The future success of the UK’s growing blockchain industry will be born out of a finely-tuned balance of readily-available finance, a broad ecosystem of business enabling organisations and institutions and, crucially, well-informed regulation. Consequently, the UK Government has engaged across many fronts with industry, academia and the wealth of blockchain communities and associations which have come to fruition. Conversely, many thought leaders in this space have actively sought to advise government on how it can best equip, stimulate and regulate the unbridled economic opportunity that lies within blockchain. Blockchain Live’s Insight Partners, Outlier Ventures, recently submitted pivotal research into digital currencies to the Treasury Committee; in this post, we look to amplify their findings.
Outlier Ventures is Europe’s first blockchain venture capital firm investing in equity and tokens. They are passionate about converging technologies bringing about markets which are open-source, distributed, automated and tokenised. With a depth of expertise in legal, structuring, crypto-economics and a partner network, they are able to provide authoritative insight into the blockchain ecosystem.
They believe it is critical to develop a responsible, balanced and proactive approach towards “crypto-asset” innovation in order to unlock its potential to serve the UK economy and maintain its long-term competitiveness. There is a concern that, if the innovation of “digital currencies” is viewed too narrowly this will restrict the true potential of crypto-assets. This could mean the UK loses out to an increasingly competitive global regulatory environment.
In order to properly appreciate the value of these assets, Outlier Ventures posits that we must re-evaluate our understanding of the term “digital currency”. When it comes to regulation in this area this is insufficient as it fails to capture the variety of functions a token may symbolise. Outlier Ventures views “crypto-assets” as more appropriate due to its ability to further encompass these functions. It is necessary to create distinct definitions and differentiate between cryptocurrencies and other crypto-assets such as “utility tokens” as the nature and purpose of these is entirely different.
Creating clear definitions allows for the implementation of appropriate regulation around crypto-assets. This is paramount for the cultivation of a globally competitive blockchain hub in the UK. Outlier Ventures advocates public, open and tokenised protocols as an innovative way for UK society to organise its economic activity in direct contrast and response to the closed proprietary systems of the past. An open-source approach is attractive as it facilitates innovation with projects building atop the foundations of others. By contrast, proprietary equity start-ups have typically seen fail rates of around 90% within the first three years with most of their knowledge and code lost forever.
Regulators need to consider the flight-risk of intellectual and human capital when crafting legislation which could limit innovative token ecosystems. Historically, when governments have been unfriendly to token-based innovations these outfits have been quick to resettle in more welcoming jurisdictions (of which there are many). Outlier Ventures’ paper outlines the various methods used by France, Singapore and Switzerland to cultivate attractive blockchain hubs, and this is something which the UK could learn from. To maintain the UK’s status as a global financial hub and a leader in technology our policy needs to be positive and clearly signpost existing regulation to simultaneously protect consumers and stimulate innovation.
Arguably the most valuable part of Outlier Ventures’ evidence submission comes at its sign-off; the policy recommendations. These actionable suggestions provide clear ways in which the UK can maintain its position as a global technological hub whilst ensuring the safety of consumers. To ensure this occurs, Outlier Ventures suggests there needs to be greater legal clarity and certainty about the treatment of crypto-assets and cryptocurrencies. Regulators should consult with industry on the design of the regulatory framework; this collaborative approach is viewed as key to the successful implementation of meaningful regulation.
Whilst other blockchain hubs such as Singapore have made themselves attractive by implementing new policies, much of the UK’s current thinking about innovative business is applicable to the blockchain arena. Schemes involving Simple Agreements for Future Tokens (SAFTs) and targeted corporation tax reliefs could all help to attract blockchain projects to the UK. Outlier Ventures proposes extending the exemption from Capital Gains Tax of foreign currency bank accounts to include holdings of crypto-assets in a wallet or exchange. These are often exchanged for other crypto-assets without being converted into national currency. Additionally, training support for blockchain start-ups, much like the existing AI sector deal for training sponsorships, would help to encourage growth and place the UK on the map as a true blockchain hub.
In the recent past, widespread uncertainty has dominated regulation surrounding crypto-assets and digital currency internationally. Recognition of these new currencies and assets is crucial to understanding the future global economy. The UK government is already making significant overtures towards crafting conscious regulation around crypto-assets and cryptocurrencies. The UK Crypto Task Force, which includes the Bank of England, the Treasury and the Financial Conduct Authority, is addressing such calls for further regulation in this space. The All-Party Parliamentary Group on Blockchain is equally working towards an understanding and engagement with blockchain in the crypto-sphere at a governmental level. A clearly defined approach will set the UK in good stead to secure a position as a global player in the Fourth Industrial Revolution.
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