At the height of summer, when most policymaking grinds to a halt, the U.K. took a major step forward in its goal of becoming a crypto hub when King Charles III granted the Financial Services and Markets Bill (FSMB) the Royal Assent, formally making the bill an act of law.
Tucked within this comprehensive act — which gives regulators more powers over the financial services industry — are provisions for digital assets. The act enables the country’s treasury, the Financial Conduct Authority (FCA) and its central bank to treat crypto as a regulated activity, meaning secondary legislation can now be introduced to regulate the sector.
This comes as the U.K. tries to establish itself as a crypto hub after facing various stops and starts. In recent years, digital asset firms have struggled to register with the FCA, while the U.K. government halted its Royal Mint non-fungible token (NFT) plans in March. Some of the country’s biggest digital asset conferences have also now dropped capital city London as a location for their events.
Now with crypto’s inclusion within FSMB, the U.K. is seen as taking a measured approach to the industry. Venture capital firm Andreessen Horowitz (a16z) commended the government on seeing “the promise of Web3” as it set up its first international outpost in the country. U.K. Prime Minister Rishi Sunak said he’s determined to turn “the U.K. into the world’s Web3 center.”
The positive momentum has helped revitalize a deflated crypto industry, which has been grappling with the after effects of the collapse of crypto exchange FTX and its impact on regulatory uncertainty, particularly in the U.S. But while the U.K. is making all the right noises, policymakers, lobby firms and industry figures are quick to note that the country is only at the start of its regulatory journey with its biggest challenges yet to come.
“There’s still a lot of work that needs to be done,” said Ijeoma Okoli, co-founder of crypto assets think tank Digital Economy Initiative. “This is just essentially the base on which to build but the details are still in the future.”
Building the UK’s crypto foundations
The U.K. isn’t alone in its regulatory journey. Many countries are racing to implement clear guidance for the industry. Some are also vying to become crypto hubs, including Hong Kong, Singapore and Dubai.
The European Union leads the pack with the passage of Markets in Cryptoassets Regulation (MiCA) into law. It’s a comprehensive framework for regulating the crypto sector that aims to replace the divergent approaches of member states. While the legislation was published in the Official Journal of the European Union this summer, many of its provisions won’t take effect until late next year.
“The U.K. acknowledges that there’s an opportunity now to be a considered second mover and learn from some of the early first movers,” said Teana Baker-Taylor, head of regulatory strategy for EMEA at stablecoin provider Circle and non-executive director at lobby firm Crypto U.K.
The U.K. was once in a first mover position when Sunak served as chief finance minister to the former U.K. Prime Minister Boris Johnson. In April 2022, Sunak set out proposals to make the U.K. a crypto-friendly tech hub including plans to launch an NFT collection with the Royal Mint.
Those plans were disrupted when Johnson stepped down as prime minister following a wave of government resignations including from Sunak. Liz Truss was appointed as the new prime minister, but was replaced by Sunak 49 days later.
Sunak’s appointment as prime minister meant a crypto hub was back on the agenda with Andrew Griffith, the economic secretary to the treasury and a known advocate for blockchain technology, steering much of the conversation.
The delay might have worked in the U.K.’s favor, allowing the country to create a competitive framework that’s also in harmony with other jurisdictions, Baker-Taylor said.
The U.K. and the EU have taken divergent approaches, with the U.K. integrating crypto into existing frameworks and the EU designing a standalone piece of regulation. However, both frameworks align, with similar timings helping to close any arbitrage gaps between the regimes, Baker-Taylor added.
Top of the UK’s crypto agenda
Top of the agenda for secondary regulation is private stablecoins. With consultations on systemic stablecoins coming out over the summer, Baker-Taylor expects a push toward rulemaking following the government’s recess.
“The government has indicated that they would like to see stablecoins regulation enacted within the next 12 months,” Baker-Taylor said.
Meanwhile, the Bank of England continues its preparatory work on the digital pound, the country’s central bank digital currency (CBDC). It’s in the design phase, which looks at the technology and policy requirements over the next few years.
“We are going to see a lot of work done there and a certain amount of tussling between the pros and cons of each of those types of stablecoins,” said Claire Cummings, founder of Cummings Pepperdine, a solicitor specializing in digital assets. “We might see more of a political divide on that. We haven’t seen so much in the U.K. but it’s playing out in the U.S.”
As the U.K.’s financial regulator, the FCA focuses on the mandate of consumer protection, but it also has increasing oversight over crypto. From October this year, crypto firms will need to comply with the financial promotion regime, which is overseen by the FCA. The regulator is also in the process of designing prudential requirements for firms carrying out crypto activities and putting in place new rules for crypto promotions.
While policies around the underlying tech remain uncertain, passage of FSMB has given hope to industry advocates that the U.K.’s aim of becoming a global hub for the digital asset industry is now back on track — particularly as the ongoing regulatory wrangling in the U.S. opens up a spot at the top of the crypto pile.
“It’s a huge opportunity for the U.K.,” said the Digital Economy Initiative’s Okoli. “But the details matter.”