UK Crypto Rules Set a Modest Post-Brexit Divergence From the European Union
The industry is keenly watching divergences from Brussels in areas like stablecoins, lending and bitcoin disclosures.
The U.K.’s new crypto rules are part of a program of regulatory divergence from the European Union, the supranational bloc of which it was until recently a member – but some crypto advocates are underwhelmed by the extent to which the country is really using post-Brexit freedoms to carve out a unique niche for itself.
A policy paper published Wednesday lays out how the Treasury wants to use powers set out in the Financial Services and Markets Bill – a law which, from the start, the government billed as a chance to finally set independent financial rules.
“The Government will move at pace to implement a more agile and more internationally competitive set of rules that will harness the potential of U.K. financial services to stimulate growth,” the government’s then-Economic Secretary Richard Fuller said in his opening speech on the bill in September, referring to other provisions of the law that “roll back or reform all European Union legislation for financial services that remains on our statute book.”
With the EU set to vote imminently to formally pass its Markets in Crypto Assets regulations (MiCA) into law, U.K. politicians are keenly aware they must move fast amid global competition.
“The EU has just agreed to a comprehensive regime for regulating crypto exchanges and crypto assets more broadly, and [U.S. President] Joe Biden has said that he is looking to do something similar,” said opposition party Treasury spokesperson Tulip Siddiq at an October bill committee meeting. Siddiq said slow rulemaking “risks leaving our country behind in the fintech and blockchain race.”
Now, the broad thrust of the U.K.’s approach – influenced by then-Finance Minister and now Prime Minister Rishi Sunak’s 2022 vow to make the U.K. a crypto hub – has been made clear, but experts point out how similar the proposals are to the EU’s framework.
“This looks like it will mostly follow, at least in terms of scope and approach, what the MiCA regulation is doing,” Diego Ballon Ossio, senior associate at U.K.-based law firm Clifford Chance, told CoinDesk. “The U.K. is positioning itself with a regime that is as comprehensive as a European regime.”
Whatever discrepancies emerge between the two jurisdictions will be keenly watched by crypto companies looking for the easiest and safest place to do business – and some have noted London has a different legal strategy.
“These proposals do not constitute an entirely new regime in the same way that the European Commission has approached MiCA, rather [the U.K. Treasury] plans to work with what we already have and extend our existing framework to this asset class,” Albert Weatherill, financial services partner at Norton Rose Fulbright, said in an emailed statement.
For Mark Aruliah, senior policy adviser at Elliptic, the U.K. may be a step ahead of the EU – in particular because the bloc chose to ban interest payments on stablecoins, which are crypto pegged to the value of other assets like fiat currencies. He thinks that by setting strict standards for stablecoin issuers, the EU could discourage decentralized finance, which uses these assets for payments.
“The U.K. legislation – and we obviously haven't seen the detail – may not address that. It might just be silent on it,” he said, in which case U.K. players will get better liquidity spreads and lower cost. “That’s better in the U.K., I think there's more flexibility.”
Historically, lending rates on U.S. dollar-pegged stablecoins were 9% to 13% – and even if those have calmed during the crypto winter, central banks across the world have been raising the interest rates for cash, making zero-reward stablecoins relatively less attractive.
The U.K. plans to have multiple regimes for the crypto sector including one for stablecoins. In its January 2021 consultation on stablecoins, it said the crypto should be subject to existing payments legislation, with the Bank of England regulating major stablecoins that could have an impact on the whole financial sector.
Unlike the EU, the U.K.’s crypto proposals leave out areas like settlement and financial advice, but include crypto lending, Dea Markova, managing director of Forefront Advisers told CoinDesk. That’s perhaps because some high-profile lenders such as Celsius Network and Voyager Digital failed in the period since MiCA was first proposed.
The U.K. also ventures into areas the EU left ambiguous – such as the knotty question of whether exchanges have to publish a white paper of investor disclosures for widely-traded assets like bitcoin (BTC), Markova said.
“The U.K. approach does not leave bitcoin, [ether] or other tokens generated via mining or validating out of scope,” she said. “They will be subject to admission and disclosure requirements.”
In other areas such as the treatment of non-fungible tokens, there could also be more divergence, she said – though it’s unclear how because in both cases the detail has been left to rule-making by regulators at the Financial Conduct Authority and European Securities and Markets Authority.
A key strand of the U.K.’s Brexit debate has been whether the country will be able to forge its own path or, in effect, continue to take dictation from its close neighbor. For Ballon Ossio, the jury is still out.
“Whether we are taking rules or setting rules, I don't know,” he said. “So much for Brexit freedoms.”
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