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February 1, 2023

All Eyes on the U.K.: Crypto on the Thames

By Chris Lehane and Tomicah Tillemann

Crypto founders have spent years asking policymakers for regulatory clarity. That goal got closer this week—just not in the United States.

There has been a lot of noise, finger-pointing, and posturing about crypto regulation in the wake of several high-profile meltdowns in the industry. In the absence of meaningful new legislation—a.k.a. new rules for new things—many American officials continue to pursue regulation by enforcement, a posture that’s been unhelpful for builders working to create innovative, compliant products and services in web3. These recent trends are disappointing, but there are bright spots emerging overseas.

By abdicating its position of regulatory leadership, the U.S. is creating opportunities for policy arbitrage. Other countries are stepping in to provide needed regulatory clarity and protection for consumers. That’s why we’re monitoring the United Kingdom’s early, encouraging efforts to develop web3-friendly policies. There are still a lot of questions to be answered about how the rules in the U.K. will evolve, particularly around DeFi and stablecoins. However, the British government made an important announcement about their intention to provide regulatory clarity for digital asset projects in the U.K. this week. We are working closely with our portfolio to capitalize on this progress.

What’s Happening

The U.K. has taken a meaningful step toward a post-Brexit regulatory update for its financial sector that looks to be a sincere, serious effort to transform Britain into a global hub for digital assets. Today, U.K. Treasury official Andrew Griffith announced the beginning of what will likely be a rapid process to develop and formalize comprehensive rules for digital assets. This is the beginning of a consultative process, not the end. Many of the details still need to be finalized before we will know the full impact of the new regulatory package. At a minimum, we expect the new rules will cover best practices for exchanges, custody, and lending. They will also address issues related to consumer protection, operational resilience, and data reporting.

Why it Matters

While the past decade has been littered with governments making promising gestures that ultimately end up hindering innovation, there is reason to believe that the momentum in the U.K. could prove more meaningful to the long-term prospects of the ecosystem. Unlike the U.S., where the separation of powers complicates legislative action, the U.K.’s parliamentary system enables the party in power to act decisively. The new rules probably will not be delayed by partisan divisions. The U.K. has a long history of using policy innovations to further their global leadership in financial markets and well defined processes for making and updating financial regulations.

What Comes Next?

  • The consultations announced today will likely move quickly. The government has committed to collect input from the public by April 30.
  • Guidance on how to participate in the consultation is available here. We encourage members of the community to take part in the process. Policymakers want perspective on how to build a smart, successful framework to support economic growth and future innovation.
  • The government will likely seek to have comprehensive rules in place for both businesses and consumers by early next year.

The rulemaking in the U.K. represents the country’s first big effort to reshape its financial sector in the aftermath of Brexit. This broader package of reforms and regulatory updates will be critical to both the U.K.’s economy and London’s future as a financial hub. The bill could finally establish the certainty and clarity that the builders and communities have been seeking for years. If that happens, London may emerge as a destination of choice for web3 projects.

The new rules could also empower specific regulatory agencies—the Financial Conduct Authority and Payments System Regulator—to provide oversight for the sector. The Bank of England may get new powers to regulate the use of digital assets for payments and stablecoins. In the same way the Telecommunications Act passed by the U.S. in 1996 was grounded in a policy commitment to make the America a global leader in innovation, the new rules in the U.K. are based on a commitment to make the U.K. a global leader in the next generation of finance and technology innovation. Again, it is still too soon to speak with certainty about the ultimate outcome, but it’s a hopeful ambition that stands in contrast to the current posture of many regulators in Washington.

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