Regulatory

Opinion by: Azariah Nukajam, head of regulation and compliance at Gemini

The UK is at a critical juncture in its approach to the rapidly evolving digital assets space.

Having solidified itself as a financial powerhouse in the modern global economy, the government has often spoken about making the UK a “leading global crypto hub.” Policy development has, however, been slow, fragmented and insufficiently ambitious.

Hesitation carries costs for a sector as fast-moving as crypto and decentralized finance (DeFi). Capital, talent and innovation are highly mobile. The UK risks losing ground to more proactive jurisdictions such as the US and Singapore.

To preserve its competitiveness, the government must match its ambition with action while learning from international peers.

Bold ambitions and slow delivery

The Financial Conduct Authority (FCA), the UK’s financial services regulator, and the UK government should work hand-in-hand to support the growth of the space and ensure these rules are both complied with and achievable. The UK government is responsible for setting the legal framework, while the FCA implements and enforces these rules, providing guidance and timelines on how to adhere to them.

Clear and progressive legislation is essential for any healthy market. A contrasting example is the previous US administration, which took a “regulation by enforcement” approach to regulating the crypto industry, with no clear agency defining the rules by which the crypto industry was governed.

The UK government recently proposed a Draft Statutory Instrument (SI), a forward-thinking framework for regulating crypto assets, hoping to create a crypto-friendly environment within the UK. Theoretically, it’s a significant milestone for the UK’s digital asset sector. But in practice, it’s only a modest step forward for many reasons.

Ongoing discussions among industry participants consistently highlight the slow pace of reform; institutions have long awaited clarity on the UK’s stance on listed crypto products, and in August, the FCA opened retail access to crypto exchange-traded notes. Meanwhile, the increasingly popular crypto exchange-traded funds (ETFs) remain banned.

Additionally, concerns about the lack of definition of the regulatory boundaries for DeFi — a fast-growing segment of the industry — make it difficult for crypto firms to navigate the DeFi and centralized finance (CeFi) perimeter.

Related: 40% of UK crypto users report blocked payments amid rise in ‘anti-consumer’ practices

The proposed legislative and regulatory rules also require considerably more reporting requirements, burdening firms’ compliance teams and undermining the privacy ethos associated with decentralization. Automated tax reporting to HMRC (the UK’s tax, payments and customs authority) is one example of this, which many argue will discourage investors from using a UK-based exchange and push them to jurisdictions with more favorable tax offerings.

Unless the government takes industry feedback seriously and adjusts to create a holistic framework balancing consumer safeguards and innovation, it risks being left behind in the global crypto race.

An engaged regulator

On the other hand, the FCA has taken a more structured and engaged approach to the UK’s crypto sector, demonstrating that it is willing to engage with crypto firms to prevent market abuse and protect consumers while remaining competitive.

Unlike the government, which often appears reactive, the FCA has been proactive: hosting roundtables, canvassing industry input and setting out a phased approach to regulatory development with its Crypto Roadmap. They have also provided more detailed guidance on effectively implementing specific rules, including consumer protection, market integrity and support for responsible innovation. Even if market participants disagree with the FCA’s proposals, this matters hugely in an industry that values transparency and predictability and is key in giving confidence to UK crypto businesses and investors.

Nevertheless, the challenge lies in the FCA ensuring that its rules are proportionate. While large firms may be able to absorb heavy compliance burdens, smaller startups may struggle to comply, which would deter them from operating out of the UK.

A path toward crypto leadership

The good news is that there’s still time to change course. Other jurisdictions have already moved more decisively with their crypto regulation. The EU’s Markets in Crypto-Assets Regulation framework gives businesses clear and comprehensive rules to operate within, the CLARITY and GENIUS Acts put the US on the path to global crypto dominance, and the Monetary Authority of Singapore has introduced a rigorous licensing process alongside regulatory sandboxes and pilot approaches. While a second-mover advantage will allow the UK to learn from the experiences of others, it also risks being left behind if they don’t act quickly to address the industry’s concerns.

The regulator has laid a promising foundation, and through greater coordination with government, bold ambitions and precise implementation, the UK can lay fertile ground to become a leader in the global crypto economy.

Opinion by: Azariah Nukajam, head of regulation and compliance at Gemini.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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