The new Prime Minister’s vision for crypto and digital finance in the UK

This week, a millennial with a PhD from Stanford and a former career as a Wall Street banker became Britain’s first ever Asian-born prime minister, and with a vision for Britain to become a hub for global crypto and digital assets.

If 42-year-old Rishi Sunak can’t deliver “Digital Britain” and kick-start the stalled digital finance innovation agenda to drive tomorrow’s productivity, social diversity and inclusion, and economic growth, who can?

Sunak appears to be the best-qualified leader in the G7 to succeed in this, and the City of London and the financial sector have high hopes for a savior after six years of the government giving business the cold shoulder. Business is the state’s best friend in an economic crisis, especially when it needs money, brains and friends.

Sunak was welcomed to 10 Downing Street this week during the toughest economic times in a generation and has some pretty big fish to fry. With double-digit inflation, skyrocketing energy costs and food costs up over 15 per cent year-on-year in the UK, the economy is starting to bite and most people can’t afford to double their mortgage rates.

After 44 tumultuous days of the Liz Truss government which saw Chancellor (Minister of Finance) Kwasi Kwarteng make £50bn of unfunded tax cuts, the pound was sent tumbling and Britain’s biggest pension fund threatened with insolvency due to rising government bond (gilt) prices and unexpected claims on liquidity. Kwarteng was fired, and Truss resigned days later.

“Stability Sunak” has brought certainty back to the markets with the pound recovering most of its losses. However, this stability may be short-term. As macro and market conditions worsen, economists are predicting a UK recession, and while an austerity budget may be good for the books, it is unlikely to be popular with the electorate.

The people want economic stability back and an end to what appears to be a serial deterioration in the quality of life for many in the UK. Labor has a 39-point lead over the Conservatives in the polls and with an election looming in 2024, Sunak and his government have their work cut out for them.

Battening down the hatches and stabilizing Good Ship UK is just one variable in this complex equation. With Britain’s productivity growth at an annual snail’s pace of 0.5 per cent for more than a decade, the country needs to transform for the digital future to boost productivity and spur greater growth.

Low business investment, weak management and too few commercial patents are the main factors behind Britain’s weak productivity cited by the London School of Economics and the Resolution Foundation think tank.

With Britain’s fintech crown jewel seeing investment fall by a staggering $9 billion, down 65 percent in a year, the dream of the City of London leading the world in digital finance is having a near-death experience and needs immediate restorative attention.

Global fintech and banks are transforming capital markets infrastructure through digitization and decentralisation, and the UK will miss the opportunity to be a player in this new digital world and maintain its position as a leading financial center if it does not act now.

Andrew Griffith MP, the new Financial Secretary to the Treasury, took the first step this week by including crypto-assets in the scope of regulated financial services in the Financial Services Bill which is expected to be passed in early 2023. This is a wise move – the UK has the last mover- advantage between the US and Europe and must seek to be aligned and competitive on crypto spot markets and stablecoins.

Industry leaders have suggested that the government also focus on the tokenization of the securities, commodities and real estate markets, a much bigger prize than just the crypto markets. With the London Stock Exchange reform on the government’s agenda, the opening of the listing market for digital securities in private markets is a game changer before we even start tokenizing other markets.

The British Law Commission has submitted proposals for law reforms on the legal status and ownership of digital assets which are now out for public consultation. By treating digital assets as a new property class of “data objects”, owners and investors of digital assets will be protected by British common law, the hallmark of global law.

There are many calls for regulatory reform by the UK’s Financial Conduct Authority (FCA), particularly following the crypto registration scheme. While reform may be part of a larger, longer-term government agenda, in the short term, clear guidance from crypto and digital asset policymakers regarding the FCA’s scope along with new regulation is what is required to get the regulator on board. .

That digital smart contracts, or goods and property for that matter, are based on hybrid blockchain technologies and are NOT cryptocurrencies is something the regulator will have to come to terms with sooner rather than later in order to accelerate the digital securities market and be globally competitive. Most firms looking to issue traditional securities on smart contracts are not in the crypto space.

The good news for the government is that putting the City back at the heart of the global financial system and harnessing digital finance to transform Britain’s productivity may not require significant government funding. The industry will do much of the financing and heavy lifting, the authorities must be the industry’s political partner and put the right laws in place – the government just has to be open to working with the industry again.

With the UK out of Europe, it is no longer bound by the state aid rules that would have banned plans for tax subsidies for digital innovation and getting future tax incentives tailored to attract institutional investors is a real key to helping unlock the greater funding of tomorrow’s Digital Britain.

Expectations are high for the talented young British Prime Minister. The industry is on deck to support the “Sunak Protocol” and kick-start the next wave of innovation in digital finance. The industry knows the UK government is listening, but it wants to see action, and will ultimately vote with its capital and talent, which is much more mobile than most in this borderless digital world.