From longer approval processes to the threat they might lose access to the European market, it’s safe to say U.K. blockchain startups are looking for contingency plans.
A quick recap: in 2016, the U.K. held a referendum on whether to stay in the European Union (E.U.), with a majority of voters opting to leave the economic bloc. Since then, the government has been negotiating with E.U. officials on the terms of its exit – but recent hurdles have raised the specter of a “no-deal Brexit” that could lead to economic turbulence and uncertainty.
It’s that uncertainty that has some blockchain startups sweating about their future prospects – at least in the months ahead as politicians attempt to hammer out an agreement.
“Brexit is a hindrance to everything in the short term,” said Jamie McNaught, CEO and founder of Solidi Ltd, which is developing a blockchain-based payments platform that uses cryptocurrencies to facilitate money remittances.
“[It’s] because all fintech regulation experts and lawyers are busy with so many things at the moment. They wouldn’t be busy if the Brexit hasn’t happened. In terms of just getting time with people is difficult at this moment. Will it (Brexit) be a hindrance in the mid-and-long term? That really depends on how successful the Brexit will be.”
The startup is one of the four blockchain companies that were accepted by the U.K.’s Financial Conduct Authority (FCA) for a normally six-month-long sandbox test in December 2017.
Until this July, Solidi was still in the regulatory test, as “the whole thing is being held up by some of the requirement as to become regulated,” McNaught said.
What Solidi is waiting for is the approval of a money service business (MSB) license from HM Revenue & Customs, the U.K. authority that reviews anti-money laundering compliance. Solidi has waited nine months to get approved for the MSB license, but the process previously took about five weeks, and the startup is not the only company in this position according to the FCA, McNaught said.
To other blockchain firms who aren’t facing that specific issue, the ramifications of a “hard Brexit” have become a big concern.
Renat Khasanshyn, co-founder of Etherisc, a European firm offering decentralized insurance protocol, expects Brexit will create hurdles for users and developers of its protocol and, therefore, hamper client growth. The company’s platform allows providers to build insurance products on top of an open-source infrastructure.
But if negotiations around Brexit falter, cross-border market testing will be much harder, and compliance costs for providers will increase, as Khasanshyn explained.
“The users of our protocol will be impacted by Brexit negatively because they will need to comply with regulations in the U.K. and the EU, which will likely go in different directions,” Khasanshyn told. “And they will comply and pay for this compliance twice.”
For London-based blockchain startup Globacap, the biggest concern is likely to be the threat of the loss of passporting rights.
In its white paper on Brexit, the British government proposed new trade arrangements with the EU, suggesting the U.K. and the economic bloc maintain current agreements to trade goods but not services.
Under the proposal, British financial services companies such as banks, insurers and asset managers risk losing their passporting rights – which grant them unconstrained access to other EU markets – when the U.K. formally exits the bloc next year.
Myles Milston, CEO and founder of Globacap, explained that “normally, once [we] become a fully authorized securities firm, we get passporting [rights] into the rest of the countries in the EU.”
“However, obviously with Brexit, we might not get that passporting right anymore,” he went on to say. “So it doesn’t actually affect the sandbox test, but it might affect our business model after the sandbox.”
Unless a deal is struck to extend market access – at least for a transition period – these firms will have to pay up to open new bases of operation in the EU or face a severe loss of market access.
Blockchain companies that provide payment or e-money services, therefore, anticipate unfavorable impacts on their businesses, with a number of firms contemplating to set up separate EU subsidiaries to avoid being blocked from the market altogether.
Globacap is another project participating in the FCA sandbox, within which it is working on the issuance of debt and equity securities on blockchain in the FCA’s oversight.
As soon as the project goes through the test and is fully launched as a company, it plans to open an office in Europe and apply for regulatory clearance to avoid losing its passporting rights, Milston said.
“At the moment we are deciding where the best place is in Europe to start that,” he added.
Nivaura, a U.K.-based fintech company building an issuance and administration platform for securities, including tokenized securities, says its seeking approval from German regulators to open an office in the country.
“The passporting now takes about three months, and we can go anywhere,” said Avtar Sehra, CEO and chief product architect for Nivaura.”But if we have to go into Germany and set up a whole new business, there is a whole approval process. It could take from a year up to 18 months.”
Not all doom and gloom
Risks aside, not everyone that spoke about the potential Brexit impact had a negative view of the situation.
Richard Cohen, a U.K.-based lawyer at international law firm Allen & Overy, contended that Brexit would have little effect on the blockchain industry as a whole – in fact, he sees it as a potential positive for the country in terms of its approach to fintech.
“The U.K. will be allowed to come up with a regulatory framework that is much more favorable to fintech companies and become a friendly jurisdiction in which banks can make the best use of blockchain and global opportunities,” Cohen argued.
Alastair Johnson, CEO of Nuggets, an e-commerce and payment ID platform, also struck a largely positive note, telling that his company has found the U.K. government to be a supportive partner.
And its actions to date – particularly through the FCA, which has sought to include blockchain and distributed ledger startups within its sandbox cohorts – bear out that assertion
“The U.K. is very supportive at the potential of innovation in fintech and technology as a whole,” Johnson said. “And I think they will also see that as an opportunity to create markets, continue growth and associate with Europe and the world as a whole. It’s everything that driving the support.”