“We’re on the cusp of something important”: UK sets out plans to create ‘global cryptoasset hub’

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John Glen, City Minister

Nick Evans writes that the UK government has unveiled a series of initiatives to exploit the potential of the fast-growing cryptoasset financial services and technology industries, kickstarting a bid to establish the UK as a “global hub” for cryptocurrencies and digital assets across an array of markets and technologies.

The effort is part of a package of measures led by Chancellor of the Exchequer Rishi Sunak aimed at harnessing new opportunities for businesses across the UK finance sector, boosting the UK as the pre-eminent global financial centre, and supporting the development of what Economic Secretary to the Treasury John Glen described as a “world-best crypto ecosystem”.

Having previously attracted criticism for an apparently hostile and obstructive attitude towards crypto market innovation by key UK regulators such as the Financial Conduct Authority (FCA) and the Bank of England – whose governor Andrew Bailey previously led the FCA – the government’s move marks a significant change of tone and direction at a time when institutional and individual investor interest in crypto assets is rising rapidly amid escalating global geopolitical and economic crises.

Industry advocates hope the moves will enable the UK to make up ground lost to other more crypto-friendly countries in Europe such as Switzerland and Germany – creating opportunities across the banking, asset management, hedge fund, private equity and fintech industries in an area that a growing number of people believe has the potential to revolutionise global finance and business.

In a statement outlining the UK’s crypto initiative, Sunak said: “This is part of our plan to ensure the UK financial services industry is always at the forefront of technology and innovation. By recognising the potential of this technology and regulating it now, the government can ensure financial stability and high regulatory standards so that these new technologies can be used both reliably and safely.”

Among the raft of proposals set out by HM Treasury are: 
•    evolving an increasingly dynamic and flexible regulatory landscape for crypto; 
•    bringing stablecoins into the UK payments framework; 
•    creating a ‘Financial Market Infrastructure Sandbox’, run by the Bank of England and the FCA, to help firms innovate and experiment in providing new services to underpin markets; 
•    establishing a Cryptoasset Engagement Group – chaired at ministerial level – that will meet regularly and bring together key industry figures with regulatory and government agencies;
•    enhancing the competitiveness of the UK tax system to encourage further cryptoasset market development; 
•    extending the scope of the Investment Manager Exemption to include cryptoassets and removing disincentives to UK fund managers to holding cryptoassets in their portfolios; 
•    exploring the feasibility of issuing UK sovereign debt instruments using distributed ledger technology (DLT), along with other blockchain and decentralised finance innovations; 
•    initiating a series of FCA-led ‘CryptoSprints’, starting in May and involving “scores” of industry experts, to tackle legal, technical and regulatory challenges – with the aim to “inform FCA policy thinking in real time”;
•    and working with the Royal Mint on a Non-Fungible Token (NFT), in what the Treasury depicts as “an emblem of the forward-looking approach the UK is determined to take”.

In a speech at the Innovate Finance Global Summit setting out the UK’s vision, City minister Glen outlined the government’s aim of “making this country a hospitable place for crypto”. He said: “We’re on the cusp of something important. We have the opportunity to shape and lead it.”

Reaction to the government proposals has been broadly positive. Arvin Abraham, partner at global law firm McDermott Will & Emery, said the plans “should be lauded”. He added: “The UK is already more advanced in cryptoasset regulation than most countries and its FinTech ecosystem leads the world. These are ideal conditions to nurture the burgeoning cryptoasset sector.”

Ian Taylor – chief executive of CryptoUK, the UK’s self-regulatory trade association representing the cryptoasset sector – welcomed the government’s new “pro-crypto” plans. “Crypto is too big to ignore and it’s not going away,” he said. “The opportunities for the UK in terms of crypto are vast.”

But he cautioned that “we must also demonstrate this commitment through actions”, adding: “This is a crucial time for the sector and we must act quickly or the UK risks being left behind.”

Although opinion remains sharply divided on the future of crypto – between what Glen portrayed in his speech as “the sceptics and the evangelists” – the adoption of cryptocurrencies and digital assets is growing rapidly among both institutional and retail investors.

In its latest annual Institutional Investor Digital Assets Study, Fidelity Digital Assets – the crypto-focused arm of US-based global asset manager Fidelity – reported surging interest among the 1,100 investors across the US, Europe and Asia that were surveyed.

More than half (52 per cent) of the survey’s investor universe – comprising endowments and foundations, family offices, pension funds, financial advisors, high net worth individuals, crypto hedge funds, venture capital funds and traditional hedge funds – said they were already invested in digital assets.

Nearly nine in 10 investors said they found digital assets ‘appealing,’ while almost 80 per cent felt that digital assets have a place in a portfolio.

In March, London-based institutional digital assets manager Nickel Digital Asset Management conducted a survey of 200 institutional investors and wealth managers from across seven countries that collectively manage some USD330 billion in assets.

More than 80 per cent of these professional investors believe that digital assets will become mainstream – compared with just 3 per cent who do not believe they will become mainstream, and 13 per cent who say that it is too early to tell.

Anatoly Crachilov, Nickel Digital’s CEO and founding partner, said: “To a great extent digital assets have already achieved ‘escape velocity’ – they have achieved a multi-trillion-dollar market cap, and there is gradual regulatory acceptance of them in key countries.”

In the US, the pace of government action is also accelerating as major financial centres respond to the explosive growth in digital assets and cryptocurrencies. Last month President Biden signed an Executive Order outlining a “whole-of-government approach to addressing the risks and harnessing the potential benefits of digital assets and their underlying technology”.

Like the UK, the US government believes the rise in digital assets – whose market capitalisation has mushroomed to over USD3 trillion, up from just USD14 billion five years ago – creates an opportunity “to reinforce American leadership in the global financial system”.

However, the White House said in its statement that the digital assets boom also has “substantial implications for consumer protection, financial stability, national security, and climate risk”.

The Russia-Ukraine conflict and the global inflation surge have further sharpened the focus on digital assets as a potential source of portfolio diversification and inflation protection among major institutional investors such as pension funds and insurers – along with hedge funds, institutional asset managers and family offices.

Several major banks and institutional asset managers have already dipped their toes in the crypto waters, with many more likely to follow suit. In his widely-read and wide-ranging annual letter to shareholders in March, Larry Fink – founder, chairman and CEO of USD10 trillion global asset management giant BlackRock – said that a potential impact of the Russia-Ukraine war would be to accelerate the use of cryptocurrencies.  
 

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