The Challenges and Impact of UK Policy on Crypto and Digital Assets?

Sean Kiernan, CEO, Greengage, talked recently with Rebecca Park who leads the financial services practice at Global Counsel, a political and regulatory risk consultancy that works with businesses to help them understand the political environment, current challenges that may impact their businesses and crucially, how they can have a better conversation with policymakers from both a government and business perspective. Rebecca has spent the best part of the past decade working in the traditional finance space of banking, payments and fintech for the trade body, UK Finance, advising them on media communications and public policy.

Major themes in UK crypto and digital assets policy agenda

A key challenge right now is that policymakers — and particularly elected ones — do not wake up every morning thinking about crypto or indeed the broader subject of decentralised finance, whether crypto assets, stablecoin or putative CBDCs. The primary reason why they are not thinking about it is because they don’t understand it or see it as economically important. Worse, any view they may have is likely to be coloured by negative media commentary talking about crypto winters, bad actors like FTX, or stories associated with money-laundering and economic crime. They may even have been approached by a constituent that has been the victim of a crypto-related investment scam. As such, debate at a national, EU and multilateral international level has been shaped by these largely negative experiences.

The policy and regulatory agenda has to come back to basics: What are we talking about? Do we understand it in the context of an asset class? Does it have real intrinsic economic value and purpose?

This is no different to what has happened with respect to other emergent financial products in recent years such as payday lending. Political and regulator interest was stoked only when it became ‘mainstream’ and highly visible in broadcasting and other media advertising, and poor customer practices started to attract the attention of consumer champions like Martin Lewis (moneysavingexpert.com) and The Daily Mail.

With respect to crypto and digital assets, until recently, these were largely referenced by the FCA as emerging trends ‘outside of the regulatory perimeter’. More recently, FTX and other market failures, crypto and digital assets are peeking increasingly over the regulatory parapet and alongside the UK Government’s commitment to position the UK as a crypto and broader fintech hub, this stance is hopefully changing.

Key drivers of the political agenda

From a regulatory perspective, it is a paradox that some degree of regulation encourages investment while over-regulation stifles it. In the case of crypto, it is inevitable that crypto will be brought inside of the regulated perimeter with the objective of having the primary piece of legislation in place in the UK in Q1 of this year. In post-Brexit Britain, a huge amount of rule-making power has been returned to national authorities to ‘make it so’. Legislation is only a first step — the challenge is defining how to bring rules into law, given that there is very little precedent. It is not simply a case of looking at what the US or other regulatory jurisdiction has done/is doing.

There is also a little nervousness in the UK sector about simply following the EU; MICA may have many qualities but it also has many flaws. As such, there’s an opportunity for the UK to define its own safe and resilient regime.

In fact, EU political debate is more arduous than the UK’s, not least because it is difficult to achieve consensus across 27 member states, so they are not always able to make much progress. This presents the opportunity for the UK to lead the way with something that others can follow.

Terminology, scherminology…

Terminology is very important when talking to regulators and policymakers, both in terms of how the sector talks about itself and how it defines crypto. The very word ‘crypto’ may already be too tainted by controversy to recover; perhaps we should focus our language more around broader ‘digital assets’ terminology? It is also essential to explain the industry and associated use cases and value in a way regulators and policy makers can understand, not as if they are another market participant with a broad grasp of the principles. It’s easy to see how a term such as ‘trustless’ might be misconstrued in the context of a digital asset smart contract. It sounds negative but is in fact very much a positive — as in removing the need to rely on (trust) any human element in the transaction chain, since all of the associated rules and procedures are baked into code.

Uniquely in the case of UK consumers, and unlike the US and France, for example, when techno and crypto terms were presented to focus groups, levels of confidence and trust declined. In fact, there is a very low level of trust in the UK associated with the term technology in its broadest form, which bleeds through into crypto and digital assets. Global Counsel has been looking at the reasons why this might be and one of the conclusions is that from a parliamentary and political perspective there is no real advocate for the industry in the UK; no-one banging the drum often and loudly enough in public debate. There was a big government speech on making the UK the leading crypto hub last year, given by John Glenn MP, but even that wasn’t particularly inspiring. Was it just the bare minimum that UK government needed to say to remain credible on the global stage with regard to crypto policy and activity? (Read our latest research on Digital Parliamentarians. [insert link]

By contrast, in France there is strong and visible backing from the Government encouraging investment in technology generally and crypto and digital assets particularly.

There is also some really interesting research from the Edelman Trust Barometer that looked at the importance of public-private partnership, not just in terms of what public-private partnership can achieve to address economic crime and illicit finance, but also the reputational benefit of being able to say that industry is working with government and the public sector to resolve challenges that impact the collective community. Typically, an industry is fully fledged before they should have to be concerned with reputational risk but it is clear in the case of crypto that it is essential to lean in to these conversations early on.

It takes a long time to build trust within industries to actually enable those conversations to happen; there are also lessons that can be learned from sectors that do it well in order to have a better conversation. It is also getting to the point where we are able to park purely commercial advantage at the door and focus on what is the greater good for the industry as a whole, a mindset that is critical for the crypto sector to navigate effectively in the next 12 to 18 months. This is something that we learned with respect to the banking community after 2008, namely that a single bad actor impugns the reputation of all market participants.

Without some very hard work, the next FTX-like business collapse or other major scandal that comes down the line will only serve to fuel negative political appetites. On the other hand, history shows us that crisis moments, like the recent pandemic, can often trigger very positive behaviours and outcomes, particularly when they force industry segments and communities to act quickly and decisively for the greater good.

As such, gaining confidence and trust and positively influencing political engagement is about being much more proactive and visible in demonstrating changed behaviours. In support of that there is enormous strength in shared initiatives, shared education and collaboration to drive forward trust and responsibility and show that it’s not simply about commercial self-interests.

To learn more, listen to our podcast series, The Gage Episode 15.