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UK targets American crypto refugees

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The FCA was given the task of regulating crypto firms’ compliance with anti-money laundering and anti-terrorist financing regulations

When UK Prime Minister Rishi Sunak served as finance minister, the value of cryptocurrencies reached historic highs. The currency was on a hot streak back in 2021. Following the popularity, Sunak revealed a strategy for turning the nation into ‘a global crypto asset technology hub’ by formulating precise rules that ‘give crypto companies the confidence they need to think and invest long-term.’ In Sunak’s words, cryptocurrency is ‘the business of tomorrow.’

Since then, the UK economy and cryptocurrency have both fallen off their heights fairly substantially. Sunak’s departure as chancellor in July 2022 contributed to the downfall of the outgoing prime minister Boris Johnson. The UK has seen its third leader and fourth chancellor in less than a year, after a terrible ‘fiscal event’ that blasted a £60 billion ($76 billion) hole in the national budget in September 2022. Many people in the nation are fighting to stay afloat as costs rise and earnings remain stagnant while economic growth has peaked. Moreover, cryptocurrency has also seen a decline. The collapse of the Terra-Luna stablecoin in May 2022 drove the market into a tailspin and resulted in the downfall of cryptocurrency exchange FTX, hedge fund Three Arrows Capital, and cryptocurrency lender Celsius. Currently, bankruptcy cases involving billions of dollars are pending, and regulators in the US and other countries are closely monitoring the industry.

However, Sunak’s enthusiasm for cryptocurrency remains the same. On June 11, he celebrated the opening of a London office for venture capital firm Andreesen Horowitz (a16z), whose fund has invested $7.6 billion in crypto, by reiterating that he is determined to make the UK the world’s Web3 centre. For firms like a16z, the UK offers an alternative to the US, where regulators have been accused of being obstinate and failing to clarify the rules for the industry. But apart from vague promises of opening avenues for crypto businesses in the UK, there are few details as to what becoming a crypto hub could mean. Meanwhile, regulatory experts are warning that the UK government could put consumers at risk by tying future crypto regulation to a desire to boost economic growth and boost a financial sector that has been battered since Brexit.

“It is not hard to imagine politicians and the crypto industry putting pressure on the regulator to relax rules to encourage growth and competitiveness. It is a way for short-term political expediency to override long-term regulatory objectivity, which could lead to a regulatory race to the bottom in which ordinary people’s money is at stake,” Mick McAteer, a former board member at the Financial Conduct Authority (FCA), the UK’s top finance regulator said, the Wired reported.

Recently, the crypto industry has been asking regulators around the world to set clear rules for their regulation. Major firms including Coinbase, Binance and Ripple have said they are ready to comply once questions are clarified about how crypto assets should be classified (and therefore which authorities should regulate them) and clear rules are set for doing so provision of crypto-related services.

The US, one of the largest and most active markets for crypto, has been slow to decide who should oversee the industry and how. Several bills related to cryptocurrencies were introduced in the 177th Congress, but these were no longer passed by the end of the December 2022 session and therefore have to be formally reintroduced and debated again. Meanwhile, the Securities and Exchange Commission (SEC), the largest US financial regulator, has expressed the view that most cryptocurrencies fall under existing securities laws and has sued major crypto companies for alleged violations. Critics, including one of the SEC’s commissioners, have accused the agency of regulating through enforcement, leaving crypto companies in the dark about their obligations until a lawsuit lands in their inbox.

Brian Quintenz, head of policy at a16z, said, “There is an obvious lack of clarity in the US, which is not conducive to entrepreneurs building new things. Right now, the administration is taking a hostile approach to the technology, and through the actions of the SEC is looking to ban it.”

This has led crypto companies to look for places where they can find regulatory clarity but also the freedom to push the boundaries of the underlying technology to create new services and financial products. Some countries, including Japan and the United Arab Emirates, have adopted crypto, but the size of these markets is relatively small and the scope of the rules is limited. In April, the European Union finalized its Markets in Crypto Assets (MiCA) scheme, the world’s first scheme to bring almost all crypto-related activities under its scope, and seemed to deliver exactly what the industry was asking for.

Although MiCA was universally applauded, the regulations require crypto firms to establish themselves as legal entities with a clearly defined governance structure and business basis, making it clear who bears legal liability in the event of a breach of the rules. This, some in the industry say, limits the ability of crypto technologies to form the basis of models where no single person or organization is accountable. When you anchor centralization in a regulatory model, you eliminate decentralization — the core benefit of this technology, Quintenz stated.

