Crypto exchanges may have more opportunity than they think if they’re eyeing the United Kingdom as a new territory for expansion.
With crypto adoption on the rise, regulatory evolution in progress, indications that the government is favorable toward crypto, and proximity to EU crypto markets, it’s a good time for exchanges to explore new and expanded opportunities in the UK.
Indicators and opportunity for crypto
Typical indicators of a welcoming environment for crypto include positive adoption rates and regulatory clarification. As users increasingly adopt crypto (either as investments or as currency used for payments, purchases, and remittances) and jurisdictions begin to provide rules, standards, and protections, investors observe less risk and are naturally drawn in.
According to Chainalysis, the UK “ranked 17th in the Global Crypto Adoption Index in 2022, up from 21st the year prior.” Crypto awareness is on the rise, and Triple A’s study notes that over 4 million people hold crypto. Notably these participants represent a younger demographic (aged 18-34), and they’re also likely “to be highly educated, with 46% holding a bachelor’s degree or higher” (Triple A, 2022).
Another indicator: other players in the market. In late summer of 2022, Crypto.com scored regulatory approval in the UK, signaling obvious financial opportunity and an agreement with the UK’s “anti-money laundering and ‘terrorist’ financing rules.”
Moving forward with crypto regulations
In general, the UK treats cryptocurrency as property instead of currency or money, issuing general guidance for taxpayers (e.g. HMRC provided further guidance on DeFi reporting in 2022) but not yet arriving at a comprehensive regulatory framework.
In April 2022, the UK Treasury made an announcement to recognize stablecoins as a valid form of payment, reflecting another intentional move to solidify its place in the world as “a global hub for cryptoasset technology and investment.” Then Chancellor of the Exchequer, Rishi Sunak, commented it was his “ambition to make the UK a global hub for cryptoasset technology, and the measures we’ve outlined [in April, 2022] will help to ensure firms can invest, innovate and scale up in this country.” Now with Sunak as Prime Minister, crypto exchanges may find an even stronger ally in Number 10.
Still, no one should expect a “wild west” approach to cryptocurrency. The UK appears to fully welcome crypto exploration and adoption, but it wants to do so in a controlled and reasonable way. Some proposed regulatory steps include:
- The establishment of “a financial market infrastructure (FMI) ’Sandbox’ that will enable firms to experiment and innovate in providing the infrastructure services that underpin markets, in particular by enabling Distributed Ledger Technology to be tested.”
- “a research programme to explore the feasibility and potential benefits of using DLT for sovereign debt instruments”
- “ways of enhancing the competitiveness of the UK tax system to encourage further development of the cryptoasset market in the UK”
- “The Economic Secretary will establish and chair a Cryptoasset Engagement Group, convening key figures from the regulatory authorities and industry to advise the government on issues facing the cryptoasset sector”
The FCA’s Sarah Pritchard, Executive Director Markets, has also signaled a common sense stance on the UK’s views on crypto proliferation and advertising: “We want people to be able to invest with confidence, understand the risks involved and get the investments that are right for them which reflect their appetite for risk… Where we see products being marketed that don’t contain the right risk warnings or are unclear, unfair or misleading, we will act.”
What does this regulatory environment mean for crypto exchanges?
As adoption increases and regulations stabilize the environment, more investments are made, more would-be users begin to see crypto as mainstream, and exchanges stand to reap the benefits of increased transaction activity.
Further, by becoming active participants, exchanges may have the opportunity to help shape policy and serve the general interests of a welcoming user base and government. Regulatory bodies are then better informed about how crypto functions across geographies, wallets, and other exchanges, and policymakers need these kinds of informed partnerships to create strong regulatory environments that better protect and serve their constituents. And this means more business opportunities for crypto exchanges as well.
UK and EU crypto ties
The UK may have exited the EU in 2020, but when viewed as an economic region encompassing Central, Northern & Western Europe (CNWE), Chainalysis’ 2022 Geography of Crypto Report identifies the UK as Europe’s largest DeFi district.
The same analysis notes that CNWE is “once again the world’s largest crypto economy. Users and institutions throughout the region received $1.3 trillion worth of cryptocurrency from July 2021 to June 2022, and Western Europe alone contained six of the 40 highest grassroots adopters of cryptocurrency: The United Kingdom (17), Germany (21), France (32), Spain (34), Portugal (38), and the Netherlands (39).”
It’s obvious that the UK’s connection to the continent (and vice versa) creates an environment ripe with possibility for crypto investments.
Crypto tax partners make a big difference
As exchanges take advantage of increased opportunity in the UK market, it’s inevitable that the complexity of regulations (and the need to track taxable and non-taxable transactions) could pose a significant obstacle to realizing those gains.
Or it could be a great opportunity to bolster revenue by identifying strong partners for the task ahead.
Exchanges that differentiate at the level of value stand to see stronger gains, and adding value at the compliance level can add acceleration to an exchange’s entry or expansion into the UK market.
After all, increased regulation is coming, and with that the need to enhance tax reporting.
Who’s going to do that? Who’s going to help users and exchanges report taxable and non-taxable events?
Increasingly, exchanges are looked to as data repositories and compliance partners, burdened with an expectation to fill the compliance gap. But without an appropriate crypto tax software solution in place, it becomes more difficult to maintain momentum.
That’s where strong partnerships make a world of difference.
BlockSentry delivers third party corroboration and verification, providing simplified compliance solutions to users, exchanges, and governments. Learn more about BlockSentry or schedule a demo to see it in action.