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On 4 April, the UK government laid out a plan to make the UK a global crypto asset technology hub. The plan included bringing in stablecoins within regulation and introducing a financial market infrastructure sandbox to enable companies to innovate, among other developments.
The statement received mixed reactions. The crypto industry was left wondering how the previously unfriendly FCA would establish favourable conditions for the market to flourish without compromising its decentralised essence.
The announcement was not made in a vacuum. A combination of growing retail investment in crypto, which according to the FCA reached £2.3 million in 2021, the slow but rising interest by large financial institutions and the growth of crypto platform providers could create a perfect storm for the industry to reach a tipping point.
Even so, a variety of challenges could prevent a still nascent generation of coins from mainstream adoption.
Despite the availability of crypto infrastructure and ongoing collaboration between providers, cryptocurrencies still lack trust from consumers.
The push to regulate stablecoins preceded the collapse of US dollar-linked stablecoin TerraUSD, which sent vast swathes of the cryptocurrency market into meltdown in mid-May.
With multiple coins including Bitcoin and Terra, yet to recover their pre-crash value at time of writing, the event reinforces the reluctance of traditional financial players and regulators.
Institutional investors, in particular, have argued the volatile nature of the crypto assets makes them a risk and a liability rather than a reliable asset.
Recognising the volatile nature of such cryptos, Alex Reddish, managing director at Tribe Payments told bobsguide before the meltdown: “Volatility in the major stablecoins makes them very difficult to utilise it as a main currency. Ensuring that there are stable currencies will be imperative to adoption as a utility for payments.”
Volatility was also highlighted by the UK HM Treasury as one of the key characteristics of cryptocurrencies, making them “less suitable for payment purposes” according to the consultation and call for evidence document published in January 2021.
HM Treasury’s attitude was drawn from the UK’s Financial Policy Committee’s analysis in March 2018, which noted the values of cryptocurrencies as “too volatile to be widely used as a currency or a store of value and, with transaction costs high and settlement times slow, they are an inefficient media of exchange”.
Following the consultation period, the HM Treasury opined that stablecoins “had the potential to develop into a widespread means of payment, and potentially deliver improvements in payments transactions” while delivering a “similar financial stability and consumer risks as traditional regulated payments.”
The HM Treasury’s announcement marks a change in attitude to the cryptocurrency market, which has until recently seen little to no backing from the UK government.
In a 2021 Bank of England citizens’ panel event, the central bank’s governor, Andrew Bailey, warned against investment in cryptocurrencies, stating: “People are looking for investment opportunities. Buy it if you want but it has no intrinsic value.”
Despite the challenges, the proliferation of the crypto assets and their related technologies has attracted traditional financial institutions to consider their possible advantages to consumers and ultimately themselves.
Although the infrastructure to adopt crypto is mature enough to be utilised, experts believe that the demand for cryptocurrencies will ultimately determine the mainstream adoption.
“Infrastructure in the UK has already been innovated enough with e-money licenses to allow for most of these [crypto providers] to operate properly within regulation without having to be using a full bank,” Daniel Belda, head of product strategy at OpenPayd states, highlighting the strides that the industry has made in recent years.
As of December 2021, 261 firms held e-money (EMI) licenses in the UK, granting them the right to distribute electronic money.
This includes providers of pre-paid cards, as well as cryptocurrency issuers, among others. However, also in 2021, watchdog Transparency International, flagged nearly 40% of the e-payment sector in the United Kingdom, as red — a warning of money laundering risk.
While the org noted that most e-payment enterprises appear to respect the regulations, it also urged for stronger oversight of the sector, without which EMI could become a preferred channel for malicious financial actors.
Tier 1 financial institutions backing various currencies could provide significant tailwinds, both to wider adoption and tighter regulation, with recent moves by several banks signifying that this is already happening.
“There is public knowledge that Standard Chartered is linked with Zodia (a crypto asset custodian),” Geoff Kendrick, head of crypto research at Standard Chartered, comments.
“And I suspect this is a good thing where traditional finance is linking up with experts in terms of building out the infrastructure in this space.”
In Belda’s opinion, more considered regulation of cryptocurrencies in the UK could bring long-term benefits to the industry.
“Because with the regulation and compliance comes trust from the consumer, which ultimately drives additional business,” he adds.
Regulation, or lack thereof, is possibly the biggest hurdle facing the crypto industry at the moment.
The lack of regulation in the crypto space initially stopped the heavily regulated financial industry from considering the decentralised assets.
However, the pandemic amplified the interest among retail investors, while the rise of crypto tech firms and expansive use cases pushed the regulators and the financial institutions to consider adoption.
The increased regulatory focus has been met with a cautious welcome. While the fintech firms understand the need for regulations if crypto is to become widely adopted, they worry that the lack of understanding from the regulators might hinder its growth prospect.
Petr Kozyakov, co-founder and CEO at global crypto payment network Mercuryo, warns, “Regulators have to see the full picture. They cannot simply expect to regulate cryptocurrency in the same way as traditional finance. They need to work with the industry to collectively understand all of the mechanics and barriers to overcome, in order to create a healthy regulatory environment that works for all parties.”
There is a general consensus in the industry that cryptocurrency must maintain its decentralised nature – an essential to crypto. Any new regulations must find the balance between leniency to enable crypto exchanges to innovate and stringency to protect retail money and other debt classes whilst providing a framework for fiat and cryptocurrencies to co-exist.
The UK’s recent regulatory interest in crypto could, at least for now, slow financial institutions from pushing for further adoption of crypto technology.
“Companies would see a patchwork of regulations from the FCA or other UK institutions, looking at money laundering, fraud prevention or taxes,” Belda explains.
“So, if you go and invest a significant amount of your development capabilities into a new way of doing things, which the blockchain allows you to do, you do need to have some security that what you spent your time on will actually be usable.”
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