London Calling

With Brexit giving the UK new found freedom from European regulation, could we see London’s dominance as a financial center grow with Fintech and Defi?  

“If there is one message I want you to leave here today with, it is that the UK is open for business - open for crypto business.”

- John Glen, the Economic Secretary to the Treasury, comments made at UK Fintech Week 2022

Fintechs in a Post-Brexit UK

Brexit has shaken up many sectors in the UK and finance is no exception. As some of these businesses relocate jobs and resources to the EU, there have been questions on how London’s reputation as a financial center would evolve. If Secretary Glenn’s speech is anything to go by, the UK is looking to lead the world with regulation to support crypto and defi with a commitment to make London the global center for fintech. He rightly points out that the UK is home to more than half of Europe’s fintech unicorns, with 23 based in London and 2 elsewhere, as can be seen below in the following data from S&P Global.

Source: S&P Global Market Intelligence

Regulation in a Decentralized World?

Complex and tedious regulation can make doing business challenging but without clear direction from regulators, fintech innovators are unlikely to hire and grow their teams in regulated jurisdictions. The Defi and crypto world have evolved in a decentralized way relying on a peer-to-peer model rather than centralization. The “De” in Defi literally stands for decentralized and this has been a major draw in areas in areas where there is a high population of unbanked.  In most developed nations, a key aspect of financial regulation is custody – who holds the underlying assets.  In most developed countries, regulated investment assets are to be held by a ‘qualified’ custodian.  Crypto assets have evolved outside of the banking system and generally crypto assets are ‘self-custodied’ in a crypto wallet.  These fundamental issues must be addressed by the global regulators and it would appear that the UK is committed to leading the charge.

A key part of the Defi ecosystem is the concept of stablecoins, a non-government issued digital coin, which can be held in crypto wallets.  In Glenn’s speech, he states that the UK ‘will introduce…legislation, as part of an ambition to deliver a world-leading regulatory regime for stablecoins.”  There has been some debate whether stablecoins will be issued by private companies or only governments, and our sense is that the UK appears to be moving in the direction of allowing private companies to issue stablecoins, but with regulatory oversight.  We believe that this is a key step in creating more confidence in the defi and crypto community and will allow for greater efficiencies in the payment space.

Many crypto enthusiasts have been attracted by the ability to hold their wallets outside of the banking system, but as governments and firms look to bring crypto and Defi into mainstream finance, key oversight on ensuring that bad actors are not able to move funds anonymously is important.  An example of this trend is a major Defi player, Aave, who have built a version of a ‘permissioned pool,’ designed to be compliant with anti-money laundering (AML) regulations.  It is a separate pool which means that regulated firms can borrow and lend in this space knowing that any entities they are interacting with are compliant with AML requirements.  

Although there is plenty of competition from countries, regions and cities who are courting the crypto industry and the jobs they will create, the UK appears to be well positioned to further London’s reputation as a global financial center with the inclusion of crypto and Defi under a regulatory framework they will build to support it. Comments from the Chancellor of the Exchequer, Rishi Sunak, at the House of the Commons have confirmed the government’s commitment to making the UK a global hub for crypto asset technology.  

Brexit has created many challenges for the UK, but having the flexibility to draft legislation for the growing world of digital assets might be just what is needed to make London the new center for Defi.