UK undermines ‘Crypto Hub’ vision as US approves Bitcoin Spot ETF

In the global rush to embrace bitcoin, the United Kingdom is implementing measures that are inadvertently causing an exodus of crypto-related businesses. While the US is moving forward with institutional acceptance, allowing entities such as BlackRockBLK to support bitcoin products, the UK’s strict regulations are stifling its own companies.

This situation represents a policy contradiction and has drawn widespread criticism, countering Prime Minister Rishi Sunak’s vision of making the UK a ‘crypto hub’.

As highlighted in a recent Financial Times article, “The hotly anticipated launch of a bitcoin ETF in the US puts the UK out of step with some other major markets in maintaining its blockade on retail access to exchange-traded crypto funds.”

Many companies are already moving to more crypto-friendly environments, highlighting the difference between the UK’s restrictive stance and other major players’ progressive steps.

Background on the new regulation

In October 2023, the UK’s Financial Conduct Authority implemented sweeping new regulations, categorizing bitcoin and other cryptocurrencies as ‘restricted mass market investments’.

As the FCA acknowledged, this went against the advice of most of the industry, which warned that different assets have different risk profiles and should not all be thrown into the same bucket. New rules included the implementation of a cooling-off period and strict client suitability testing, with firms initially given a deadline of January 8, 2024 to comply.

The goal was to bring clarity and security to the market, while protecting consumers from the inherent risks associated with these high-risk investments. This involved ensuring that companies’ marketing strategies were clear, fair and not misleading. The results have been much less clear and in some cases the harm to consumers actually appears to have increased rather than decreased, leading to criticism from industry experts and stakeholders.

Initially, firms were given a period of six months from the issuance of ‘near-final’ legislation in May 2023, which targeted an implementation date of 8 October. However, this deadline has effectively been shortened by two months compared to the original deadline of December 8.

Concerns about the risks of hasty compliance measures potentially putting client funds at risk have been raised, and as a result the FCA has extended the deadline from 8 October to 8 January, with firms struggling to meet the changing compliance requirements within a limited time frame.

Despite extending the deadline by three months, the FCA’s approach has left many consumers and businesses in a difficult position, particularly with the regulation’s requirement that retail investors not invest more than 10% of their net assets in high-risk investments such as cryptoassets should not invest.

Industry Voices: The Impact

Jamie McNaught, CEO of Solidi, a UK-based FCA-regulated exchange, gave details. McNaught pointed out the adverse effects of these regulations on consumers and emphasized that honest customers are now left with limited options.

In an exclusive interview, McNaught revealed: “Customers are either selling their crypto assets before the deadline, potentially incurring significant capital gains taxes, or lying on their applications.”

On Wednesday, January 10, 2024, the US Securities and Exchange Commission approved a bitcoin spot ETF, which allows institutional players such as BlackRock to directly back products listed on stock exchanges one-to-one through bitcoin. In the same week, the United Kingdom introduced strict regulations that significantly restrict the purchase of bitcoin. This appears to be a particularly backward move just when the US, the leading market in the space, has taken such a progressive step forward.

The FCA’s strict regulations will hinder both entry and innovation. We have already seen a number of companies pull out of the UK, or announce that they will no longer serve UK customers, making a complete mockery of the UK’s ambitions to become a ‘crypto-hub’.

This is a stated policy of Prime Minister Rishi Sunak and has been reiterated by several Economic Secretaries of the Treasury; start-ups are deterred from setting up in the UK due to these barriers, and many crypto companies are relocating to more crypto-friendly environments such as the UAE or Switzerland. Retail investors face more barriers, and getting a business bank account for crypto-related activities has become almost impossible.

Guy Turner, co-founder of The Coin Bureau, runs a well-known online platform with 2.4 million subscribers. This platform is highly regarded for delivering comprehensive educational content on bitcoin, cryptocurrencies and financial news.

Initially based in the UK, Turner revealed in an exclusive for this Forbes article that the company has moved in 2022. The move was prompted by challenges accessing banking services in the UK: “As a media entity we do not issue, trade or sell any cryptocurrencies; our sole focus is to discuss the industry and reporting on it. Recognizing the shifting regulatory landscape in the UK, we have taken a strategic decision to move to a more crypto-friendly environment in Dubai,” he said.

As Guy Turner correctly points out, “Investor protection needs to be taken seriously, and the high-risk nature of digital assets needs to be emphasized. But telling people how much of their own money they can invest in an asset class amounts to overreach and is likely unenforceable anyway. And this is a country where anyone can walk into a bookie and lose their shirt in a matter of minutes, no questions asked.”

Freddie New, head of policy at Bitcoin Policy UK, said: “It is deeply regrettable that the FCA, after consulting with experts in this highly complex and novel area, has largely ignored the advice they received. I am fully supportive of regulation that has the effect of reducing harm to customers. However, the FCA has chosen to ignore the detailed feedback from the industry in general, which raises concerns. Now there is a risk that the UK market share in ‘ a global competitive arena will lose out. British citizens may turn to unregulated firms to buy bitcoin and other less secure crypto-assets, exposing them to greater risks than if the FCA had adopted a more nuanced approach.”

The fallout from UK crypto regulations

The UK’s approach to crypto regulation, which aims to protect investors and promote a safe investment environment, has had unintended consequences. This led to an increase in customer damage, characterized by the loss of banking facilities and reduced investment and employment opportunities. This strategy has imposed a short-sighted restriction on access to a potentially profitable asset class, simultaneously driving out innovation.

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