How Cryptocurrency Market is affected by Brexit

April 2, 2019

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In June 2016, an unprecedented referendum saw the United Kingdom vote to leave the European Union by a majority of 51.9% to 48.1%. Since then, Brexit – the term coined to describe Britain’s departure from the EU – has been a subject of huge controversy within the Houses of Parliament and in the country at large. The UK triggered Article 50 to begin its departure plans from the EU, but failure to build consensus within Parliament has seen Brexit delayed by at least six weeks.

If MPs eventually follow through with the referendum result and Brexit occurs, what will the impact be on other financial markets such as the burgeoning cryptocurrency sector?

Brexit’s likely effect on the cryptocurrency market

To explore the likely effect of Brexit on the cryptocurrency markets, it’s a good idea to first get a handle on how the leading cryptocurrency markets fared during the outcome of the initial UK referendum. The value of the original and highest-value cryptocurrency, Bitcoin, fell considerably on the outcome of the Leave vote. Prior to the referendum, the price of Bitcoin soared by an impressive 47% with investors seemingly wishing to invest in Bitcoin as a hedge to their other assets in the event of a fall in the value of the pound in the event of a Leave vote.

The Leave vote eventually saw the price of Bitcoin head in the opposite direction, as the negative shockwaves of Brexit hit Bitcoin hard, similarly to how they hit the price of the Great British Pound. Nevertheless, while the pound has continued to struggle against both the euro and the US dollar in the last 18 months, it would seem that a lack of faith and support in fiat currencies is leading to a rise in support for cryptos.

An independent advisory group, Global Council, previously indicated that the UK would be the first of several EU nations to consider holding referenda on their future in the EU. Multiple referenda could lead to another five, maybe ten years of instability in the fiat currency markets. One thing’s for certain, when there is a lack of clarity in the fiat currency markets, financial investors generally turn to alternative assets that have a more stable growth curve – notably gold, silver and, more recently, Bitcoin.

Given that Bitcoin and all other crypto altcoins are considered politically neutral, these apolitical investment opportunities are a great chance for the digital economy to thrive in the years ahead. The price of Bitcoin has continued to rise significantly since the Brexit Leave vote in June 2016. At the time of the UK referendum, Bitcoin was priced at less than $700 per BTC. It spiked at more than $17,000 per BTC before settling at just over $3,000 in 2019 – still five times the price of Bitcoin at the time of the referendum.

So far in 2019, there has been a steady, consistent rise in the price of Bitcoin, which has proven that there is no real direct link between uncertain fiat currencies and falling crypto prices. Bitcoin is threatening to break past the $4,000 resistance point which would also help to breathe new life into the prices of other altcoins too. Leading crypto trader and analyst Luke Martin recently pointed to a correlation between Bitcoin and altcoins, stating that if Bitcoin rises, most altcoins will follow suit and, in some cases, rise even quicker than Bitcoin.

It can therefore be argued that whether or not the UK leaves the EU or not, the opinion within the crypto space is that cryptocurrency markets will continue to have a mind of their own.

Brexit’s likely effect on USA vs UK market post Brexit

At the time of writing, the UK has no specific cryptocurrency regulations, nor are cryptocurrencies considered legal tender in the UK. The EU has long been pushing for cryptocurrency regulation both at a continental and global level and plans such as its Capital Markets Union (CMU) and Anti-Money Laundering (AML) directives for crypto assets are likely to be transposed into member state national laws by January 2020.

uk gbp brexit

Given that the UK could be out of the jurisdiction of the EU by then, it means the UK will have to chart its own course when it comes to cryptocurrency regulations. In 2018, Bank of England governor, Mark Carney confirmed that the Financial Conduct Authority (FCA would be working closely with the Bank of England and the UK Treasury to design a watertight strategy for handling the risks of cryptocurrency, touching upon AML and combating the financing of terrorism (CFT). There are no indications that Brexit will put these plans on hold, but a no-deal Brexit could mean the strategy falls down the government’s list of priorities.

Across the pond in the United States, there is no clear legislation surrounding cryptocurrencies either. However, the US Treasury has spoken at length on several occasions of the need to regulate cryptos and combat domestic and global criminal activities via cryptocurrencies and crypto exchanges. Last year, a new FSOC working group was established to review the vibrant cryptocurrency marketplace. Given that Brexit has little effect on the USA, uniting around cryptocurrency legislation is rather a case of developing a consistent legal approach that all US organizations can agree upon.

Brexit’s effect on ICOs

If the UK experiences a slowdown in direct foreign investment as a consequence of Brexit, it could look to use initial coin offerings (ICOs) as a route to overcome this issue. Investors are growing increasingly reticent to pour their funds into UK firms when the rules could suddenly change after Brexit. Some people have suggested UK companies could tap into the wealth generated by the Bitcoin boom by launching their own individual ICOs, enabling investors and consumers to invest in companies or projects they support without the threat of legislature getting in the way. Think of it like the digital version of buying shares in a startup.

On the flip side, UK companies may have to contend with shareholders that don’t wholly embrace the concept of crypto investors coming on board. Companies would also need to devise a structure or hierarchy that rewarded token holders while giving shareholders enough of a voice.

Brexit’s effect on Blockchain

uk blockchain market

If anything, it would appear that blockchain’s influence in the UK will grow in the face of Brexit. A recent study by Nexus discovered that more than half of mid-to-large-sized companies in the UK are investigating the use of blockchain to negate any operational risks deriving from Brexit.

Furthermore, blockchain technology could even become part of the solution to some of the trickier elements of the UK’s Withdrawal Agreement with the EU, notably the Irish “backstop”. Chancellor Philip Hammond once said that blockchain technology was an “obvious” solution to the backstop problem on the Irish border, allowing for the UK government to track the movement of goods in a transparent, immutable manner.

As the UK seeks to develop a new customs landscape post-Brexit, it would seem that blockchain companies are going to be one of the real winners of this political scenario. The technology could be used to allow traders to automate the collection and submission of data required for customs declarations while also allowing for immutable data sharing between borders, combating import and export fraud.

First image: ZGPhotography/Shutterstock.com

Second image: jax10289/Shutterstock.com

Third image: Visual Generation/Shutterstock.com