How the regulation of fintech could help the UK stay competitive in the sector
The UK has a proud history as a global financial centre, consistently at the cutting-edge of innovation and technological advancement.
At a time of rapid development within the fintech space, there is undoubtedly a strong desire within both the UK government and the wider financial community to do more and go further.
In one of the biggest recent developments in UK fintech, the UK government has announced plans to make Britain “a global hub for cryptoasset technology and investment”, including a bold commitment to see stablecoins recognised as a valid form of payment in the UK.
Prizes worth competing for
Fintech has plenty to offer. The government’s desire to keep the UK at the forefront of the global fintech space is not merely a vanity project – the prizes are far more tangible. As highlighted in the seminal Kalifa Review, “a strong fintech industry creates high income employment, furthers international trade and can support citizens and small businesses to access more, better and cheaper financial services”.
In following many of the Kalifa Review’s recommendations, the UK has arguably kept itself in pole position. For example, the Bank of England has already commenced work on a central bank digital currency and the government recently committed to exploring how the UK tax system could encourage further development of the cryptoasset market.
However, the UK is not alone in pushing fintech towards the top of the economic agenda. Competitors including Singapore, Australia and Canada are all investing heavily in capital, skills and direct support for fintechs. Legislation has also been passed in other countries to support the industry and US President Joe Biden recently issued an Executive Order for the development of a national policy on digital assets.
Current lack of regulation breeds uncertainty and risk
To achieve real and sustainable progress, the UK must balance innovation and competition with customer protection through effective regulation. This will imbue market confidence, and in turn further drive and support innovation.
Although it is the writer’s view that the UK’s fundamental legal and regulatory structures are largely fit for purpose, potentially placing the UK ahead of other jurisdictions, there is still work to be done.
In relation to cryptoassets, for example, the existing UK financial regulatory regime(s) only apply to certain limited categories of cryptoassets. Determining whether any given cryptoasset falls within existing regulatory regimes has often been a difficult and uncertain exercise – based on definitions and concepts which were not designed with DLT and other new technologies in mind.
The UK is working hard to remedy this. The Treasury only recently published a detailed response to its consultation on cryptoassets, stablecoins and DLT – where it confirmed that it will be working to bring stablecoin arrangements onto a clearer statutory and regulatory basis. The Treasury has also committed to consulting on a wider set of cryptoasset activities. These developments are necessary and will, I hope, be key to resolving these historic uncertainties.
For without clear and effective regulation, scams and poor market practices proliferate. In 2021 alone, the FCA investigated 300 unauthorised UK cryptocurrency operators in six months and reported that over £27 million had been lost to crypto and foreign exchange scams in 2018/2019. This behaviour erodes trust and poses longer-term systemic risks to the industry.
Equally, this uncertainty creates a real challenge for fintechs and other actors trying to develop innovative products, which might explain why cryptoasset exchanges and other cryptoasset FMIs have not established themselves in earnest in the UK. There are, however, promising developments in the payment systems space, including the development of next-generation cross-border payment systems by both Fnality International and RTGS.global and the Treasury’s announcement of a financial market infrastructure sandbox to further foster innovation.
In addition to regulatory considerations, lawmakers and the courts will need to grapple with a multitude of complex and nuanced legal questions. In the case of a distributed network with nodes in multiple jurisdictions, what is/ought to be the governing law of cryptoassets on that network? Properly addressing these uncertainties will be critical to building effective and certain regimes that support fintech, innovation and the UK’s competitive position.
Regulation must look to the future
To be effective, any new regulation must be clear, balanced and forward-thinking. As a first step, it is critical that the UK legislator and regulators address some of the existing legal uncertainties and provide clarity and confidence for both fintechs to innovate and consumers to participate.
In creating regulation that is forward-looking, the UK government must also have environmental and social issues at the forefront of its agenda.
There are few definitive answers about the environmental impact of fintech. Although fintech does, in some contexts, have the capacity to support the UK’s environmental goals, should customers be sceptical of what cryptocurrencies can offer because Bitcoin is currently estimated to use 133 terawatt-hours of electricity every year? Or should cryptocurrencies be celebrated because renewable energy supplies over a third of the energy used in Bitcoin mining (according to the Cambridge Bitcoin Electricity Consumption Index)? Clear and well-designed reporting standards which reward positive change are needed.
From a social perspective, with the potential to contribute to the economic development and stability of a country, and with a remarkable 1.7 billion adults globally still unbanked, financial inclusion could arguably be fintech’s greatest long-term prize. Striking the right balance between these (potentially) competing objectives will be challenging but important.
A long and winding road – but one worth taking
I look forward to seeing how the UK’s fintech industry develops over the near-to-medium term. Effective legislative change is not enacted overnight and must be carefully considered and balanced. Many jurisdictions are concurrently grappling with similar legal and technical complexities. But the benefits offered to the UK by remaining at the forefront of the fintech agenda mean we must, and are best placed, to get it right first time. So, strap in – it will be a long and winding road, but one with an exciting and prosperous destination. Will it be worth the wait? Watch this space.
About the author
Natalie Lewis is a partner in Travers Smith’s financial services and markets department and is a member of the firm’s cross-disciplinary fintech, market infrastructure and payments (FMIP) group.