In this opinion piece, Gilbert Verdian, Founder and CEO at Quant, argues that a Digital Finance Agency is needed to shepherd the UK into a leadership position in the digital financial markets of the future.
In the decades following the ‘big bang’ of the 1980s, London and New York vied for the title of top global financial hub. Metaphorical clouds have since formed over the Big Smoke. The combination of Brexit, economic uncertainty, and fewer listings on the London Stock Exchange are all leading to a feeling that the capital has lost its financial innovation mojo.
But blockchain technology – and specifically the issuance of central bank digital currency, and the tokenisation of commercial bank deposits and other assets – offers us a huge opportunity to reinvigorate the Square Mile.
As is often the case, the buy side leads. It’s estimated that almost one in three UK asset managers will offer tokenised funds within the next five years, with over half set to do so in the next decade. Despite this growing enthusiasm, asset managers are waiting for regulation to catch up. A survey from EY found that half of institutional investors cite regulatory uncertainty as the primary obstacle to tokenising funds. If the UK wants to be a leader in tokenisation, regulation must be a priority. The benefits to the UK of being an early mover include new sources of capital, increased financial market liquidity and enhanced operational efficiency.
Of course, trades involving digital assets or tokenised funds need to be settled and so would be far more efficient when the other side of the trade is using digital currencies – ideally tokenised commercial bank deposits.
The issue is that the UK lacks a body which can drive forward responsible and innovative regulation to govern all of this. Now is the time to review the current set up. For tokenisation to put London back at the forefront of financial innovation, we need a separate regulatory body – working name: Digital Finance Agency – dedicated entirely to digital assets.
The Financial Conduct Authority, which monitors digital assets, holds an extremely broad remit, and has become more and more focused on consumer protection at the expense of driving forward innovation and efficiencies.
A 2024 House of Lords report titled Improving the performance, independence and accountability of UK regulatorsreflects this culture shift. In it, former FCA chairman Charles Randell explains that the regulator has a consumer panel, a consumer network, and a national outreach programme, as well as the new Consumer Duty which he said, “is leading to a fundamental change”. He also highlighted that, at the outset of his chairmanship, he had pledged to “meet all the consumer groups before I met a single business”.
While the FCA’s efforts as a member of the Digital Regulation Cooperation Forum, should be applauded, this body is designed to help the UK collaborate with other nations. Welcome, certainly, but not necessarily an approach which will see London stake its claim as the world’s digital finance leader.
The DFA would be able to provide regulatory clarity for the adoption and usage of digital assets in our financial services industry. Crucially, it would also play a central role in driving the City’s pro-modernisation agenda.
The concept of a DFA will naturally raise many questions. The most glaring: would the DFA be a source of friction with the FCA? I argue the opposite, that the DFA would be welcomed. The FCA is already swamped and does not have the manpower to focus on a technology that could have massive implications for markets, but which requires deep, specialist knowledge.
And if the FCA is under-resourced, then who will be manning a DFA? I propose a combination of a ‘lift and shift’ approach – transferring staff already covering digital assets at the FCA – and proactively hiring new staff through a recruitment drive. London has a unique talent pool which is well placed to support the DFA from a skills perspective, with unique expertise built up from years of pioneering world-leading industry digital finance initiatives, like Project Rosalind and the Regulated Liability Network. The creation of a DFA is a compelling opportunity to harness this talent and experience.
Tokenisation offers a way to future-proof our financial services infrastructure for the next 30 years, putting our banking, payments and capital markets at the very cutting edge of technological innovation.
Blockchain is wrongly synonymised with crypto speculation. In fact, this technology has a far more important and transformational part to play in the future of finance, becoming a core part of our financial infrastructure.
As other countries seek to integrate digital assets into their regulatory regimes, it is vital that the UK does not fall behind. A DFA will help the UK stay ahead of the pack and help secure the City’s leadership position in the new age of digital finance.
