The Sunak government’s desire to attract crypto could give impetus to attempts to build a more comprehensive regime for the industry. But it could also create competing incentives. Critics of the government’s approach say they fear that expediting regulations and giving the crypto industry too much room to maneuver could lead to decisions that expose consumers to risks, or end up undermining long-running attempts to prevent financial crimes, such as money laundering and terrorist financing.
The message lobbyists are “pouring into the ears” of politicians is that crypto needs bespoke rules if the UK is to keep pace with financial innovation, says Martin Walker, director for banking and finance at the Center for Evidence Based Management, a nonprofit that advises businesses on management strategy. Walker, who gave evidence as part of a 2018 government crypto inquiry, says that an “anxiety-driven flexibility” toward crypto risks a repeat of previous boom-and-bust cycles in finance. “After the dotcom bubble, which involved a lot of fraud, and the 2007 financial crisis, driven by bad financial innovation, it’s like the lessons have been completely forgotten,” he says.
The UK capital—described sneeringly as “Londongrad” or “Moscow-on-Thames” for its past willingness to host money from Russia and other pariah states—already has an unsavory reputation as a venue for money laundering and other financial crime, says Stephen Diehl, a crypto-skeptic commentator. Inviting crypto into the fold would only give its critics more ammunition. “I don’t think the predominant view is that we want to become a dark money laundromat,” he says.
Some in Sunak’s own party don’t agree with his vision for crypto, either. In May, a report from the Treasury Select Committee, a cross-party group of MPs, claimed that cryptocurrencies serve “no useful social purpose” and expose consumers to fraud and scams. It also asserted that crypto trading should be regulated as a form of gambling, not as a financial service, or risk a “halo effect” that creates the false impression of safety.
To avoid glamorizing crypto, the FCA has historically adopted a cautious approach. “Given the volume of harm, our position has always been that it’s a high-risk investment,” says Matthew Long, director of payments and digital assets at the FCA. “We’ve been clear that people should be prepared to lose their money.”
Because the UK’s ability to attract crypto businesses to its shores hinges on the tenor of its eventual regulatory regime, there is concern the FCA may come under political pressure to relax its stance as it develops a rulebook.
Sunak’s plan, McAteer says, imposes a secondary and potentially “very dangerous” objective: economic growth. It creates an opening for political interference as the FCA drafts the rulebook for crypto, he says, when it should be free to prioritize public interest.
For as long as there are few specific rules in the UK and political promises continue to be vague, that fear will remain amorphous and unspecific. It’s unclear whether crypto firms might be afforded more lenient reporting requirements, for example, or be allowed to offer riskier financial products, such as crypto derivatives, or be free to cut corners when storing customers’ crypto. But the idea that third-parties might be able to meddle in rulemaking is worrying, McAteer suggests, and regulators could find themselves under pressure if they take decisions that interfere with the political agenda. The FCA will be “hauled in front of select committees and the Treasury,” McAteer says, and “criticized if seen to be stifling innovation.” The Treasury did not return a request for comment.
The FCA dismisses the idea that government or industry players might be allowed to puppeteer: “We’re an independent regulator,” says Long. “Once our perimeter is set, we do our job, which is to create rules.”
But the ability for regulators to perform their protective function, McAteer says, is contingent on their capacity to tune out the appeals of industry and stand apart from political machinations. “It’s a really bad sign when there is a confluence of hype and government pressure,” he says. “That’s when mistakes are made.”