The fund manager decision: Europe VS the UK

The crypto-asset industry is at a crossroads. Fund managers are faced with the decision on where to establish their funds. The choice typically falls between the EU, which has harmonised regulation across 27 member states with a single licence, or the UK, which is still evolving and less harmonised, but is potentially more flexible and innovative.

This article will look at the EU’s Markets in Crypto-Assets (MiCA) regulation and its monolithic framework, and compare it with the UK post-Brexit. For fund managers, these decisions are rarely about geography and are more deeply tied to strategy and a long-term outlook. While mainland Europe appears to have more stability, the UK could potentially be more radical in its openness to DeFi and innovation. 

Is the European Union's MiCA a haven of stability?

The Markets in Crypto-Assets (MiCA) regulation came into effect in mid-2023. It represented, quite accurately, the bloc's effort to impose some order on crypto, which, for a top-down rule-ridden bloc, is a technology that poses some threats. 

Its objective, like usual, is to create a harmonised framework. This would apply to crypto-assets, which don’t apply to existing legislation, and thereby bring more far-reaching market integrity and mitigate some risks of fraud and market abuse. The goal is always to protect consumers, but at what cost? 

For fund managers, MiCA isn’t a bunch of red tape but has a compelling offer of "passporting". An authorisation as a Crypto-Asset Service Provider (CASP) within a single member state (Luxembourg and Ireland are often candidates for tax reasons) then grants the entity a licence to operate across the entire EU single market. 

This eradicates the costly process of seeking country-by-country approvals. There is an operational efficiency that comes with this, but also a commercial one, given the reach is 450 million people. The European Securities and Markets Authority (ESMA) is currently deep in the implementation phase and is releasing consultation packages to finalise the technical standards - this is for everything from authorisation and governance to transparency and disclosure. 

This rules-based and very thorough approach provides fund managers with legal certainty and predictability that is important for attracting institutional capital and for firms planning expansion. By establishing a clear rulebook, the EU is positioning itself as a stable, albeit rigid, market.

The United Kingdom's agile gambit

Since Brexit, the UK has eschewed a MiCA-like law and has instead gone with a far more adaptive and fragmented approach to crypto regulation. Many of the details can be found in its "Plan for Change", where the UK states its ambition to become "the best place in the world to innovate". In fairness, London has been a financial capital, but some question whether this know-how only applies to old money.

The goal has been to create a regulatory environment that balances consumer protection with crypto growth. Rather than a single regulation, the UK is developing a framework of official laws, not just recommendations, aimed at boosting transparency through clear risk disclosures and precise terms of service. This is the textbook FCA way of cracking down on opportunism. 

A key part of this strategy is to embrace regulatory sandboxes. In this, there are discussions with the United States to create a joint environment for testing new crypto products. This approach is designed to attract fintech pioneers and those operating at the bleeding edge of decentralised finance (DeFi)—it offers a flexibility that a framework like MiCA may not accommodate. And, in many ways, it’s mature about its own lack of certainty about where crypto will be in ten years (like we all are), and so it leaves it up in the air, ready to adapt.

This agility does come at the cost of certainty. While the potential for crypto to boost the UK economy is big, the detailed rules of engagement remain under development. Fund managers are therefore faced with a strategic gamble, and the decision may come down to whether you view the EU’s certainty and rigidity as being premature, given the infantile state of crypto. Or, if you think crypto is maturing and it needs this institutional certainty, then the EU might be a safer bet.

The domicile decision—considerations for fund managers

The choice of domicile between the EU and the UK will hinge on the fund manager's own strategy and risk appetite. 

Firstly, regarding the regulatory clarity, the EU offers an undeniable advantage as it stands. MiCA has a unified rulebook that pretty much covers everything. It has a clear implementation timeline from ESMA. The UK’s framework, while flexible, is still a work in progress, which could be concerning considering it should be easier and faster to act compared to the EU’s 27 member states. Perhaps it doesn’t want to act fast, but to see how the landscape naturally shifts before committing to a strategy… The good news, here, is that this means the UK is serious about being a leader in attracting crypto projects because of this open-mindedness. So, there is more of a sense of being “on the same team”.

Secondly, for speed to market and operational costs, the decision isn’t straightforward. The EU’s passporting system reduces the compliance burden for any fund with pan-European ambitions. The UK offers a faster setup for domestically focused funds, though scaling internationally would require some bilateral agreements.

Target market and product innovation are perhaps the main differentiators. For managers of funds targeting institutional clients across Europe, MiCA’s stable and unified environment is a draw. But for a fund focused on pioneering new DeFi products or complex tokenisation strategies, the UK's regulatory sandbox and agility may be more suitable and less restrictive. 

A complementary future?

Viewing the EU and UK as locked in a zero-sum battle for crypto dominance may be a bit short-sighted. The two jurisdictions may actually form complementary roles, with the EU attracting large, institutional-grade crypto funds, while the UK is an incubator for the innovation that made crypto great in the first place. The relationship, in the end, could become symbiotic and threaten the US by offering two unique approaches.