In recent findings shared by the FCA, it appears that strict regulatory frameworks and prolonged approval times are undermining the UK’s goal to position itself as a global digital asset hub.
According to Finextra, data obtained through a Freedom of Information request by legal firm Reed Smith reveals a stark decline in the number of digital asset firms seeking registration in the UK. Over the past three years, applications have plummeted by 51%, with only 29 applications recorded from May 1, 2023, to April 30, 2024. This decline is even more pronounced in the first quarter of 2024, tying for the second-lowest number of applications in three years.
The average approval time for these applications has been alarmingly high, with an average of 459 days, nearly mirroring the timeframe for full banking licences. This sluggish pace is partly attributed to a lack of specialised digital asset skills within the FCA, as highlighted in a December report by the UK’s National Audit Office. The shortage of skilled personnel has extended the expected registration timelines for digital asset firms under money laundering regulations set in 2021.
Furthermore, since the implementation of stringent financial promotions rules in October 2023, the FCA has cited 1,010 breaches in just the first seven months, reflecting the tough regulatory environment. This has led to a significant number of firms, 186 over three years, withdrawing their applications, discouraged by the arduous approval process.
Reed Smith Partner Brett Hillis commented on the issue, highlighting the detrimental impact of the prolonged approval process on London’s aspirations as a digital asset hub. “If we expect firms to apply for full authorisation further down the line when the regulatory perimeter expands, then something clearly needs to change to speed up the process, especially if London wants to become a major centre for digital assets,” Hillis said. He further added, “If it’s the case that applications are falling because digital asset firms have essentially given up waiting and started looking abroad, this should send a clear warning about London’s competitiveness.
“Firms aren’t going to wait forever for approval, particularly if another jurisdiction seems to offer a comparatively quick process, with access to a comparably sized or even larger market. Effectively, we risk the UK’s digital asset market being challenged from without by a growing number of increasingly digital asset-friendly regimes and also from within by a remarkably slow approval process.”
An FCA spokesperson said: “We offer significant support for firms interested in applying and register those that demonstrate they can meet the required standards. We expect firms to be fit and proper and have adequate systems to identify and prevent flows of money from crime. These standards we hold firms to are essential to help protect people and the integrity of our financial system.”
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