Why Brexit could benefit the UK's tech sector

If the UK can take the lead on regulating emerging tech, its many well-funded start-ups could prosper.

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When the pandemic struck, many bricks-and-mortar retailers quickly launched online stores and began to process payments digitally for the first time. For many this was relatively straightforward, but for one London-based wig merchant, there was a problem. The company's payment provider classed the wigs – made from real hair – as “human remains”, and spent months deliberating over whether it could process the payments.

“That's how you make wigs,” says Noam Nevo, CEO and co-founder of SME payments platform Osu. “There's no other way around it.” Osu – launched in early 2020 to help SMEs and freelancers excluded by traditional providers – was able to help the wigmaker, and many others, join the rapid switch to e-commerce. 

Like many foreign-born entrepreneurs, Nevo chose to launch in the UK because of its world-leading fintech sector and the maturity of its open banking system. For the past five years, the outlook for start-ups has been cast into doubt by Brexit. It was thought that the prospect of increased friction in trading with Europe and a shallower pool of tech talent would deter entrepreneurs from coming to the UK. But as Osu’s story – and company creation data – shows, that has not been the case. In fact, Britain’s exit from the EU could make it a more attractive destination for start-ups in the future.

The UK is still a top destination for entrepreneurs
Number of new businesses that started trading each year

Some of the most enthusiastic proponents of the UK are in financial technology. Yang Li, chief growth officer at cryptocurrency trading start-up Ziglu, which also launched in the UK less than a year before Brexit happened, says the UK’s Financial Conduct Authority (FCA) leads on innovation and will have even more scope to do so outside the EU.

“Post-Brexit, the FCA has the flexibility and the resources to tailor its regulation to specifically cater for the UK market,” he says, citing the difficulties of designing policy that works across all the EU member states. “Innovation flourishes more when innovators have a good framework to work off, as you only really push the boundaries of what is out there in the market if there's boundaries in the first place.”

The UK is already developing an edge in some frontier technologies. A recent Treasury consultation into the regulation of crypto assets and “stablecoins” recommended that they be treated as e-money tokens, establishing a clear framework for users. In the EU, meanwhile, there is still a “vacuum” for guidance in this area, which has created a “difficult patchwork of local regulation”, says Li.

The UK punches above its weight on AI
Number of newly funded AI companies between 2016 and 2020

Artificial intelligence (AI) is another sector that could benefit. Experts voiced concerns to the Telegraph last year about the EU’s “poorly constructed” approach to AI, adding that the UK could benefit from setting its own rules as it possesses “the expertise required to make good regulation".

[see also: Why Dominic Cummings fears the £800m research agency he championed will fail]

Dom Hallas, executive director of the Coalition for a Digital Economy (Coadec), says the UK's “world-leading AI and machine-learning ecosystem” will be at the forefront of how governments regulate emerging technologies. “The UK is naturally setting up its own strategy through the AI Council,” he explains.

Brexit has also shone a spotlight on data protection. Brussels' GDPR regulation has been lauded as the gold standard for protecting citizens' data rights, but it has also been widely criticised, especially by small businesses, as unnecessarily burdensome. Almost one third of businesses in the Europe, Middle East and Africa (EMEA) region say GDPR is the biggest barrier to sourcing and sharing data, according to a survey by the Economist Intelligence Unit.

Biggest burden from data protection is in Europe, Middle East and Africa
% companies stating regulation is the biggest barrier to sourcing and sharing data

At the moment, GDPR compliance is “gobbledegook” to most start-ups, says one tech founder. "We often have to fill in 50-page documents, which baffle serious IT professionals.”

The UK government is already looking at the viability of a “GDPR-lite” that would reduce the time and money spent on compliance, while still ensuring that the EU grants the UK the “adequacy” status that will enable data to flow between the two jurisdictions.

Writing in the Financial Times, the Culture Secretary Oliver Dowden highlighted the “real-life costs” of burdensome data regulation that has “hampered innovation and the improvement of public services, and prevented scientists from making new discoveries”. He added that taking a new British approach represents a “multi-billion-pound opportunity to boost trade in sectors where physical distance is no object”. Some £11bn in UK service exports has been lost, he claims, to the barriers to international data transfers created by GDPR.

[see also: How the EU’s naivety led to its vaccine debacle]

Aoife Sexton, chief privacy officer and chief of product innovation at start-up Truata, which provides privacy-enhanced data analytics, says British companies are still at risk of “privacy paralysis... Companies are still grappling with this conundrum of secondary use of data, and I think that is stymieing innovation because there's a lot of confusion and uncertainty.”

Sexton adds that there is “a careful balancing act” between fast adoption of cutting-edge technologies and the adequacy status needed to handle the data of EU customers, but that good, proactive regulation would make this possible. “Where there is new tech emerging and where a lot of hard questions get asked in grey areas, there's absolutely ample space there for a leading regulator to step forward.”

Investment in UK companies since the Brexit vote in 2016 suggests some confidence that Britain will continue to innovate. Last year, international investors pumped more than three times the capital they invested in 2016 into the UK according to data from Tech Nation. Start-ups say they have not struggled to find backing from domestic or international investors; both Osu and Ziglu raised early-stage funding in the past month.

International investment in UK tech has surged since 2016
Investment in UK technology companies ($)

Overall, there is a “really optimistic picture” for UK start-ups, despite the sector’s well-founded reservations about Brexit, says Coadec’s Hallas.

“The UK over the past five years has actually, if anything, cemented its place as the foremost technology ecosystem in Europe,” he says. “The very successful growth of the ecosystem has continued and there's no signs of that abating.”

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