The UK likes to think of itself as a leader in financial innovation. Since 2010, the government has been bragging about its ambitions in green finance, renminbi trading, sukuk issuance, and most recently, crypto.
But the reality doesn’t match the rhetoric. While other countries are making huge strides with blockchain and digital assets this year, the UK seems to just not care all that much.
Talk about blockchain bonds and crypto innovation is mostly just talk. In 2022, digital bonds accounted for a measly 0.02% of the $7.3 trillion raised by traditional methods.
The idea of using blockchain to issue government debt, or gilts, is met with skepticism. This lack of interest is obvious when you consider that the government’s against the widespread use of Bitcoin.
UK’s reluctance to change
The UK’s Debt Management Office (DMO) apparently sees very little benefit in blockchain tech. Issuers think it is just a distraction from their main job, which is, you know, issuing bonds.
Investors aren’t interested either. The platforms for digital bonds are incompatible, and this lack of standardization kills any chance of growing secondary markets.
And crypto startups? Oh they’re practically locked out.
The UK’s financial market is too heavily regulated, and incumbents (big banks and financial institutions) aren’t eager to adopt a technology that could cut them out of the equation. It’s a chicken-and-egg situation.
Digital bonds need a huge volume of issuance to justify the costs, but without integrated systems, no one wants to take the plunge. So nothing changes.
Even if the government wanted to push blockchain bonds, integrating them into banks’ legacy systems is insanely expensive.
Australia’s stock exchange tried something similar around two years ago, and it was a $171 million failure.
The regulation problem
Regulation is another issue. The UK’s approach to crypto is slow and disjointed.
The Financial Conduct Authority (FCA) has made some efforts, implementing anti-money laundering protocols and tightening rules on crypto advertising. But that’s about it.
Only a small subset of crypto assets are regulated, which leaves investors and businesses in the dark about what’s allowed and what isn’t. Compared to the EU, the UK is half-baked.
The European Union’s Markets in Crypto Assets Regulation (MiCA) is far more comprehensive, with clear guidelines on everything from consumer protection to market stability.
The UK has hinted at a disapproval of MiCA because they believe it opens the door a bit too wide for a technology as new as crypto.
UK investors don’t care about crypto
UK investors aren’t exactly rushing into the market either. Crypto’s notorious volatility has made them skittish.
Retail participation has dropped significantly. Add to that the government’s tax changes, and it all makes sense.
Starting in April, the tax-free allowance for capital gains on crypto has been slashed from £6,000 to £3,000. This makes Bitcoin and its buddies a much less attractive investment.
Why would anyone want to take on the risk of investing in something already so unpredictable when the potential tax hit is so steep?
And the media is filled with stories about crypto failures, frauds, and scams in crypto. These stories have dominated the narrative for so long that any positive news quickly fade into the background now.
For many people there, crypto is just a playground for criminals and scammers.
Culturally, the UK is risk-averse. Unlike markets in the US or Asia, the UK tends to be extra careful about speculative investments. This conservative approach clearly extends to crypto.
All in all, the government’s interest in the blockchain seems superficial at best, and the financial sector has little motivation to change. It likely never will.
Because if there is one thing the Brits are known for, it’s that they hardly ever change their minds.
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