Applications for registration as a crypto asset exchange or custodian wallet provider to the Financial Conduct Authority have fallen by 51 per cent in the past three years.
A Freedom of Information request by law firm Reed Smith to the FCA, revealed that just 29 applications were received between May 2023 and April 2024 by the regulator, compared with 42 and 59 in the two years prior.
Just seven applications were received in Q1 2024, the joint second lowest quarter in the last three years, according to Reed Smith.
The average time taken to approve applications within the last three years was 459 days.
Brett Hillis, partner at Reed Smith, said: “The herculean effort that the FCA has put into identifying breaches of the financial promotions rules shows unequivocally that the regulator takes its responsibility to protect consumers incredibly seriously.
“Looking at the time taken to approve applications, the question is not whether the FCA is being thorough, but whether its processes are too slow.
"Balancing consumer protections with the promotion of innovation is always tricky – some might say you should not balance them at all.
“But it does seem that even though approval times are falling, the time taken to grant approval remains something of a drag on the UK’s broader ambition to become a crypto hub.”
The FOI request also revealed that in the past three years, 186 firms have withdrawn applications.
However this number has fallen by 78 per cent in the last year when compared with 2021-2022.
“Put in context, the time taken to approve an application for registration might take about as long as an application for a full banking licence, which is frankly astounding.
"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 added.
Additional data showed that since 2021 the FCA has spent the equivalent of 25 years assessing crypto applications, according to Reed Smith.
Since the financial promotions rules came into effect in October 2023, the FCA also identified 1,010 breaches in the first seven months to April 2024.
Hillis said: “If it’s the case that applications are falling because crypto 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 crypto market being challenged from without by a growing number of increasingly crypto-friendly regimes and also from within by a remarkably slow approval process.
“The good news is that the falling number of applications suggests that firms are now much better acquainted with what the regulator expects.
"This can only be a positive development and would also explain the fall in approval times as the FCA has to spend less time wading through poor quality applications. Clearly, though, there is scope to speed up further.”
