When he was the UK’s Treasury head, Prime Minister Rishi Sunak pledged to turn the United Kingdom into a crypto hub.
Two years later, these ambitions are being thwarted by a low rate of company registrations, industry insiders warn.
DL News looked into the registry of virtual asset service providers in the UK, established in 2020 by the watchdog, the Financial Conduct Authority.
Registry data shows that while 28 companies applied in the past year to provide crypto asset services, the FCA approved just four applications.
The four? Brokerage firm Interactive Brokers, crypto exchange Bitstamp, Nomura-backed crypto custodian Komainu, and payments giant PayPal.
Last year also saw 10 times more withdrawn applications than new registrants — 43 companies withdrew their applications.
The reasons vary, say sources who advise crypto firms on their registrations: a high bar set by the FCA, firms submitting poor applications, and tough new rules on crypto advertising.
“There needs to be a better understanding of the system, better guidance throughout the application process, better understanding of what is coming down the pipeline, and what people can expect from the FCA,” Oliver Linch, CEO and general counsel of defunct crypto exchange Bittrex Global, told DL News.
Even so, crypto pundits suggests that there may be hope for No. 10′s crypto ambitions as the government gears up to roll out new digital assets laws designed to rival those of the European Union.
Not up to par
The FCA sets strict anti-money laundering and anti-terror financing standards for financial firms in the UK.
Historically, many companies applying to provide crypto services have been unable to satisfy the regulator that they have the right processes in place.
‘Firms may just have assumed that they would be fast-tracked by the FCA or given an easy ride, and they’re now discovering that they underestimated the rigour of the system.’
Early in 2023, the FCA’s executive director of markets, Sarah Pritchard, told the Treasury that 85% of firms applying could not meet even minimum standards.
“Firms may just have assumed that they would be fast-tracked by the FCA or given an easy ride, and they’re now discovering that they underestimated the rigour of the system,” Linch said.
“That is a good thing.”
Others say that even experienced compliance professionals working for global financial institutions well-versed in the law struggled to get their applications rubber-stamped.
A spokesperson for the FCA told DL News that the regulator registers “firms that demonstrate they can meet the required standards.”
“We expect firms to be fit and proper and have adequate systems to identify and prevent flows of money from crime,” they said.
They added that the FCA is very engaged with the industry.
It regularly provides detailed feedback to individual firms when applicants can’t demonstrate compliance with the rules, and even offers firms a pre-application meeting to help them understand the requirements.
“And we have engaged regularly with the sector to provide further support to applicants,” the spokesperson said.
Promotions rules take a bite
The high number of withdrawn applications may also be explained by the FCA’s new advertising rules.
In October 2023, the regulator’s strict standards on marketing of financial products were extended to crypto companies.
Firms must ensure their advertising is clear and not misleading, and adequately informs consumers of the risks involved in investing.
The rules are complex and costly to comply with, crypto companies say.
ByBit, Binance, and PayPal have all paused services to UK customers, citing the promotions regime.
MiCA rival
Still, there may yet be hope for Sunak’s ambitions.
Linch said one reason firms have struggled to register in the UK is uncertainty amid a lack of clear regulations.
That will change in 2024, as the government begins to roll out regulations for digital assets set to rival the EU’s Markets in Crypto-Assets regime.
The Treasury published its framework — which extends existing financial rules to crypto businesses — in October.
The FCA is now working on rules implementing these laws.
Linch said precedent set by UK courts is sufficiently clear to allow the country to become a crypto hotbed.
For example, clarification on how the law treats digital assets, provided in mid-2023 by the UK’s Law Commission, provides a distinct advantage over many EU countries, where that status is not clear.
That must be bolstered by the certainty a regulatory framework will provide, Linch said.
“The UK remains a fair way behind the EU and time is running out,” he said.
“The prime minister is therefore under quite a bit of pressure to fulfil his pledge and deliver a substantive regulatory framework for crypto.”
In parallel, the FCA has been strengthening its resources to better understand the crypto market, lobby group CryptoUK executive director Ian Taylor told DL News.
“Over the past few years, they’ve created new dedicated teams,” Taylor said. “They now have a policy team, authorisation teams for retail and wholesale, and a sector-specific team that connects the dots from across all the new teams.”
He added that the FCA understands that crypto is here to stay and that shaping the UK into a crypto centre is government policy.
The FCA spokesperson said the regulator “has a global reputation for supporting innovative financial services firms and products, and we are supporting firms with new ideas drawing on crypto and distributed ledger technology.
“We will continue to work with government, international counterparts, industry and others to develop a future regulatory regime for cryptoassets,” they said.
Data takeaways:
A total of 337 applications have been received by the FCA since it established the virtual asset service provider registry in 2020.45 providers — including Bitpanda, eToro, Revolut, and Fidelity Digital Assets — have registered successfully since then.While 35 companies were rejected, 226 withdrew their applications.That means that about 11% of the companies that apply are rejected — 35 companies since 2020, seven of them during the past year.
