There is an unrivalled opportunity for the UK to lead in crypto in terms of rules, regulations, words and welcome. Crypto is not a silver bullet nor indeed the solution to all our ills, but it holds a real and sustainable opportunity for us all in the UK and we must consider carefully what we require from Government to make this possibility a purposed reality.
My interest in the potential of crypto was spurred by my work on the related, often underpinning technology of blockchain and other distributed ledger technologies (DLT). I have been conscious of the possibilities afforded by DLT for at least a decade now.
Back in 2017 I gathered together a group of experts and published my report, Distributed Ledger Technologies for Public Good: leadership, collaboration and innovation, building on the excellent work of Sir Mark Walport, Distributed Ledger Technology: beyond block chain. If the opportunities were there in 2017 and 2018 when I published a report update they are there in multiples today, and arguably with everything else we are facing as a country the opportunity if we get it right has become an even bigger prize.
It has been fascinating learning about how Auditchain have built an audit tool that uses this underpinning technology (an Ethereum layer 2 protocol) combined with a higher level semantic logic based on Xtensible Business Reporting Language “XBRL” to set the rules for the valid state of a reporting entity based on its reporting style and reporting scheme.
Could this be the future of auditing? Instead of a system based on samples that often misses fraud and failure a technological solution such as the one described by Auditchain would have 100% transaction inclusion and a cryptographic audit trail. Would it – as they suggest – become cost prohibitive to commit fraud by the perpetrators and substantially raise the ability for auditors to detect fraud. Blockchain in the auditing puts an end to fraud?
It is clear that we require tailored regulation for crypto and we need it now. If the UK can set out clarity in this area we will not only influence the environment in the UK we will give ourselves the best opportunity to influence global policy. Similarly, such certainty would obviously be attractive to firms looking to locate in the UK. Just as the rule of law worked and continues to work such certainty magic for so many businesses who choose to come to the UK and/or structure their dealings under this, so it could be for crypto businesses.
The challenge in devising a regulatory approach to new technologies is finding the appropriate balance between encouraging innovation and providing regulatory clarity and ensuring that legislation mitigates possible risks raised by the relevant activities. Investors must be protected, competition must be promoted and encouraged.
A real source of stability in this space is in the fact that many of those involved are themselves ex-regulators with positive history and hinterland to bring to the debate. Thus, industry engagement must be maximised, as it is crucial to achieve a proportionate and risk-based approach. It is equally crucial for legislators and regulators to continue to become increasingly knowledgeable and involved with opportunities, use cases, benefits and indeed, risks.
It is encouraging that over the decade of discussing fintech with fellow parliamentarians (the fintech parliamentary group I founded and co-chair was established in 2015) the sector is now so much better understood in Westminster. CBDCs and stable coins are currently at the fore of many of the discussions and debates currently being held in Parliament.
As was the case with fintech over a decade ago, the UK must engender an innovation-friendly business ecosystem by having a principles-based, outcome-focused approach to regulation, so that existing regulatory solutions and frameworks can be adapted quickly, if appropriate and required. It will be the combination of Government positive action on crypto regulation, Bank of England positive action on a potential ‘Brit Coin’, industry and policy makers coming together for the wider public good and national interest which will enable and empower future finance now.
An extended version of this article was published in Finextra, 12th October ’21