“Sounds nice, but there isn’t much substance to it”: Crypto firms respond to HM Treasury

The government’s vision for the UK to become a crypto hub is inconsistent with the Financial Conduct Authority’s (FCA) stance towards crypto firms, industry players say.

While Monday’s announcement was welcomed by crypto industry players, it sparked some confusion as to the UK’s overall stance towards the industry.

The FCA’s crypto register – under which firms must be listed to domicile in the UK – has so far only approved 33 players, including the likes of Gemini, one of the largest global crypto exchanges. Henry Burrows, founder and CEO at crypto firm Hoptrail, says the number only represents a small proportion of total applicants.

“It’s a statement of intent by the Treasury at least, on getting to terms with blockchain and crypto,” says Burrows. “But the issue that I have, and most in the industry have, is the lack of consistency in messaging over the past few years.”

“It’s been difficult to get to grips with how the government and the regulator are tackling crypto and the associated risks. The FCA’s approach over the past years has been quite tough on crypto players – there have been some good, innovative firms that have not made the cut, and I think it’s to the detriment of the industry. We are seeing a lot of intellectual flight.”

The FCA pushed back its deadline for several firms still on the Temporary Register for a third time in March this year, which Charlie Delingpole, founder and CEO at ComplyAdvantage, says “speaks to the complexity” of what the regulator is grappling with.

But Burrows also blames organisational shortfalls within the FCA.

“[The FCA] has in the past sometimes ignored [crypto firms’] advice,” he says. “There’s been a high turnover and a lot of viewpoints on how to handle crypto businesses – I think this has played into a level of disorganisation within the regulator.”

Over 60 firms have now either been rejected or withdrawn their applications, with London-based crypto firm Wirex being the most recent firm to do so.  

Burrows says the real concern are the smaller businesses that need to be in the UK to operate, but don’t have the resources to bring everything that the FCA demands, right away.

“Some businesses are redomiciling to places like Gibraltar and Dublin – it’s not just a brain drain from the UK, but it also signals a broader messaging to crypto businesses,” he says.

He adds that the UK needs to be providing a consistency in regulation that will entice new businesses to come and invest, safe in the knowledge that the regulatory environment will be stable in the longer-term.

Crypto exchange CoinPass got its licence after 20 months of back and forth with the FCA – a process that CEO Jeff Hancock estimates consumed around 500 hours of senior executive time.

“Sometimes it felt like what [we] were being asked to do [by the FCA], was for a different sport entirely,” says Hancock. “The first six months of our application process was around KYC, AML, and then the following 10 months moved onto things that had nothing to do with AML, KYC, or CTF. There would be up to 60 questions coming back in an email. It became quite laborious.”

“There was a lot of head scratching and asking, “what does this have to do with registration”? We were quite lucky because we had the same case officer throughout the process. Some people had up to three.”

It’s not all bad…

Despite this, crypto firms agree that the Treasury’s announcement certainly marks an improvement in attitude towards crypto, and one that perhaps has been led by example from elsewhere.

“To get a message at a keynote at UK fintech week is a big deal,” says Sean Kiernan, founder and CEO of crypto asset merchant bank, Greengage Global Holding. “Last year, I don’t think crypto was even mentioned. People are realising there are other jurisdictions that have a valuable crypto coin base (such as the US) that’s making a significant contribution to the economy. I think that’s resonating over here.”

“I’ve been intrigued to see how different jurisdictions have positioned themselves towards crypto,” he adds. “Malta is calling itself ‘Blockchain Island’ and Dubai is making big noises to say that they are open for crypto businesses to come and set up.”

Proposals around a ‘financial market infrastructure sandbox’ and efforts on behalf of the FCA to reopen consultation with crypto firms at its ‘CryptoSprint’ event in May, have also been welcomed.

“It is really important for regulators to keep up with the industry developments and understand the challenges firms face – this is particularly true in the crypto space given its fast-moving nature,” says James Young, head of compliance and MLRO at Transak. “The FCA’s CryptoSprint and sandbox will hopefully help with this.”

Coinpass is more sceptical of the promises coming from the regulator, however, given past experience with FCA-led consultation.

“They’ve done that before, and it was horrendous. I know people that were in that sandbox before and were trying to get out,” says Hancock.

Broader motivations?

With growing emphasis on the development of central bank digital currencies (CBDCs), some firms believe that the UK’s unexpected pivot towards legitimising digital assets – with the minting of a UK non-fungible token (NFT) and regulation over stablecoins – could be a broader marketing ploy to generate hype around a digital pound.

“I don’t think anyone is under any illusions that the Royal Mint NFT is going to generate billions in investment into the UK,” says Kiernan. “But as a form of marketing, it is a potential precursor to open the door to bigger things.”

“It seems every central bank is having a discussion around CBDCs – which are essentially the national version of a stablecoin – and about bringing them within the regulatory perimeter.”

“[Payments infrastructure] is secure but involves a lot of inefficiencies and costs,” Kiernan continues. “It is a very good thing that the UK is looking at this, both from an efficiency perspective, but also in terms of reserve currencies and the attractiveness of pound sterling as an asset.”

Calls for consistency

The consensus among firms seems to be that consistency of messaging between the Treasury and the regulator is key, and there is still a long way to go to make good on the government’s promises.

“It sounds nice, but there isn’t much substance to it at the moment,” says Burrows. “We will have to see what comes about in terms of concrete policy changes to improve the landscape for crypto businesses.”

Nonetheless, the right noises are being made, according to Greengage; a positive sign for the future. 

“The messaging on Monday can only be positive,” says Kiernan. “Our industry has a lot of good people in it, but for better or worse, has a reputation for being a Wild West. So, I understand the caution.” 

The industry’s hope is now that the Treasury’s new messaging will help to shift that caution into positive action that allows responsible actors to flourish within regulatory perimeters.

*Article amended on 8th April to correct the inclusion of Revolut on the FCA register. Revolut remains on the temporary register.