The Breakdown - After Prime Minister Boris Johnson Resigns, Are the UK’s Crypto Hub Dreams Dead?

Episode Date: July 10, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.    After years of what many would consider hostility to the industry, the British government did a major about-face in April when Chancellor of the Exchequer Rishi Sunak announced the country’s intention to make the U.K. a global crypto hub. But as Sunak resigned as part of a mass exit leading to Prime Minister Boris Johnson’s resignation this week, that ideal seems unlikely.  - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “The Now” by Aaron Sprinkle. Image credit: Dan Kitwood/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, July 9th, and that means it's time for the weekly recap. A quick note, before we dive in, there are two ways to listen to the Breakdown podcast. You can hear it on the podcast. You can hear it on the video. a Coindesk podcast network, which comes out every day in the afternoon, and features the breakdown alongside other great Coin desk shows. Or if you just want to hear the breakdown-only feed,

that comes out a little later in the evening. Wherever you're listening, if you would be so kind as to leave a rating or a review, it makes a huge difference, and I really appreciate it. Lastly, a disclosure, as always. In addition to them being a sponsor of the show, I also work with FTX. Now, today we are doing something a little bit different. We are talking about the volatility and upheaval in UK politics, but specifically, of course, what it might mean for the crypto community in that country. This is the type of show that I love doing during the weekly recap because while it's a little bit outside of what we might normally cover, there is some interesting overlap, and it's certainly big picture power shift time in the UK right now. I'm not going to go deep on the situation,

because obviously this isn't a politics podcast. It's not particularly a UK podcast, but if you haven't scene, the Prime Minister of the UK, Boris Johnson, resigned on Thursday morning. This is coming after months of building criticism and scandal around everything from economic policy, COVID policy, national health systems, ministerial conduct, and more. Johnson had been on the ropes for a while, having survived a vote of no confidence held by his conservative party in early June. And everything came to a head on Tuesday this week when Chancellor of the Exchequer, Rishi Sunak, and health minister Sajad Javid, resigned. We'll get into that, Scy, Sajid. of it in just a little bit, but first, I want to go back a couple years to talk about how UK policy

had been with regard to crypto. And to put it lightly, up until this year, the UK had been fairly hostile to the industry. While the U.S. is still figuring out whether it's going to be the SEC or the CFTC or someone else that has jurisdiction over crypto regulation, the UK granted power to regulate the crypto industry to their financial conduct authority or FCA, starting at the beginning of 2020. One of their first big moves came in October of that year when the FCA announced a ban on the sale marketing and distribution of crypto derivatives to retail investors. The FCA press release announcing this ban stated,

Significant price volatility combined with the inherent difficulties of value in crypto assets reliably, places retail consumers at a high risk of suffering losses from trading crypto derivatives. We have evidence of this happening on a significant scale. The ban provides an appropriate level of protection. Now, obviously, crypto derivatives for retail are also not available in the U.S. either. They have been controversial in many jurisdictions due to the way that they allow retail users to access leverage in their trading. This is an area of crypto regulation that has a lot of discussion and a lot of progress being

made that sees both the true risks, of course, but also the value that access to these types of products can create. Done properly, derivatives enable legitimate hedging activity to occur, which can actually help retail traders manage their risk. Anyway, for the point of our story, obviously the key part is that the FCA banned them. Next, in December 2020, the FCA announced a money laundering registration scheme for crypto companies. The regulator required crypto firms to start submitting applications for registration immediately, and those that did would receive temporary registrations, which would allow them to continue operating in the UK pending full consideration

of their applications, which was intended to be completed by July 2021. However, this was a not to be. By March 2021, the scheme was attracting lots of criticism from the industry regarding delays and lack of communication. At that stage, only four out of 200 applicants for temporary registration had been decided on by the regulator. Crypto UK chairman Ian Taylor hit out at Chancellor Rishi Sonak in a statement. He requested Sunak's intervention in the delays, stating that the UK is, quote, missing out on a major opportunity, has crypto companies trying to sign up under the new regulatory regime experience an arduous process, with most of the group's members having received little or no response from the FCA. For some, more than eight months have elapsed

without a single response from the regulator, Taylor said. These delays ended up prompting the FCA to extend the temporary registration period until March of this year 2022. However, the regulator also noted that a, quote, significantly high number of crypto firms were failing to meet their standards on anti-money laundering protections. In March of this year, the FCA finalized the registration process, leaving the temporary registration status active for only a small handful of firms whose applications were progressing. Out of the nearly 200 applicants, only 34 were approved to be fully registered, with a further five firms remaining on the temporary registry pending a final decision. And by the way, some of those five were really big firms in the country. These weren't just sort of fly-by-night crypto operations.

As all of this was happening, the FCA had also gone after Binance specifically. In June of 21, they refused registration to the crypto exchange and announced that Binance, quote, is not permitted to undertake any regulated activity in the UK. Now, there was a whole set of back and forth, but again, for our purposes, the key thing here is that the FCA explicitly went after Binance. Last note on where things stood in 2021. In the later part of that year, the UK advertising standards authority cracked down on crypto advertisements and even banned a number of them.

These advertisements were all over the London subway and bus. networks and the regulator criticized them for failing to properly warn about the risks of crypto investing, as well as often being misleading in nature. One of the things that they didn't like was companies highlighting Bitcoin gains over the last decade. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets.

Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, Chainalysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence and investigations support for all crypto assets. For organizations like Gemini, Crypto.com, and BlockFi, gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at chainalysis.com slash coin desk. The breakdown is sponsored by FTXUS. FtXUS is the safe,

regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCS app today and use Referral Code Breakdown to support the show. So here you kind of have a picture of where the UK was, which is why it was so surprising in April of 2022, when again, Chancellor of the Exchequer Rishi Sunak announced a gigantic policy shift. He came out and stated that he wanted the UK to be a global hub for crypto assets technology.

