The UK needs to get serious about DeFi, digital assets, stablecoins, crypto, RWAs, tokenisation and the kind of compliance that supports innovation and protects consumers.
Hopefully the days of politicians confusing bitcoin with blockchain are well behind us and there is now a greater appreciation of the potential of this technology, which is broader and more profound than, for example, the political grift of particular memecoins
would perhaps suggest.
Institutional thinking is certainly shifting, and bitcoin has been described as forming the basis of a viable institutional asset class. BlackRock’s ETFs are driving institutional adoption and the US President has signed an executive order to establish a
“Strategic Bitcoin Reserve” as well as a “Digital Asset Stockpile”, which will consist of other forms of digital currency.
Regulation in this context, as always, means the underpinning principles are key. Risk, trust, and transparency levels must be established, and it is crucial to understand and design around particular features, for example, utility, volatility, whether with
underpins or none.
On the same day the
Financial Conduct Authority published their five year strategy setting out key priorities (including an intention to be a "smarter regulator") the chief executive Nikhil Rathi, chair Ashley Alder, and head of authorisations Sheree Howard, all gave evidence
to the Commons Treasury Committee. They stressed a view consistent with the financial promotions regime that focuses on consumer risk, with both Rathi and Alder saying (with unbacked crypto assets) “be prepared to lose all your money”.
Important, but of course not the whole story, and we really do need to broaden the conversations – such as this one - between regulators and parliamentarians. Consumer protection is crucial, but a Bill (now Act) that I remember well – the Financial Services
and Markets Act 2023 added a secondary international competitiveness and growth objective to the FCA.
The five year strategy refers to this and refers to the UK, as a leading global financial hub, which must uphold international standards to maintain trust and prevent market fragmentation while fostering innovation. To strengthen global cooperation, there
are plans to establish a permanent presence in the US and Asia-Pacific, with an ambition to ensure strong bilateral relationships and support for financial firms seeking UK authorisation.
This is a welcome development.
Stablecoin payments, offering near-instant, 24/7 settlement and seamless cross-border transfers, are reshaping financial services globally. This trend is particularly evident in emerging markets, where stablecoins provide a reliable alternative to local banking
systems. The $1.1 billion acquisition of stablecoin platform Bridge by Stripe underscores that mainstream adoption is also well underway.
The dominance of US dollar-backed stablecoins (Tether, USD Coin and USDS – formerly DAI) is likely to reinforce dollar hegemony and further concentrate financial power within the US and the Genius Act looks set to introduce a legal framework for stablecoins
for payments. In Europe, with MiCA fully in force, there are hopes that Euro-backed stablecoins will rise by 60%, driven by the European Central Bank’s push for monetary sovereignty.
How does the UK approach sit within these trends?
Regulating the rapidly evolving landscape of digital assets presents a complex challenge. The aforementioned Financial Services and Markets Act 2023 marked a significant step by bringing digital assets into the FCA’s regulatory perimeter and in November
2024, the new government confirmed it will proceed with further legislation in an approach closely aligned to proposals set out in the previous government’s consultation, with one key difference: the jettisoning of a ‘phased approach’. This means that fiat-referenced
stablecoin activities (previously ‘phase 1’) will be legislated for at the same time as crypto trading, exchange, and other activities (previously ‘phase 2’). We are expecting to receive this draft legislation in Parliament this year.
Additionally, the introduction of the Property (Digital Assets etc.) Bill seeks to clarify the legal status of digital assets, such as cryptocurrencies and non-fungible tokens (NFTs), recognising them as personal property under English and Welsh law. Some
commentators have wondered whether this is still necessary and as a member of the special public bill committee, I am closely engaged in these discussions and look forward to the Bill coming back on
report stage on 30 April.
At the Treasury evidence session FCA, Rathi highlighted the challenge of regulating in the age of AI pointing out that “by the time that we write regulation and make it effective, it will be out of date”. He suggested that our “outcomes-based regulation
and the consumer duty, alongside our senior managers regime for governance and accountability” gives the FCA an “advantage over some of our competitor jurisdictions in enabling innovation.”
Although he also went on to address ex-Economic Secretary to the Treasury Mr Glen with a specific example of the tension between balancing risk and innovation acknowledging that Mr Glen had urged the FCA to “be more open-minded” with regard to crypto. He
insisted that the FCA “are not anti-innovation; we absolutely want to make sure that the UK is an attractive place. But let me be really clear with the Committee: 86% of those applications were refused because they did not meet the standards that you had given
us in legislation to deliver on money laundering”.
This point was reiterated by Howard, who reminded the committee that “at the moment, we only regulate crypto for AML”. She went on to acknowledge that “when you go on to social media … it is very tempting for people to purchase it.” She believed the FCA
made it very clear about the lack of regulation and associated risk – a claim that was queried by members of the committee - and perhaps also challenged by a fascinating stat about the number of under 35-year olds for whom the financial product that they invest
in first is crypto— several million in the UK—rather than equities or debt or other types of products.
Other messages from the session conveyed a lack of urgency and a sense of the existing gaps, with Alder saying, “it is still relatively early days, but that is why we have set up the digital sandbox, for example, and we are also pursuing projects such as
fund tokenisation”.
I don’t necessarily agree that it is still early days and as the market continues to evolve, I thought about those millions of under-35s and wondered how that appetite and engagement could be harnessed for good. Many questions remain about how best to achieve
regulation that addresses emerging risks and opportunities effectively while taking advantage of the UK's, potential to be at the forefront of these developments, transforming digital and financial literacy and establishing the UK as the home of tokenisation.