Financial deregulation is back in vogue. In the ongoing quest for economic growth, even Chancellor Rachel Reeves has embraced the trend.
In her recent Mansion House speech, she argued that heavy-handed regulation is “a boot on the neck of business, choking off the enterprise and innovation that is the lifeblood of economic growth.” According to Reeves, the balance has tipped too far in favour of eliminating risk.
Seated beside her, Bank of England Governor Andrew Bailey looked visibly displeased.
Speaking to MPs last week, Bailey made it clear he has no interest in rolling back the post-financial crisis reforms—aside from a few minor adjustments.
Bailey’s caution is well-founded. Deregulation and the burst of so-called “financial innovation” that typically follows have been common threads running through nearly every major financial crisis.
Consider the Glass-Steagall Act in the US, introduced during the Great Depression to separate retail and investment banking. While it remained in place, the country avoided any systemic banking crises. But once it was repealed at the start of the 21st century, it took less than a decade for the financial sector to trigger a global economic meltdown.
Whether repealing Glass-Steagall directly caused the crisis is still debated. Yet its removal symbolised a broader wave of deregulation that helped spawn financial time bombs like collateralised debt obligations.
History may not repeat itself exactly, but it often rhymes. Today, the US is once again dismantling the guardrails that keep finance in check—a new era of “light-touch” regulation.
Should the UK follow? Bailey is right to sound the alarm. Still, if the City of London is to stay competitive as a global financial hub, the UK may have little choice but to mirror at least some of the deregulatory steps being taken in Washington.
Signs of decline in the City are increasingly hard to ignore. Since Brexit, London has struggled to redefine itself, having lost its role as Europe’s default financial hub.
Technology is now the real disruptor. The risk is that the UK, like the EU, clings to outdated regulatory models—fixated on past crises rather than embracing the potential of emerging innovations. Trying to impose analogue-era controls on a digital financial landscape is a recipe for stagnation.
True to form, the EU was quick to move with its “Markets in Crypto Assets” (MiCA) directive, aiming to bring fintech—particularly crypto—under regulatory control.
But MiCA largely reflects a pre-emptive mindset: trying to legislate for hypothetical risks before they arise. In doing so, it creates friction that can stifle innovation before it has a chance to flourish.
At the core of the EU’s approach to fintech regulation lies the familiar precautionary principle: when in doubt, ban it.
This mindset extends to digital currency plans. Both the EU and China are pursuing state-controlled central bank digital currencies (CBDCs)—the digital euro and digital yuan, respectively—designed to preserve government control over money and payments.
In the wake of high-profile crypto collapses like FTX, the US briefly looked poised to follow a similar path. Under the Biden administration, crypto became a pariah, with heavy-handed regulation threatening to smother the sector entirely.
Then came Trump, championing a radically different, market-first approach aimed at fostering innovation. His stance opens the door to privately issued digital money—particularly stablecoins—which are rapidly gaining traction as fast, low-cost alternatives for settling payments.
Trump’s recent “Genius Act” could prove a turning point. It paves the way for exponential growth in the stablecoin market, with some estimates predicting a leap from $250 billion to over $2 trillion within just a few years.
His motivations are threefold. First, both Trump and key figures in his circle, such as Commerce Secretary Howard Lutnick, have financial interests in stablecoin ventures—and stand to gain significantly if the sector takes off.
Second, it’s a strategic move to reinforce the dollar’s dominance in global finance, especially as China and the EU explore digital currencies of their own. If dollar-backed stablecoins become the preferred medium for international payments, they could entrench and even expand the greenback’s global role.
Third, since stablecoins must be backed one-for-one with highly secure, liquid US assets, they provide a new, potentially massive source of demand for US Treasuries—much needed in an era of ballooning fiscal deficits.
While the Bank of England hasn’t been idle, it’s fair to say it’s been caught off guard by the speed and scale of America’s pivot. Just four years ago, Trump dismissed Bitcoin as a “scam against the dollar.” Now, he views stablecoins as a way to extend the dollar’s reach, not undermine it.
Sterling-based stablecoins have yet to take off—largely because there’s no clear regulatory path forward. UK banks are understandably hesitant to invest in the infrastructure without regulatory clarity and assurance.
The Bank of England is right to insist on strong safeguards. Stablecoins must be fully backed, free from abuse, and not allowed to threaten financial stability. But industry insiders warn that the UK’s current approach is overly complex and costly, potentially pushing fintech innovation elsewhere.
Rachel Reeves talks a good game on deregulation and appears to lean more toward the US model than the EU’s. That’s promising. But is she truly prepared to accept the messy, high-risk trade-offs that come with fostering disruptive innovation?
And even if she is, it will all be for nothing if the UK tax regime squeezes fintech firms too hard. Overburdened, they’ll simply set up shop elsewhere.
