A new report from TheCityUK calls on the UK government and regulators to act quickly to capitalise on the opportunities arising from the rapid growth of cryptoassets and the use of Distributed Ledger Technology (DLT) and take a world-leading position in this high-growth, high-potential sector.
The ‘Cryptoassets: Shaping UK regulation for innovation and global leadership’ report urges policymakers to use the UK’s newly acquired regulatory freedom and nimbleness to steal a march on global competitors and drive future innovation and competitiveness. The report also stresses the need to strike a balance between encouraging innovation, protecting consumers, and providing regulatory clarity, while also ensuring legislation is proportionate and takes a technology-neutral approach.
“There is a fierce global race underway to see which applications of DLT and cryptoassets will win out, and who will grab the biggest slice of the value they promise,” comments Miles Celic, Chief Executive Officer, TheCityUK. “The ultimate winner is for markets to decide, but government and regulators have an important part to play. They must set safe and robust rules for this burgeoning sector – while ensuring they don’t inadvertently squash good ideas before they can mature and flourish.”
“The UK has a great track record in supporting innovation with regulation,” Miles continues. “Its regulatory fintech sandboxes, for example, have been copied around the world. Now we need to show similar vision and nimbleness in our regulatory approach to cryptoassets.”
Cryptoassets and stablecoins have been rapidly increasing in popularity in recent years. Around 9.8 million people in the UK – approximately 19% of the population – owned cryptoassets in 2021, an increase of 558% since 2018 when just 3% of the population owned cryptoassets. The total market capitalisation of stablecoins has grown from $2.6 billion at the start of 2019, to $20 billion in September 2020 – with global trading volumes estimated at $198 billion in April 2021.
While UK regulators are already making progress, TheCityUK has set out five important principles for driving innovation and shaping regulation in this space:
1. The UK must act quickly if it is to set a global gold standard in cryptoassets and DLT regulation. Many other jurisdictions have recognised the opportunities presented by cryptoassets and related technologies, and are moving to set their own agendas. While the UK should be considered in its response, it must act as quickly as possible if it is to remain at the forefront of innovation while also providing certainty and addressing any new, unregulated risks.
The UK should show ambition and have the confidence to set out its own internationally compatible gold standard. This could be done in collaboration with like-minded jurisdictions, ideally with a view to achieving some degree of mutual recognition of regulatory standards to enable cross-border interoperability.
2. Specific features of novel technologies and use cases should not be overlooked. It’s important to set the regulatory perimeter and related definitions clearly and appropriately, otherwise innovation will be stifled. This applies to clarifying the application of existing regulation, and to developing new regimes. When faced with regulating a rapidly evolving industry, it is important to allow flexibility to accommodate new developments as they evolve and ensure regulatory standards remain technology-neutral.
Much of the value in DLT arises because the networks are cross-border. While it is essential to protect UK consumers, the UK should not seek to regulate overseas firms or cross-border/global business models in a way that may be difficult to enforce or that is overly burdensome in practice.
3. Not all uses of DLT need to be regulated. These novel technologies can be deployed in many different ways. While some uses may create new forms of financial products and services which may be suitable for regulation, others will provide an alternative delivery mechanism for existing products and services, or act as a better record-keeping system without posing any new risks. These distinctions must be recognised, and clarity given to what falls outside the regulatory perimeter and/or is adequately covered by existing frameworks.
4. Industry engagement is crucial to achieving an appropriate risk-based approach. The UK should seek to develop a regulatory framework that is genuinely risk-based in order to make it appealing for crypto-related activities to be established in the UK. To achieve this, UK regulators should draw on previous experience in creating world-leading, innovation-friendly regulation and regulatory support structures (such as regulatory sandboxes) while continuing to engage substantively with the industry.
5. Take advantage of the transformative potential of stablecoins and Central Bank Digital Currencies (CBDCs). Stablecoins and CBDCs present valuable opportunities, particularly in relation to state-backed currencies. These have the potential to act as a platform for wide-scale payments innovation and broader digital transformations. The UK should seek to capitalise on these opportunities and remain at the forefront of international discussions and collaborations on these topics.