The UK: a global hub for digital assets and technologies

The UK is advancing a vision of an innovative, responsible, world-leading digital asset ecosystem. As it evolves, this digital assets ecosystem will enhance the competitiveness of the UK as an international financial services centre.  

This is a goal which the then Economic Secretary to the Treasury, John Glen MP, outlined in 2022 at the Innovate Finance Global Summit 2022, hosted at the Guildhall. He gave a very clear and positive signal that the Government wants the UK “to be a global hub - the very best place in the world to start and scale crypto-companies.” Capitalising on an established culture of entrepreneurialism, the UK is making great progress to make this vision a reality.

The same sentiment has been echoed more recently - on 9 December 2022, the Chancellor of the Exchequer announced a set of reforms to drive growth and competitiveness in the financial services sector which includes provisions looking to foster the adoption of cutting-edge technologies. The measures ensure the government will have the necessary powers to bring a broader range of investment-related cryptoasset activities into UK regulation. This provides an exciting push to continue building on the UK’s vision to be a global hub for digital assets and technologies.

Work to date on the UK’s digital asset regulation landscape

A range of high profile developments to help the digital assets ecosystem to evolve are currently in train. The most wide reaching of these is the Financial Services and Markets (FSM) Bill, which will:

• Bring certain stablecoins into the UK regulatory perimeter.
• Strengthen rules for financial promotions for digital assets.
• Set up Financial Market Infrastructure (FMI) sandboxes which will be a safe space for FMIs to use Distributed Ledger Technology (DLT).
• Allow certain crypto asset and activities to be regulated.

The FSM Bill is due to complete its House of Commons stage this year and may receive Royal Asset in Spring 2023.

Evidence based policy development

At the same time, a number of trials and consultations led by the Government, regulators and industry, are helping to inform future policy developments.

• Government will consult on a UK retail central bank digital currency alongside the Bank of England in the coming weeks
• Government has published a response to its consultation on expanding the Investment Manager Exemption to include cryptoassets
• The Financial Conduct Authority (FCA) has held ‘crypto sprints‘ to enable practitioners to ‘hack’ certain policy areas.
• HMT has consulted on the taxation of decentralised finance (DeFI) involving the lending and staking of cryptoassets
• HMRC has consulted on the inclusion of cryptoassets in the list of asset types used for the Investment Manager Exemption (IME) and certain fund tax regimes.
• The Law Commission has consulted on proposals to ensure that the law recognises and protects digital assets.
• HMT has consulted on the failure of systemic Digital Settlement Asset (including stablecoin) firms.

Beyond crypto-currencies

The UK is a natural home for digital asset players given our longstanding strengths in financial and professional services, supplemented by the presence of world-leading fintech hubs.

Crypto-technologies hold great potential to improve financial services. Public and media attention has tended to focus on crypto-currencies. However, the real economic value lies in using the benefits of DLT – tokenisation, atomic settlement and smart contracts – across financial services. 

For example:

• In cross-border payments and settlements, wholesale settlement networks are using distributed ledger technologies to reduce settlement times from days to minutes.
• In trade finance, networks are establishing common ledgers with traceability to automate document verification, enabling faster financing decisions and lower processing costs.
• CBDCs could decrease the maintenance that complex financial systems require, reduce cross-border transaction costs, and provide those who currently use alternative money transfer methods with lower-cost options.
• Tokenisation can be applied to financial assets like cash, bonds and funds, real assets like property, and intangible assets like carbon credits. There is huge potential here for the asset management industry to open up access to investments and reduce costs.

Industry leadership in integration of Distributed Ledger Technology

Financial and professional firms in the UK have been trialling and implementing DLT solutions and products dating back to 2014. Some of the most notable are set out below.

The Bank of England tested blockchain for gross settlement applications with PwC, looking at their capability to address some of the central bank’s unique hurdles. These included BoE’s role as a single point of failure in the UK banking settlement process. PwC used Ethereum, a blockchain-based distributed operating system that can verify smart contracts electronically, in a proof of concept POC project to test how this might work in practice. The project gave the Bank of England the confidence to include blockchain as part of its FinTech Accelerator, a project that works with FinTech firms to introduce new technology into the financial ecosystem.

Lloyds Banking Group won the Barclays RISE CBDC challenge this summer. This hackathon sought to address risks of fragmentation in payments markets and retail deposits, by challenging participants to seek interoperability between traditional and new forms of money via a new retail CBDC design. Lloyds Banking rejected the BoE’s premise, and propose that by merging DLT with regulated bank money, the same CBDC outcomes can be achieved while avoiding disruptions to the credit supply.

Accenture has developed jointly with DHL a solution that simplifies the tracking of pharmaceuticals across the supply chain in six regions. The two companies launched a proof of concept which contained nodes able to track the medicine and record its journey on the blockchain with various stakeholders including manufacturers, warehouses, hospitals, doctors. Blockchain technology can achieve a higher standard of safety whilst keeping costs and complexities to a minimum.

Good growth and good regulation

The City Corporation is clear that the UK needs to build competitive advantage by developing, at pace, a robust regulatory framework that enables innovation. A solid framework will provide confidence, clarity, help to manage risk and overall is a crucial ingredient for scaling the market and unlocking the potential of the digital assets ecosystem.

Deputy Bank of England Governor Sir John Cunliffe recently argued that “Innovation may start in unregulated spaces. But it will only be developed and adopted at scale within a framework that manages risks to existing standards.” He is absolutely right.  Good growth and good regulation are two sides of the same coin. A clear and proportionate regulatory framework on digital assets – not a race to the bottom - will attract capital, talent and firms. The UK is benefitting from an early mover advantage – it’s amongst the first jurisdictions globally to recognise crypto assets as regulated products via the FSM Bill, and claiming the highest crypto transaction value of any European nation as of October 2022. The UK is successfully safeguarding its future competitive offer into the future by building an innovative and responsible digital assets ecosystem.