When London dreams of becoming the financial capital of crypto

When London dreams of becoming the financial capital of crypto

‍After leaving the subject to one side for years, the UK seems to have fallen in love with cryptos. By 2024, the country could have flexible regulation with the aim of competing with the European Union. Is this a realistic ambition? Part one of our report from London.

The sun is shining in London this morning. The buildings of Canary Wharf, the business district in the east of the British capital, are flooded with a clear light that makes the big names in finance stand out: HSBC, Citi, StateStreet...

We just happen to have an appointment for a coffee ☕ ️ with the banker from one of these global giants.

Nick*, who wished to remain anonymous, is not just another banker. He is one of those "traditional" bankers working on cryptocurrency-related projects. These are mainly projects involving the trading and custody of digital assets (crypto and NFTs).

Because of the recent scandals, notably FTX, and the sharp fall in the markets, he has been keeping a rather low profile in recent weeks. "We've seen simpler times," he smiles. 😅

Not easy, in fact, to work in crypto at the moment, especially within a banking institution. But beyond this tricky period, Nick is optimistic because things are moving across the Channel. "We finally have a government that wants to accelerate on cryptos. This is an excellent thing", he is pleased to say.

In fact, while some countries such as the United States have decided to take a much tougher line - Kraken has just been sanctioned by the SEC - the discourse is radically different in the country of King Charles III.

The recent arrival of Rishi Sunak in power is obviously not to blame.

The new Conservative Prime Minister, who started his career at Goldman Sachs (he's only 42), is an outspoken supporter of cryptos. "He's someone who comes from finance, he understands that crypto is not a fad," Nick points out. "These technologies are going to have a huge impact," he adds.

This is why Boris Johnson's former finance minister has just launched a major project on financial regulation, of which cryptos are an important chapter.

The aim of this project is clear: to attract Web3 investors, their billions of dollars, and create jobs in the country. 💰

According to CryptoUK, the UK's leading trade association for the sector (with more than 100 member companies), London could create several thousand direct jobs in the sector over the next few years.

A figure that has obviously not escaped the notice of Rishi Sunak, who, like his predecessors, wants to erase some of the consequences of Brexit, which caused the country to lose some of its jobs, particularly in finance.

"With Brexit, the UK has lost some of its attractiveness, so we need to find new levers, and crypto is an excellent one," confirms George Morris, lawyer at Simmons & Simmons.

What could this regulation look like?

For the moment, little has filtered out about the first draft of the UK government's future regulation. 📝

According to initial indications, the text is based on the main principles of the European MiCA regulation, which the European Union is due to adopt definitively in April. "MiCA is a very good basis", explains George Morris.

The idea for London, however, is to make a text that is "even more comprehensive", according to several lawyers and consultants, in particular by incorporating decentralised finance and NFTs, and above all by trying to be a little more flexible. "Otherwise there wouldn't be much point", says Ian Emerson, a partner at Fabric Ventures, a London-based fund specialising in Web3.


With Ian Emerson (Fabric Ventures)

The government has just launched a public consultation on the subject. This will last for two months. "All the players in the ecosystem can contribute and make their proposals", explains Diego Ballon Ossio, a partner at the law firm Clifford Chance.

After this consultation, which should therefore be completed during April, the government will take over again, judge what has come out of it, and possibly amend its first draft.

Then the executive will pass the dossier to the Financial Conduct Authority (FCA), the UK's stock market watchdog, which also has the power to legislate on financial matters. Unlike its French or German counterparts, the FCA is not just an administrative authority. 🧐

If the timetable follows its course, UK regulation could come into force in 2024 or 2025. "No one will recognise it, but there is a form of race against time with the European Union," says the head of a London-based fund.

The MiCA regulation is due to come into force in 2024 (with derogations until 2026 for certain players already registered). ⏳

Whatever happens firms that want to move to the EU will have to comply with MiCA. "The Brexit gives the UK more flexibility, but they also lose the advantages they had by being in the EU," says a French lawyer.

Meanwhile, a recent study by "Recap", a UK crypto company (important to note), ranked London as the most "welcoming" city on the planet for crypto. It is ahead of Dubai, New York and Singapore.

The top EU city is... Paris. The French capital ranks 8th.

The study has caused a stir in the UK ecosystem. "A lot of people seem to be discovering that the UK, and especially London, is not starting from scratch and that there is a crypto ecosystem already there," laughs Jérémy Obadia, head of derivatives at Ribbon Finance, a decentralised finance protocol based on Ethereum. 😏

Without yet speaking of a "crypto hub", London is indeed far from lagging behind.

Many exchange platforms of American origin such as Coinbase and Kraken have European offices in the British capital. The world of NFTs is also dynamic. "We organise an event every month and there are hundreds of people who come," points out Mila Lolli, founder of NFTUK, an organisation whose aim is to acculturate people to Web3 topics (find her interview below).

DeFi in the UK

But beyond all the activities linked to buying and selling crypto-currencies or NFTs, the big strength of the UK ecosystem is clearly on the side of... decentralised finance (DeFi).

While there are no official figures, a significant proportion of start-ups and crypto projects such as Valk, a system for monitoring flows on DeFi, gravitate towards this universe. "The majority of the big players in DeFi are in London," stresses Antoine Loth, co-founder of Valk.

This is particularly the case for the giant Aave. A large part of the team is based in London, including Aave Limited, the commercial company responsible for developing applications on the protocol of the same name.

Several London-based banks and investment funds are working with the teams on the protocol launched by Stani Kulechov (read his interview). 🏦

"I've set up three start-ups in London, and there's a huge concentration of talent and investors," says Itamar Lesuisse, creator of the DeFi Argent wallet (one of the most innovative in the sector, ed. note). "The legal system is very favourable for start-ups, not to mention the fact that there's a huge amount of FinTech innovation here," he continues. "Seen from the UK, you can feel a change for French start-ups, but London is still way ahead when it comes to access to finance."

The capital 🇬🇧 is also home to most of the market makers in the ecosystem. Market makers are very important players because they are the ones who provide liquidity to the various exchange platforms.

In London, there are the biggest specialists in the sector such as GSR and Wintermute, who have an excellent reputation. "They were among those who completely came through the crashes of Celsius or FTX, so it's no coincidence," explains someone close to Aave.

This strong UK position on DeFi is quite simple to understand. "London is a hub for traditional finance. Here, there are all the best profiles (including many French 🇫🇷 , editor's note), so it's normal that decentralised finance is developing so much", explains Olivier Legris, founder of CVRE, an agency specialising in Web3.

It is for these same reasons that players such as Revolut, at the forefront of access to crypto investment for the general public, or Monzo, are based in London.

Until now, this ecosystem has developed under the radar. The challenge for Rishi Sunak will be to succeed in continuing to grow it in a more regulated world. From this point of view, the recent debates surrounding the MiCA regulation show just how difficult it is to strike this balance...

We'll tell you the rest next week!

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