In April 2022, the government announced that the UK planned to be a global hub for cryptocurrencies and digital assets. An ambitious plan, but sadly mistimed.
Barely a month later, a precipitous decline in the values of many digital tokens had begun to shake investor confidence. The terraUSD stablecoin toppled from its dollar peg to just 35 cents, while its companion token LUNA collapsed.
By December, Bitcoin’s price had fallen to under $17,000 – roughly a quarter of its record high of $64,000 in November 2021. Meanwhile, failures of management and financial probity at crypto exchange FTX deepened the crypto winter, with scandals at other companies following in the cold wind of its bankruptcy.
While none of these problems were the fault of the British government, the then Chancellor, Rishi Sunak – now Prime Minister – seemed to have a reverse Midas Touch when he made his April proclamation.
A year on from the blizzard of bad news that followed, Bitcoin is still worth less than half of its record high. But measured over five years, its value has increased by nearly 321%, even at today’s price ($25,650 at the time of writing).
It is precisely such rollercoaster changes in value, plus a preponderance of fraud, financial crime, and high-risk speculation, that have persuaded many of the need to regulate this market to protect consumers, perhaps bringing in similar controls to those in traditional finance. The very things that many crypto advocates and speculators resist, of course.
Accordingly, the UK’s Crypto and Digital Assets All Party Parliamentary Group (APPG) launched an inquiry in August 2022.
This was partly designed to explore why the new financial system seemed to have replicated the problems of the old, and at internet speed. But it was also to learn more about the opportunities for growth that digital assets and supporting technologies still presented. At that time, the UK economy was only growing at 0.1% (and still is, according to Q1 2023 figures).
Fast forward to this week, and the APPG – which has not only focused on crypto regulation, but also on the digital pound and tackling financial crime – has just issued its first report, after a nine-month consultation.
That’s good news. But the recommendations contained in the document, entitled (deep breath) ‘Realizing Government’s Vision for the UK to Become a Global Hub for Cryptocurrency and Fintech Innovation’, are hardly a revelation.
Indeed, they largely state the obvious. But at least this suggests that an all-party group of MPs has engaged with and understood the issues, which is something in this day and age.
The report says:
The rapid growth of cryptocurrency and digital assets in recent years and the increased interest and adoption amongst consumers and investors, suggests that the sector is here to stay and that it therefore needs to be regulated to protect consumers and to ensure guardrails for investment and economic growth.
Uh huh. Then it adds:
Regulation of cryptocurrency and digital assets within financial services is vital to addressing consumer risks whilst harnessing the sector’s potential and contribution towards economic growth.
Again, it’s hard to argue with that – unless you’re a crypto fundamentalist. Then it says:
The cryptocurrency and digital assets industry presents a number of potential opportunities in the UK, including efficiencies and innovation in financial services and payments, economic growth, contribution to careers of the future, research and collaboration opportunities and greater financial inclusion for those who are currently marginalized.
The UK is well placed to harness these opportunities, but it will require cross-governmental strategic planning to realize them. […] The UK must move within a finite window of opportunity within the next 12-18 months to ensure early leadership within this sector.
In short: the UK really ought to do something, and fast! But what, exactly? Frustratingly, the report is full of astute observations and even-handed commentary, but almost entirely devoid of new ideas.
For example, in the chapter headed, ‘The UK as a global hub of cryptocurrency and digital asset investment’, the APPG makes 11 recommendations. But these find 11 different ways of saying the same thing: the UK has an opportunity and should explore how to capitalize on it, or risk losing out. No, really?
In the chapter headed, ‘The UK’s current approach to the regulation of cryptocurrency and digital assets’, the report makes as many as 18 recommendations. But again, these mainly make a single, obvious point: the UK is falling behind, and regulation urgently needs to balance stability and security with innovation and access to financial markets. The government must therefore take the lead. Who could have guessed?
