The UK was the blockchain future once. It is after all a small sovereign country with a globally impactful financial centre and newly won freedoms to regulate more nimbly than the European Union it just left.
Talk of shaping UK regulation for global leadership has since disappeared. Only a year ago in 2024, one of the leading stablecoin organisations was beseeching a key UK regulator at an OMFIF Digital Monetary Institute meeting to set a regulatory agenda more accommodating than the European Union’s Markets in Crypto-Assets Regulation – and one which the US, then striven with bipartisan gridlock, might go on to copy.
Too late. While MiCA is already established and the US gets ready for a ‘big bang’ of digital assets regulation, with the Senate just passing the Genius Act, the UK government continues to talk un-specifically about regulation in the future. As it stands, there is a date conspicuously missing for the ‘Regime go-live’ portion of the Financial Conduct Authority’s ‘Crypto Roadmap’, though it suggests some time after 2026.
Taking notes from the US
The UK also appears to be making some fundamental errors. A leading fintech lawyer described the UK regulatory aim to be ‘somewhere between Europe and the US’ in terms of prudential restrictiveness. This hackneyed idea might not work, for several reasons.
UK regulators are lumping stablecoins with other digital assets to the mystification of market observers, who hoped to see stablecoins treated as a settlement instrument, not an investment asset. If the UK is to orient itself more to the American financial ecosystem than that of Europe’s, they would be well advised to copy the distinction at play in the US, which is treating stablecoins separately from cryptoassets in the Genius Act.
Though there are nuances, these instruments intend to be a version of money, not securities. These payment instruments may have a far-reaching impact on finance, one that the Bank of England was initially wary of. Its first pass at a regulatory framework for stablecoins it deems ‘of systemic importance’ required 100% of backing assets to be held in central bank money – a model that makes the issuance of systemic stablecoins all but unviable as a business model.
This leaves the UK with two frameworks: one where stablecoins are treated as a payment instrument, but where issuers are severely limited from earning, and another where the reserves framework is more reasonable, but the asset is treated as an investment with onerous prudential regulations. The absence of a workable framework retards the UK’s ability to adapt to the possibility that, as one well-connected stablecoin utility put it to us, ‘all of finance is going on chain’.
Proceeding with caution
The Bank is now edging away from its earlier stance in the face of US facts on the ground. However, despite this softening, UK regulators may still believe that stablecoins could go on to create a systemic crisis, and therefore should be held at arm’s length, particularly with the failure of FTX in 2022.
One provision in the draft UK regulation makes digital exchanges liable for ‘customer detriment’ – an extraordinary departure from the typical role of enabling price discovery in securities and facilitating their trading and settlement. The proposed framework is neither attractive for market infrastructure operators, nor issuers of digital money. Market participants tend to point to the United Arab Emirates’ Vara as the better model – also because it is a dedicated digital assets regulator, rather than an attempt to shoehorn tokenised finance into existing regulatory bodies, descending from the UK’s Financial Services and Markets Act, defined in 2000.
The UK could be forgiven for a degree of caution. It is still living with the socio-economic consequences of the 2008 financial crisis, which stemmed from naïve regulation of a securitisation ecosystem materially rooted in US collateral. Nevertheless, the UK finance minister discussed reciprocal recognition of US digital assets regulation and the setting up of a transatlantic digital sandbox during talks with Scott Bessent, US treasury secretary, to frame the new UK-US trading regime in the wake of the ‘Liberation Day’ tariff merry-go-round,.
How would this work? Demand for sterling-denominated digital assets in the US is likely to be slight. There may be scope for UK-based dollar-denominated instruments, though this might be unhelpful for a financial centre whose stock market is shrivelling with defections to New York, and whose chance to be the centre of Europe’s – anyway perpetually postponed – Capital Markets Union has disappeared. Meanwhile, a key state regulator told a recent DMI roundtable that they are continuing to advise federal lawmakers drafting the Genius Bill to restrict foreign-domiciled digital assets.
‘Policy procrastination’
The other – unAmerican – path the UK could take to anchor its tokenisation environment as a key global financial centre is to speed up implementation of wholesale central bank digital currency, as the European Central Bank is doing. DMI has heard national banks in the Eurosystem talk about the implementation of Deutsche Bundesbank’s ‘Trigger solution’ later in 2025. The Bank is also pursuing a similar plan to create a ‘synchronisation’ system much like the Trigger solution, which would allow the cash leg of tokenised securities transaction to settle in a real-time gross settlement system on a delivery-versus-payment basis. The difference is that, while the Bundesbank’s ‘Trigger solution’ is a stopgap before a full wholesale CBDC, the Bank as yet sees no need for anything beyond synchronisation.
Or the UK could, as Hong Kong is, do both. It is a financial centre acutely aware that its global status in markets is vulnerable to competitors. The special administrative region’s stablecoin bill was passed on 21 May, and Project Ensemble is laying the ground for a tokenisation ecosystem rooted in wholesale CBDC and intermediated by the existing banking system as that develops its own tokenisation platforms. The Bank of England was an early pioneer in experiments to put public money at the heart of tokenisation with its Omnibus accounts initiative in 2021 already.
While consultations carry on, market participants in both traditional and digital finance organisations continue to be baffled by the UK’s collective policy procrastination, especially having mastered fintech so well in the 2010s. We hear frequently of digital assets players which intend to give up. Even though London has its time zone, language and common law on its side, it should look to Antwerp to remember that financial centres come and go.
John Orchard is Chairman and Lewis McLellan is Editor of the Digital Monetary Institute at OMFIF.
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