The UK’s Unseen Advantage in Cryptocurrency Regulation
Opinion by: Pavan Kaur, Partner at Gunnercooke
Conventional wisdom would lead one to believe that the United Kingdom outside the European Union economic bloc is a minnow relative to comparable markets such as China and the United States. Indeed, in traditional trade negotiations, the market size decides the scale and quality of terms that can be negotiated.
However, in cryptocurrency markets, the rules are far from set, and the UK has several overlooked and misunderstood advantages relative to other markets that it would do well to seize on in the current emerging regulatory landscape.
Global Financial Hub
Owing to London’s leading position as a global financial hub, UK regulation has a sizable global influence. It is now non-negotiable when selling a fungible, transferable token from any country that, whether via Europe or not, observance of UK financial promotion rules is required if the communication can affect the UK.
UK Regulatory Superpowers
A breach of the UK rules is punishable by up to two years imprisonment and an unlimited fine. Furthermore, the Financial Conduct Authority (FCA) has recently published guidance that firms providing on/off-ramp services to crypto firms conducting illegitimate activities could themselves be committing an offense or facilitating an offense. Firms breaching the FCA rules risk losing their banking and payment rails.
The new guidance also highlights the growing interest from the FCA in taking action to ensure that the UK’s rules are complied with. Marketing materials that purport to promote investment activity in a token must be created to comply with or fall out of the regulatory scope of the UK Financial Promotions regime.
Recent: Regulation Compliance Key to India’s Crypto Future — Bitget COO
Growing Regulatory Clarity
As regulatory clarity grows, it makes sense for cryptocurrency companies to take a risk-based approach when entering a new market and engaging with ethical third parties to scale their ventures. For companies looking to expand into the EU, the Markets in Crypto-Assets (MiCA) regulation creates several challenges and opportunities that can be approached from a stronger position than many think when based outside the EU.
Although MiCA purports to be a single regime, experience shows that different EU countries will seek to position themselves as the ‘go-to jurisdiction.’ In practice, there are only likely to be a couple of winners.
EU Member States
We are already seeing some divergence between EU member states in this respect, for example, in terms of the level of taxes imposed on crypto firms and the ease with which firms can interact with existing infrastructure to sell products. There’s also some difference around whether there is the ability to leverage pre-existing licenses to reduce the cost of going to market.
The level of substance required to obtain a license, such as the required number of local directors and whether local banking support is needed and available, also plays a role. From this perspective, non-EU cryptocurrency companies can choose the best jurisdiction. This takes careful consideration, however, as advisers in each jurisdiction will seek to sell themselves.
The Cost Differences
The cost differences can be substantive, as we see companies using specific strategic solutions to reduce EU access costs by around 90%. Given the cost of compliance with MiCA can be minimized, companies are looking to headquarter their corporate group in the UK thanks to its deep network of legal and financial services, world-class universities, and regulatory impact.
While Web3 natives do not see the UK as market-leading because English law is often used for international business deals, regulators are usually interested in the UK’s position in drafting their frameworks. It is worth noting that the outcome of the European Securities and Markets Authority’s guidance on reverse solicitation provided under MiCA, while phrased differently, leads to a similar outcome as the UK financial promotion rules.
Collaboration Among Regulators
We have also found through advising various regulators globally that they are always interested in seeing what the UK regulatory position is, and indeed, we have seen collaboration among regulators to set common minimum global standards. Companies that take a UK-first approach to their products benefit from an established and robust legal framework internationally recognized by other jurisdictions.
Setting Out Requirements for Regulating Crypto Asset Businesses
This framework sets out their requirements for regulating crypto asset businesses. Businesses and investors would do well to consider these all-too-often overlooked regulatory advantages that being based in the UK offers when planning for the future.
Conclusion
In conclusion, while conventional wisdom may suggest otherwise, the UK has several unseen advantages in cryptocurrency regulation that it would be wise to seize on in the current emerging regulatory landscape. By taking a risk-based approach and engaging with ethical third parties to scale their ventures, companies can minimize costs and maximize opportunities.
As regulatory clarity grows, it is essential for cryptocurrency companies to consider the benefits of being based in the UK, including its global influence, robust legal framework, and collaboration among regulators. By doing so, they can position themselves for success in the rapidly evolving world of cryptocurrency regulation.
About the Author
Pavan Kaur is a partner at Gunnercooke, a leading law firm specializing in financial services and technology. With extensive experience in advising clients on regulatory matters, Pavan has worked with numerous companies to navigate complex regulatory landscapes and achieve their goals.
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