Conventional Wisdom vs. Emerging Reality
Traditional trade negotiations often prioritize market size, making the United Kingdom (UK) seem like a small player compared to giants like China and the United States. However, the cryptocurrency market operates under different rules, where the UK has several overlooked and misunderstood advantages that can be leveraged in the current emerging regulatory landscape.
Global Financial Hub: A Regulatory Superpower
London’s leading position as a global financial hub gives the UK significant influence on global regulation. The requirement for observance of UK financial promotion rules is non-negotiable when selling fungible, transferable tokens from any country, regardless of whether it’s via Europe or not. This regulatory superpower has severe consequences: breaching UK rules can result in up to two years’ imprisonment and an unlimited fine.
Financial Conduct Authority (FCA) Guidance
The FCA has recently published guidance highlighting the importance of compliance with regulations. Firms providing on/off-ramp services to crypto firms conducting illegitimate activities risk committing an offense or facilitating one. Losing banking and payment rails is a significant consequence, demonstrating the FCA’s growing interest in ensuring UK rules are complied with.
Marketing materials promoting investment activity in tokens must be created to comply with or fall out of the regulatory scope of the UK Financial Promotions regime. Companies failing to do so risk severe repercussions, emphasizing the need for strict compliance.
Growing Regulatory Clarity
As regulatory clarity grows, cryptocurrency companies should adopt a risk-based approach when entering new markets and engaging with ethical third parties to scale their ventures. The Markets in Crypto-Assets (MiCA) regulation presents several challenges and opportunities that can be approached from a stronger position than many think, especially for non-EU based companies.
EU Member States: Divergent Approaches
Although MiCA is intended as a single regime, experience shows that different EU countries will seek to position themselves as the ‘go-to jurisdiction.’ This results in only a few winners. We’re already seeing divergence between EU member states, such as:
- Taxes imposed on crypto firms
- Ease of interacting with existing infrastructure to sell products
- Ability to leverage pre-existing licenses to reduce costs
- Required substance for obtaining a license (e.g., local directors, banking support)
Choosing the Best Jurisdiction
Non-EU cryptocurrency companies can choose the best jurisdiction based on their specific needs. However, this requires careful consideration and advice from experienced professionals, as advisers in each jurisdiction will seek to sell themselves.
The cost differences can be substantial, with companies using strategic solutions to reduce EU access costs by around 90%. By choosing the right jurisdiction, companies can minimize compliance costs and take advantage of the UK’s regulatory advantages.
The Cost of Compliance
Minimizing the cost of compliance with MiCA is crucial for companies looking to expand into the EU. The UK offers a deep network of legal and financial services, world-class universities, and regulatory influence. While English law may not be considered market-leading by Web3 natives, regulators are interested in the UK’s position when drafting frameworks.
The outcome of the European Securities and Markets Authority’s guidance on reverse solicitation under MiCA leads to similar results as the UK financial promotion rules. Collaboration among regulators to set common minimum global standards is also evident.
UK-First Approach: A Regulatory Advantage
Companies adopting a UK-first approach benefit from an established and robust legal framework, internationally recognized by other jurisdictions. This sets out requirements for regulating crypto asset businesses, making it essential for businesses and investors to consider these often-overlooked regulatory advantages when planning for the future.
Conclusion
The UK’s hidden advantage in cryptocurrency regulation is undeniable. By leveraging this position, companies can minimize compliance costs and take a stronger approach to their products. As the regulatory landscape continues to evolve, it’s crucial for businesses and investors to understand the benefits of being based in the UK.
By adopting a risk-based approach and choosing the best jurisdiction, companies can navigate the complexities of MiCA regulation and capitalize on the UK’s regulatory superpowers.