Is the UK the next crypto haven?

The UK is regulating crypto assets.

That means bringing the rules governing the issuance, trading and lending of crypto tokens closely into line with those for traditional financial assets such as stocks and bonds.

Playing catch up

The FCA has supervised crypto asset businesses from an anti-money laundering perspective since January 2020, although more than four in every five applicants have been unable to meet the regulator’s minimum standards for registration.

The FCA’s aggressive stance on crypto has led to a perception that London is falling behind other financial centres when it comes to digital assets, and that the EU’s upcoming Markets in Crypto Assets (MiCA) regulation positions it to benefit from the UK’s risk aversion.

A money spinner

Now that’s changing. The government is seeking to position the UK as a “hub” for the crypto business, presumably in the hope that it turns into a lucrative money spinner (and contributor to tax revenues). 

This is a turn up for the books, to say the least. But given the spectacular implosion of the industry last year (FTX, Three Arrows, Celsius, Terra-Luna, to name a few), pitching the UK as a “safe” place to dabble in crypto is savvy.  

Hurry up and wait

The EU has already published its own regulatory framework so the UK, by being slower to move, has the opportunity to “compete” by trying to establish a regime that is “less bureaucratic but just as safe” (if that’s even possible). Call it second-mover advantage.

So there is a focus on addressing areas of MiCA which are perceived as less robust – such custody requirements for crypto assets (including restrictions on co-mingling), or the possibility of capital and liquidity requirements for crypto lenders, amongst other things.

The key however, as Helen Thomas of the FT points out, is that even if crypto firms can adhere to the requirements around segregating client funds or publishing accurate risks and disclaimers, one of the toughest areas for crypto compliance is in the realm of money laundering.

More than a name

For some in finance, “AML” (especially when presented in the acronym form) is just another annoying regulatory box that needs to be ticked. 

But money laundering has been shown to be the perfect use case for crypto, with high profile examples including Mexican drug cartels, Chinese gangs, North Korean hackers, and more. 

Whatever your views on the virtues of new digital money, I think we can all agree that money laundering safeguards are of paramount importance. We’re not just talking about people’s savings, but people’s lives. Up to a tenth of UK adults are estimated to own crypto assets, according to the government and that number has doubled over the past couple of years.

A high bar

The FCA recently reported that 86% of UK crypto firms already fall short of anti-money laundering standards. 

Whilst firms such as Revolut, eToro, GlobalBlock, Wintermute, and CEX.io have been approved in the UK, Director of Markets for the FCA, Sarah Pritchard, has said that a significant number lack “appropriate knowledge, skills and experience to carry out allocated roles and control risks effectively. And MPs have described UK crypto as akin to “the wild west.”

So, even if the UK sets up a broader crypto regulation regime that is “industry friendly,” expect it to still be tighter than the status quo – with most existing providers failing to make the cut.