Alongside this proclamation, there were a range of proposed policies that included enabling stable coin payments with clear regulation, simplifying and clarifying the tax treatment of crypto, including defy, staking in NFTs, creating a framework for the recognition of Dow's as a type of legal entity, and also announcing that the more than 1100-year-old Royal Mint would be instructed to mint an NFT to be available in the summer. The UK Treasury stated this decision shows the forward-looking approach we are determined to take towards crypto assets in the UK. Now, there was obviously excitement around this from those particularly in the UK crypto community, but still it was

in many ways confusing. The UK regulator had spent the last two years shutting down the majority of the local crypto industry, but now they wanted to be a global hub. just weeks before the announcement, the regulator had declared crypto ATMs illegal due to money laundering risk. Many felt that there was an internal tension here, with the UK government being at odds with the FCA on their views of the future of the UK crypto industry. Now, in the next couple of months, there was some progress made. We saw people being hired to fill crypto-related positions. We saw a slightly different tone from the FCA. For example, at the end of April, the FCA co-director of consumer and retail policy stated at a conference.

that the regulator had been perhaps overly focused on risks instead of focusing on the opportunities. In May, the FCA announced that they would be holding a quote-unquote crypto sprint, which they described as, quote, the main aim of the event was to increase our understanding of emerging crypto asset market practices and to seek views from the industry on what an appropriate regulatory regime might look like. We want to consider how further crypto asset regulation could ensure consumers and markets have sufficient protections as the industry evolves. So that's where we were. Things were looking great. But then the government got caught up in itself.

The list of scandals has just been insane. We're talking ministers ignoring COVID lockdown rules, formal investigations of improper financing for the refurbishment of the prime minister's official flat. A formal investigation into Boris Johnson's reporting of travel expenses. A minister found to be committing, quote, egregious case of paid advocacy while engaging with lobbyists. drunken Christmas parties, drunken lockdown parties, more and more and more. To sum up, basically, the big things were, one, the repeated violation of lockdown policies, which were much more strict in the UK than in the U.S., and which found the police actually fining Johnson and condemning the actions.

The second was the renovation of the flat and the improper travel expenses, and ultimately a kind of tone or sentiment that the prime minister was spending public money as if it were his own, and then on top of all of this just general economic turmoil, which is, obviously going on everywhere, but is particularly acute in the UK. The UK saw 9.1% inflation in May, which is its highest level in 40 years. Food inflation is forecast to rise to 15% over the summer, and the pound is down 10% year to date. All of this scandal and animosity came to a head on Tuesday when Chancellor Rishi Sunak, again, from our story, and the health minister resigned. The specific catalyst of this resignation was to be a protest over the appointment of an MP to

cabinet who had an outstanding sexual assault allegation hanging over him. On Wednesday, Boris Johnson stood defiant against these resignations, asserting that his 2019 election win gave him a, quote, colossal mandate from voters. However, by Thursday morning, over 50 members of the Johnson government had resigned, forcing him to face the obvious and announce his resignation of the prime ministership. He did not apologize for his behavior, instead blaming the politics of his party. quote, when the herd moves, it moves, and my friends in politics, no one is remotely indispensable. So anyways, to the crypto implications. As you might imagine, the resignation of Rishi Sunak as Chancellor puts on hold the plans to

reimagine the UK as a crypto hub. Sunok was the driving force behind the initiative and the primary force behind the change of direction at the FCA. He has acknowledged that this may be his last ministerial job. What's more, while the government is in caretaker mode, the convention is that policy agendas will not be put forward. And even if legislation is proposed, there is no quorum of MPs to vote on anything as nuanced and controversial as a crypto-regulation bill. What's more, there is an open possibility that Parliament will be dissolved in a vote held.

So, TLDR, it appears for now that crypto-regulation is on hold at the legislative level. That means it will be on the FCA to regulate the industry as it sees fit without significant input from the government. Just days before the crisis, we got updates on the new hiring of the FCA Crypto Division. They've so far hired almost 500 new staff as part of a three-year strategy to restructure and bulk out the agency across all divisions. Among these new hires are six directors, including Matthew Long, who's being hired as the director of payments and digital assets, and being transferred over from the National Crime Agency where he was previously a director of the National Economic Crime Command.

Karen Baxter is another leadership hired due to start in September, taking the role as a director of strategy, policy, international, and intelligence, and again, comes from a similar background, formerly a commander and national coordinator for economic crime with the city of London police. Now, of course, we would expect a financial services regulator to have a strong law enforcement arm, but given the fact that these folks are moving into such broad positions, it kind of does beg the question about whether the FCA is still looking to this idea of the crypto hub, or whether it really just wants to focus on enforcement and crime. Stack on top of this that we are not in a bold.

buoyant bull market anymore. There's more negative public sentiment around the industry, and so it seems for now that any sort of big and bold pro-crypto platform is likely not going to emerge. But at the end of the day, we'll have to wait and see. Clearly, when it comes to something as momentous as the prime minister resigning, crypto is not the first, second, or even third concern for most folks. But I still do hope for those in the UK crypto community who are excited about these shifts in tone, that there's been enough progress made, enough dialogue opened with the FCA or whoever else is regulating crypto in the country, that things don't revert back entirely to where they might have been before. And even if that's not the case, well, it's Saturday. So I hope you're having a

great weekend at least. I want to say thanks again to my sponsors, nexo.io, chain aliasis and FtX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.