their own credit card payment networks, but draw on wider infrastructure offerings from specialised partners, it seems likely that the hybrid blend of the digital asset future will also involve existing institutions, with established brands and customer bases, drawing on expert infrastructure providers to provide different elements of their value-add proposition. We must be careful that rules we make clearly identify where compliance burdens lie, and encourage integrated solutions and commercial value in the widest possible format.
Given failings of intermediated crypto businesses in 2022, customer financial protection and the quality of the overall customer experience takes on a primary importance. It is therefore encouraging to see future regulatory regime proposals encompassing considerations such as required information disclosures, market abuse monitoring and a consideration of the extension of the Financial Services Compensation Scheme for claims against failed authorised cryptoasset custodians. Echoing the spirit of ‘same risk, same regulatory outcome’, we should aim to guarantee a further claim: ‘same regulatory outcome, same investor protection’. When a customer feels the same confidence – and enjoys the same protections – using an intermediated crypto service as they would using any other financial product is when we unlock adoption at scale.
Of course, the ideas behind – and many of the players currently involved in – digital assets are much bigger than any one geography or jurisdiction. UK developments are unfolding against the backdrop of evolving international regulatory harmonisation, with similar avenues already, or continuing, to be pursued by the UK’s closest neighbours. Positively, current UK proposals have been set up to allow for equivalence arrangements with third party countries where similar standards can be shown to be applied: as ideas are pursued, it is important that this equivalence extends both ways, and that UK businesses can equally use a UK platform to serve the world without suffering any competitive disadvantage. In this regard, international cooperation and harmonisation of standards will be key, even as new UK proposals attempt to protect against the provision of (often laxer) services into the UK from offshore.
At its best, the future UK regulatory regime puts cryptoasset services on an equal footing with any other financial service: providing confidence, credibility and regulatory clarity to intermediated cryptoasset activities; boosting innovation and commerce in the era of enterprise adoption; and building on a thought out, proportionate framework and long-term plan to provide stability and protection. One thing is for sure: digital assets are here to stay, and the time to have your say is now.