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UK fintech, crypto industry looks for Brexit silver lining, free from EU rules

Brexit has one silver lining, according to some in the U.K.'s financial technology and blockchain communities: The chance to shrug off some of the more onerous EU financial regulations they believe are a drag on innovation.

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Pro-Brexit British lawmaker Boris Johnson, then Britain's foreign secretary, at a meeting in 2017 at the Tyro Fintech hub in Sydney, where he was asked for reassurances that London would be open to tech entrepreneurs after Brexit.
Source: Associated Press

Sean Kiernan, CEO of DAG Global, a London-based financial services firm that provides trading and custodial services for both the fiat and digital assets/cryptocurrencies, believes leaving the EU would mean the U.K. would be free to adopt its own regulations for blockchain and cryptocurrency.

"The U.K. has been at the forefront of financial innovation for centuries. Brexit is a unique opportunity to capitalize on the strengths of this history, and means that the U.K. can foster digital innovation independently," he said in an email.

"People often make a mistake about what's unique about London — as if finance were just a circus that can move from London to Frankfurt, Paris or even New York — depending on who is offering the best terms. What makes London unique, and will keep it [as] the vanguard, whatever happens, is that it is flexible and innovative with a legally dependable and stable base."

While there has been much discussion about the negative potential economic impact of Brexit, less has been said about the opportunity for Britain to steer its own course in terms of tech regulation and policy after leaving the EU, Kiernan argued in a 2018 report co-written with Hirander Misra, CEO of U.K.-based fintech firm GMEX Technologies Ltd.

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Silicon Roundabout in London, widely regarded as the heart of the city's technology industry.
Source: Google Maps

'One-size-fits-all European rules'

In particular, Brexit would give the U.K. the freedom to develop its own regulation around cryptocurrency and digital tokens rather than having to adhere to one-size-fits-all European rules, Kiernan said in an email.

Malta has established "forward-thinking" regulation around blockchain and cryptocurrency, but that regulatory framework could be revised at any time as the result of Europe-wide decisions that "don't always respect what's been achieved in specific markets," he said.

The Maltese government passed three laws in July 2018 that established a regulatory framework for cryptocurrency, blockchain and distributed ledger technology.

The FCA established a Cryptoasset Taskforce in early 2018, and concluded in a report that the U.K. must be proactive in regulating cryptocurrency and blockchain in order to strike a balance between ensuring the safety and transparency of markets and maintaining its leading position in financial innovation.

Brexit could also free up the U.K. to develop a central bank digital currency, the report argued. The Bank of England has toyed with the idea of issuing its own digital currency, and published estimates in 2016 that introducing one could boost GDP by 3%. The Bank of England has not yet taken concrete steps toward establishing a digital currency, but the Estonian central bank laid out plans in 2018 for a national cryptocurrency in 2018, only to be stopped by the EU "given the imperative of retaining the status of the euro as the unique regional currency," the FCA report noted.

The Estonian central bank came under fire from both European Central Bank President Mario Draghi and local banking authorities for the idea and shelved plans to introduced a so-called "Estcoin," a digital currency pegged to the euro, Bloomberg News reported in June 2018.

Stifling progress

The view that EU regulation stifles progress is widespread in London's banking community, according to an April 23 report from City University's Cass Business School. A survey of senior bankers conducted for the report revealed that 45% believe that EU regulation and supervision is holding back U.K. financial innovation.

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Conservative Party MP Adam Afriyie.
Source: Associated Press

While the survey did not go into detail on which specific regulations were seen to be the problem, EU regulation is "potentially stifling innovation" and making it harder for startups to scale, Barbara Casu Lukac, director of Cass's Centre for Banking Research, and one of the report's authors, said in an email.

When it comes to fintech regulation and policies designed to nurture fintech innovation, it is widely acknowledged that the U.K.'s approach has been both more proactive than that of many other major EU economies.

For a start, the Financial Conduct Authority started a fintech sandbox in 2016 to help young companies to scale, while regulators on the continent have been slow to implement similar policies — or have rejected them outright. German regulator BaFin, for example, has expressed its distaste for the concept of applying lighter regulation to young fintechs in sandboxes, arguing that all financial institutions should play by the same rules.

For Adam Afriyie, a Conservative Party member of parliament and head of the all-party parliamentary group on fintech, there are cultural differences between the approach of the U.K. regulator and its counterparts in continental Europe.

Channel 'a stark gulf'

"When it comes to attitudes towards regulation, the English Channel is a stark gulf. The U.K.'s position as the best place in the world to start or grow a fintech business is no accident; it is due to decades of supportive, light-touch regulation drawn up in partnership with industry. After Brexit, this will become more important than ever," he said in an email.

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Bank of England deputy governor for markets and banking, Dave Ramsden.
Source: Associated Press

However, the Bank of England's deputy governor for markets and banking, Dave Ramsden, told CNBC on the sidelines of a fintech summit in London on April 29 that the bank was not considering relaxing regulations to "for some kind of competitiveness reason."

And the idea that Brexit will help the U.K. blossom into a liberal hub appears not to have universal appeal. Efforts by blockchain entrepreneur Laurenzo Mefsut in March to rally the industry to call on the U.K. government to push back against stricter EU regulation of cryptocurrencies under the Fifth Anti-Money Laundering Directive and to demand a tech-friendly Brexit, or "Techxit," have failed to win many supporters. His petition to the government for a tech-focused Brexit garnered only a handful of signatures and was rejected by parliament.

The directive, which comes into force in January 2020, strengthens rules around transparency and the disclosure of beneficial ownership. It adds new provisions for cryptocurrency, for example, making cryptocurrency exchanges responsible for performing customer due diligence and submitting suspicious activities in the same way a bank or other financial institution would.

Elsewhere, fintech entrepreneurs in the U.K. have expressed concern about the detrimental impact that Brexit could have on areas ranging from attracting talent to continuing to service clients in the EU.