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The UK's Love/Hate History With Crypto
New regulation may end UK banks' mean streak against crypto companies.
UK has just published forward-thinking regulation for the crypto sector, in the form of final rules for crypto businesses. These will come into force next year, providing far greater clarity for the blockchain sector. Two notable developments are rules that could see fiat-backed stablecoins integrated into payment systems in 2024, and the fact that the UK government has no intention of banning DeFi, stating that it's too early to regulate it at present.
This is good news for UK crypto firms, especially given the elements within the government that wanted to regulate crypto like gambling. Instead, the rules enable the UK to position itself as a crypto hub, adding to its reputation as a center for financial services. But it wasn't always this way, thanks to a lack of clear regulation and hostility from the financial sector.
Banks And Government
Perhaps unsurprisingly, the UK government took little notice of bitcoin in the early years, when it was too small to be worth expending resources on. As angel investor Simon Dixon found, there wasn't much interest within government for regulating a tiny fringe technology.
That's not to say there wasn't plenty of innovation from the grassroots, though. The first true crypto exchanges and brokerages (i.e. not P2P platforms) date back to at least 2011, when Britcoin launched, later to be rebranded as Intersango. The platform closed in December 2012 after its bank pulled its account and it was unable to establish another.
At the end of 2013, Bit121 was launched by two former IBM execs. Unfortunately, the same story played out: Its bank (Barclays) closed its account, forcing it to shut up shop in 2014. In Bitcoin We Trust (IBWT) went the same way for the same reasons. For a short period of time, it limped on using workarounds to allow customers to move money, including postal orders: Pretty much an 18th century technology, and subject to long delays and high fees.
After a temporary halt to trading, IBWT has re-launched with alternative methods of funding customer fiat accounts. This alternative funding so far consists of Royal Mail and Postal Orders via Royal Mail. With plans to expand to additional funding methods as the business grows, IBWT has stated that these methods of funding will not be subject to bank account closures, nor transaction freezes, or any other bank related issue.
Instead, P2P services sprang up. These worked on trust, with a few reliable sellers sending BTC after buyers had made a direct bank transfer to their accounts. Bittylicious was one of the foremost of these. Customers were instructed to mention nothing about bitcoin in the bank transfer reference.
These P2P services helped fill the gap, but were less flexible than exchanges, with a single quoted price. There was also a price premium over spot exchanges of around 5%, reflecting the costs entailed in buying BTC from external exchanges with foreign currencies, to sell to UK buyers for GBP.
A Conservative Financial Culture
The UK is a major financial center—and was even more important a few years ago, before Brexit. The banks tended to be conservative. They did not want to get involved in something considered risky, both financially and from a criminal/reputational perspective. The threat of fines or other sanctions for facilitating fraud and financial crime, for such a limited benefit (given the tiny size of the crypto economy 10 years ago) meant that it wasn't worth it.
Additionally, there was probably some kind of recognition that blockchain posed a threat to the banks' dominance—and the fact that they had demonstrated serious failings. After all, the Genesis block of the Bitcoin blockchain made reference to the banks' role in causing the Global Financial Crisis.
Nonetheless, the government came around before the banks, showing interest in blockchain technology and expressing hope for its potential long before crypto companies were able to do business in the UK. The first government consultations into crypto and blockchain took place in 2014.
Now, the new regulation looks set to allow the financial sector to incorporate crypto and blockchain technologies, offering easy transfer of funds between the two systems.
What's sad is that it has taken over 10 years to get here, and the UK could have become a powerhouse of crypto innovation long ago.
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