“If the US approach isn’t prescriptive enough and the EUs are too prescriptive, the UK has a chance, says Mark Foster, head of EU policy at the Crypto Council for Innovation, a body that represents the interests of crypto firms, to use its ‘second-mover advantage’ to create a Goldilocks economy for crypto, which attracted a16z. This ecosystem needs a strong and clear regulatory framework that respects innovation but takes a strong stance on consumer protection. That is what we expect in the UK,” he added.

Currently, the FCA has limited jurisdiction over cryptocurrencies in the UK. In 2020, the agency was given the task of regulating crypto firms’ compliance with anti-money laundering and anti-terrorist financing regulations. In January 2022, it took charge of how crypto can be marketed, with new rules set to be implemented in October.

The passing of the Financial Services and Markets Act in the coming months will mean that stablecoin tokens that are tied to the value of a benchmark such as fiat currency or a commodity will also come under the FCA’s purview. The phased approach of adding accountability for crypto layer by layer means a full, detailed ruleset like MiCA in the UK is still a long way off.

The Sunak government’s desire to attract cryptocurrencies could spur attempts to build a more comprehensive system for the industry. But it could also create competing incentives. Critics of the government’s approach fear that speeding up regulation and giving the crypto industry too much room to manoeuvre could lead to decisions that put consumers at risk, or end up undermining long-standing attempts to prevent financial crimes such as money laundering and terrorism Funding.

Martin Walker, director for banking and finance at the Centre for Evidence Based Management, a nonprofit that counsels businesses on management strategy, claims that lobbyists are “pouring into the ears” of politicians the idea that bespoke regulations are necessary for cryptocurrency if the UK is to keep up with financial innovation.

According to Walker, who testified as part of a 2018 government crypto probe, an “anxiety-driven flexibility” towards crypto runs the danger of a recurrence of prior boom-and-bust cycles in finance.

It seems as though no one has remembered the lessons from the dotcom bubble, which contained significant fraud, and the 2007 financial catastrophe, which was brought on by subpar financial innovation, he claims.

According to Stephen Diehl, a crypto-sceptic analyst, the UK city already has an unsavoury reputation as a location for money laundering and other financial criminality. It is mockingly referred to as ‘Londongrad’ or ‘Moscow-on-Thames’ for its historical propensity to welcome money from Russia and other pariah governments.

The inclusion of cryptocurrency will further strengthen the arguments made against it.

“I don’t think the predominant view is that we want to become a dark money laundromat,” he asserts.

Some members of Sunak’s own party also disagree with his outlook on cryptocurrency. The Treasury Select Committee, a bipartisan group of MPs, released a report in May claiming that cryptocurrencies have “no useful social purpose” and expose users to fraud and con artists. It further argued that cryptocurrency trading needs to be governed as a type of gambling rather than a financial activity to avoid a ‘halo effect’ that gives the idea of security.

The FCA has historically adopted a cautious approach in order to avoid glamorizing crypto.

“Given the volume of harm, our position has always been that it is a high-risk investment. We have been clear that people should be prepared to lose their money,” Matthew Long, director of payments and digital assets at the FCA said.

There is anxiety the FCA may succumb to political pressure to soften its approach as it crafts a rulebook because the UK’s capacity to entice crypto firms to its shores depends on the tone of its eventual regulatory framework.

According to McAteer, Sunak’s strategy adds an additional goal that could be very dangerous to economic growth. He claims that while the FCA should be able to put the public interest first when drafting the crypto rules, it now leaves room for political meddling.

McAteer also stated that fear will continue to be vague and amorphous as long as there are few clear rules in the UK and ambiguous political promises. Uncertainty exists around the possibility of giving crypto firms more lax reporting standards, allowing them to sell riskier financial products like crypto derivatives, or allowing them to take shortcuts while keeping clients’ coin. Regulators may come under pressure if they make choices that conflict with the political agenda.

The FCA will be ‘hauled in front of select committees and the Treasury,’ and ‘criticised if seen to be stifling innovation’, McAteer added.

Matthew Long said, “The FCA rejects the idea that governments or industry players could be given the opportunity to play puppets: We are an independent regulator. Once our scope for action is established, we do our job of creating rules.”

But regulators’ ability to protect themselves depends on their ability to tune out industry stimuli and isolate themselves from political machinations, McAteer said.

It’s a really bad sign when hype and government pressure come together, that is when mistakes are made, he concluded.

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