Will the 'unambitious' UK be left behind by Europe’s sweeping new crypto proposals?

Last week, the European Commission published a wide-ranging set of proposals for regulating crypto-assets. Regulatory experts say the proposed rules, which seek to apply more stringent standards to crypto-assets and stablecoins, could stand as a global model for crypto regulation. 

What will that mean for the UK, which in recent years has emerged as a particularly attractive destination for crypto firms thanks to its own relatively advanced policies geared toward digital assets? 

In light of the EU’s new so-called Markets in Crypto-assets proposals (MiCA), the UK’s regime no longer looks quite so advanced. The EU proposals are far more comprehensive and appear poised to remake the global crypto map.

John Salmon, a partner at the law firm Hogan Lovells, said the new framework “will effectively set the global standard in the same way that GDPR does for data regulation.” He and other sector experts believe the proposals, part of Europe’s Digital Finance package, put pressure on UK regulators to come up with a more composite regime.“I think it makes the UK proposal look pretty unambitious,” Salmon added.

The UK has been among the most proactive in the world when it comes to regulating the emergent cryptocurrency industry. Its regulatory sandbox initiative has given crypto and blockchain founders, including the likes of Fractal and Karma, a chance to test new technologies without fear of regulatory backlash. 

The UK's Financial Conduct Authority (FCA) has also introduced policies targeted at certain crypto products. In the summer of 2019, for example, the finance watchdog proposed a ban on the sale of complex digital asset investment products, like derivatives and exchange-traded notes.

That ban — which drew fierce opposition from industry lobbyists — currently sits on a list of delayed rules because of the COVID-19 pandemic, and is not due to come into effect until 2021. More recently, the Treasury kicked off a consultation on giving the FCA oversight of the promotion of certain types of crypto-assets. That consultation closes on October 25.

But Britain’s approach looks piecemeal compared to the EU’s sweeping new proposals. 

“MiCA represents a different approach to the current FCA strategy. Specifically, the FCA focuses on regulating the marketing and promotion of crypto-assets whilst raising the bar regarding AML and KYC requirements,” said Matthew Pollard, co-founder and chief financial officer of Archax, a digital securities exchange which is one of only four UK operators currently listed on the FCA’s crypto-assets register.

The authors of MiCA, on the other hand, have tried to try to encompass all forms of digital assets within a single framework. 

The different approaches taken by Europe and the UK, which are destined for a cleaner split when the Brexit transition period ends on December 31, may impact where crypto companies choose to base themselves in the future.

Tom Albright, chief executive of Bittrex Global, told the Block he expects UK regulators to adopt similar standards to Europe to avoid being “left behind by the technology and the industry as participants in the space will flock to jurisdictions with well-thought-out regulation that protects customers but still supports the industry”.

Michel Rauchs, founder of the consulting firm Paradigma, suggested the sheer size of Europe makes divergence impractical.

“The EU is just a much bigger market than the UK, so if you already have to comply with those potentially stricter MiCA rules, I wouldn’t be surprised if those businesses apply the same standards to their UK customers as well,” he said.

On the other hand, the size and fragmented nature of Europe also means that MiCA’s “harmonised” rules could be more difficult to implement in a timely fashion. That could give the UK a chance to regain the upper hand.The MiCA proposals must be debated in the EU Parliament and then adopted first by the EU writ-large and then by each member-state before coming to force.

“Given the estimated time to implement MiCA — I would guess as a minimum 18 months — and the challenges of convergent adoption across the EU bloc, the Treasury and the FCA have a window of opportunity, post-Brexit, to implement an equivalent regime in order to remain competitive,” said Archax’s Pollard.

It is worth considering, too, that a lot can change in that time — especially in crypto.

MiCA’s 168 pages do not, for instance, contain any mention whatsoever of decentralized finance projects or how they will be treated.

“It seems to me that they spent a lot of time thinking about what the concerns of the industry were a year ago. If you look at it, this is really about Libra isn’t it?” said Hogan Lovells’ Salmon. 

Lavan Thasarathakumar, head of regulatory affairs at Global Digital Finance, the London-based trade group, went a step further.  

“A huge area in this area that is coming through is DeFi. This proposal doesn’t address that, and for me it’s kind of a gaping hole,” he said.