Former UK chancellor Philip Hammond has warned that the EU’s forthcoming crypto regulation bill could create such an attractive trading environment for the web3 sector that Brussels could eclipse London “in terms of financial services innovation”.
The European Union will vote on the final wording of the Markets in Crypto Assets (MiCA) bill this month. It is set to make the bloc the first major global jurisdiction to install a comprehensive regulatory framework for the crypto sector.
The law is expected to provide credibility to the crypto sector, with licensed crypto-asset service providers (CASPs) required to offer investor protections under MiCA across the EU.
Speaking on this week’s episode of Yahoo Finance UK’s The Crypto Mile, Hammond warned that if the EU sets the right regulatory balance between freedom and restriction, the bloc could eclipse London as a centre of trade for digitised financial markets.
“I think there is a real risk, and candidly this is the first time in 40 years that there has ever been an issue in which Eurozone countries looked as though they are going to be ahead of the UK in terms of financial services innovation,” Hammond said.
“During the time that the UK was a member of the EU, typically the UK drove the financial services agenda, and was always a first mover.
“It is a very uncomfortable proposition to think that with the MiCA vote coming up, we could see the European Union offering a trading environment which is more permissive and looks more attractive to institutions and to innovators, than the UK does.”
The UK government is working to regulate the crypto sector through amendments to the Financial Services and Markets Bill.
Hammond said that London needs to establish itself as the premier trading venue for digitised assets, to ensure the future of Britain’s financial services industry post-Brexit.
Hammond believes that this centres around web3 innovation, the digitisation of traditional markets and cryptocurrency trading.
“I am hopeful that the very fact of the European Union moving forward on its MiCA plan would jolt regulators and legislators in the UK awake, and just underscore that this is not some marginal activity being experimented on by a few third tier jurisdictions, it is mainstream,” he said.
UK needs an optimal balancing act when setting regulation
Hammond said: “As ever, when designing a regulatory regime for a new product, its a very careful balancing act; if you err on the side of being too accommodating, you risk disasters happening and your reputation being trashed. If you err on the side of being too restrictive, then the business goes elsewhere.
“If you look back over the past 40 or 50 years, the UK has a pretty good record in financial services regulation of getting this balance about right and being not the most accommodating jurisdiction, but being accommodating enough to attract the services away from more conservative jurisdictions, and I hope we are about to pull this trick off again.”
UK’s ambition to become ‘global crypto hub’
In 2021, Hammond became senior advisor at London-based crypto custody firm Copper, becoming chair of the company in 2023.
He described the UK as currently lagging behind other jurisdictions in terms of its ambition to become “a global crypto hub”.
In April 2022, then-chancellor Rishi Sunak planned to make the UK “a global crypto asset technology hub”. Alongside former economic secretary to the Treasury John Glen, he laid out a roadmap for the UK’s crypto future.
This included the development of new legislation for a “financial market infrastructure sandbox” that can aid crypto-firms to innovate.
However, Hammond said: “At the moment, we are quite some way away from the UK becoming a global crypto hub.
“I see other jurisdictions around the world making significant strides towards creating broader digitised financial markets, which is the big prize here.
“I hope it is not too late, and I hope that the UK will move into the vanguard of this action. But at the moment, it is the smaller jurisdictions that are making the running.
Should the UK follow the US’s harsh regulatory stance on crypto?
“The regulatory environment needs to be safe, secure and effective, and in my own view, the US has gone too far in effectively making it impossible for certain actors to participate in digital asset marketplace,” Hammond said.
“But, I don’t think that is necessary given the size and the sophistication of the actors. I think the UK does have an opportunity to lead a well regulated, properly ordered digital marketplace, which is none the less more accommodating to those big intuitional players, than the US looks as though it is going to be.”
He highlighted the issue of competing regulators in the US. In contrast, the UK has a single regulatory authority for financial services, the Financial Conduct Authority (FCA).
“The US has got a bit of an intuitional challenge here, in the fact that there are competitive regulators in the US, and whenever a new product or market place comes along, there is always a sense that different regulators are trying to position themselves around that.
“We have just the one regulatory here in the UK for financial services, so it seems to me that there is an opportunity now for the UK, as it has done successfully in the past to identify a mistake, which is an excess of regulation in the US, and thus create a more attractive environment in the UK.”
There is global competition to attract players in the web3 space.
Hong Kong has implemented its own crypto and digital asset regulatory framework, and Gulf states such as Dubai are also positioning themselves as attractive environments for digital asset trading.
The colonisation of the web3 sector by traditional finance and web2 firms is advancing, and according to Hammond, jurisdictions neglect the growth potential of the sector “at their peril”.
