Why the UK must embrace the ‘crypto revolution’
by Adam Afriyie MP
The left would have us believe that opportunism is a dirty word. Yet, opportunism underpins innovation. It generates jobs and prosperity, and the economic growth that improves our lives. Opportunism is a force for good when it means embracing the opportunities and reaping rewards that modern technologies can deliver to consumers.
Historically, the financial services sector in the UK has embodied this philosophy. It has evolved faster than its competitors around the world and is firmly in the number one slot as a global financial centre and FinTech hub.
The roots of our rich history in financial markets reach back hundreds of years. We have a legal framework venerated and replicated around the world. Our Financial Conduct Authority has boosted safer innovation with its regulatory sandbox which allows new services to reach customers in a controlled fashion. This all means that we have a strong foundation on which to seize the regulatory and legislative freedoms that Brexit has opened up for us.
Continue to adapt
Yet, for the UK to remain ahead of the curve, it must continue to adapt. As Chair of the All-Party Parliamentary Group on FinTech, I have been encouraged by the attitude of the Chancellor and our Government. It is right that we are instilling a technology and ‘digital-first’ approach to policymaking as we look to grow the UK’s financial services sector. Everything from the UK Listing Review to the Chancellor’s Financial Services roadmap: ‘A new chapter for financial services’ demonstrate this Government’s determination to prioritise for a strategic ‘digital advantage’.
Over the last decade, we have seen remarkable growth in blockchain and distributed ledger technologies. These technologies will disrupt and redefine financial services as we know them – driving down costs for consumers and driving up security and transparency for all, everything will change: our currencies, mortgages, pensions, insurance policies and bank accounts. The choice of services, cost reductions, speed and ease of use for consumers and benefits to the wider economy will be striking.
The world’s largest financial institutions are pouring resources and brainpower into newly-founded innovation and blockchain teams focused on these new technologies. They are aware of the paradigm shift underway and the public sector should be too.
A few years ago, these digital innovations we the stuff of science fiction, but in recent years we have seen central bank digital currencies (CBDCs) discussed by the world’s largest governments, including our own, alongside a vast increase of consumer interest in all things digital.
It is a question of when, not if, the widespread adoption of blockchain, cryptocurrencies and other digital assets will take place.
Some industry insiders suggest that these changes are a threat to the UK financial services industry. Whilst countries such as Singapore, France, and Switzerland have embraced digital assets – the UK appears to be dragging its feet.
Time to decide
In the UK we have a choice to make. We can either remain sceptical and be the laggards in financial services for the first time in our history, or we can embrace digital assets, be the world leader in setting the standards and continue to be the birthplace of financial innovation.
So where are we today? The FCA has released its cryptoasset guidance and several firms have registered. A handful of those firms are already fully regulated and seeking to build financial market infrastructure using this technology. This seems in line with this Government’s ambition to foster digital innovation.
Regulatory barriers pushing jobs overseas
Yet there is a disconnect between the discourse and the operational reality. I have spoken to several digital firms in the space, and they describe some alarming and unnecessary elements of the regulatory framework which make it more difficult to operate in the UK than elsewhere.
I also have received reports that the FCA is ‘advising’ digital assets firms to withdraw applications from the temporary cryptoasset register and reapply outside the UK. These companies have been forced to set up in competitor jurisdictions overseas. They have no barriers to serving UK customers but the UK is losing the innovation, jobs, tax revenue and consumer protection – and enjoys regulatory deniability.
While it’s impossible to quantify precisely the opportunity cost to the Exchequer, it is likely to be in the region of £50m in lost tax revenue, if the UK were to capture only its global share of spot and derivatives trading volume.
Banks are still refusing accounts to the most credible of cryptoasset firms without reason, despite the rhetoric from Whitehall and the FCA guidance. UK companies are forced to use smaller offshore firms and sources of finance increasing the risks to the consumer that we are trying to avoid by stymying the chance for a transparent UK-based operation.
These regulatory barriers reveal some deep-rooted prejudices against the underlying technology, which have led to the FCA’s Money Laundering Directives inhibiting progress and innovation in this field thereby risking our number one slot in FinTech.
In July of last year, the FCA announced an £11m budget to warn people about investing in crypto. Whilst there is no doubt that we need effective controls in place, and of course, consumers should be protected from rogue firms operating outside the regulatory framework, we must not send the message that the UK is an unsafe place for digital business.
For the UK to remain a FinTech hub in the future it needs to embrace innovation and place reasonable controls around it. Digital assets are key to our prosperity as we look to recover from the pandemic and secure post-Brexit opportunities.
Consumers, investors and businesses must see the UK as a beacon for digital innovation and consumer protection. In this way, we will boost prosperity and safeguard the future of our financial services sector.