And so it goes on, through more chapters. On CBDCs, for example: apparently the government should consider the benefits of the digital pound, but also the potential risks. Who knew!
But the overall message from this timely, well-intentioned, yet largely pointless document is more troubling. Namely, that the situation urgently demands strong strategic leadership from Whitehall, understanding, management of detail, and a joined-up, coordinated, whole-government approach.
Tragically, these are not things that Britain has been famous for of late, with five different Prime Ministers from the same party since 2010, none of whom seem to agree about anything. (One lasted 49 days, 10 of which were national mourning.) The same administration, of course, that took Britain out of the EU without anything resembling a plan, or detailed action points.
So, perhaps someone should be put in charge of this vital project? The APPG seems to think so, and we agree with them. The report explains:
UK regulators will play a key role in delivering the government’s vision for cryptocurrency and digital assets. [But] significant concerns remain regarding whether regulators currently have the resources, capacity, and technical expertise required, and further support and monitoring must be provided to ensure progress is made.
Government should consider the appointment of a ‘Crypto Tsar’ who can help coordinate across departments to ensure a consistent approach.
Indeed. But remember: the UK has, in the APPG’s estimation, barely a year to 18 months to act decisively, before some unknown factor comes into play – presumably moves by the US and Europe, which are having similar, but more focused discussions.
For example, US House Republicans have introduced a bill to regulate crypto assets and exchanges, allow conventional platforms to trade in digital assets, and define regulators’ role in the sector more clearly.
For the US, the key question is whether a cryptocurrency or digital token can be regarded as a security – a fungible instrument that represents an agreed financial value. Under current rules, a company may not offer or sell securities unless the offering is registered with the SEC, or has been granted an exception.
Meanwhile, the EU is bringing crypto-assets, plus their issuers and service providers, under a new framework covering markets in crypto-assets (MiCA). An announcement from the European Council last month said the new regulations will:
Protect investors by increasing transparency and putting in place a comprehensive framework for issuers and service providers including compliance with the anti-money laundering rules.
The new rules cover issuers of utility tokens, asset referenced tokens, and so-called stablecoins. It [sic] also covers service providers such as trading venues and the wallets where crypto assets are held.
This regulatory framework aims to protect investors, preserve financial stability, while allowing innovation and fostering the attractiveness of the crypto-asset sector.
MiCA will introduce a harmonized regulatory framework for the 27 nations of the European Union, replacing the piecemeal approaches adopted by individual states.
In both cases, that all seems more active, focused, and coherent than the British approach.
But back in the UK, what does the crypto sector make of the APPG’s flimsy, aspirational, if well-observed report? Ian Taylor, Board Advisor at trade body CryptoUK, described it as “balanced, considered” and “a holistic view”. Perhaps because it states the obvious, while offering few solutions.
The report recognizes the significant growth of the sector in the UK and the tremendous opportunity it presents for the country’s economy and reputation as a leader in financial innovation. It also emphasises the need for the government and regulators to define a clear, proportionate and bespoke regulatory framework to enable blockchain businesses to operate effectively, foster innovation, and protect consumers.
We acknowledge the concerns about the readiness of the current regulatory governance regime, and fully support the work needed to ensure this is robust, fit-for-purpose and enables the industry to realize its full potential whilst operating effectively and safely.
As ever, the UK is adept at talking up its leadership of different markets, notably fintech, AI, space, and quantum computing.
Yet for the current administration, the order of the day seems to be “Hey, let’s talk about things, leave them as they are for now, and see what happens”. While promising to tear up hundreds of EU regulations in the meantime, and replace them with… what?
On crypto, a cynic might ask whether this government is sitting on its hands while it waits for the US to act. Europe has made its move. But for this government, of course, that can only be A Bad Thing.
In short, it’s lazy British exceptionalism and entitlement again. If only that exceptionalism came with a strategy, plan, and competent management thrown in. Alas, none of that has been in evidence for years.