This follows the consultation that the HM Treasury had published on the UK’s regulatory approach to crypto assets and stablecoins back in January 2021. The government has since then maintained its stance that crypto assets should adhere to standards expected of similar existing financial service activities.
Activities like lending and trading will come under the purview of the country’s financial regulation, followed by other crypto areas, such as algorithmic stablecoins. According to the document, these standards are necessary to commensurate the risks they pose, while harnessing potential benefits of the technologies behind them.
The government added: “Having a regulatory framework in place will stimulate growth and innovation in the sector by giving responsible actors regulatory certainty whilst mitigating financial stability risks and ensuring consumer protection. Therefore, it is right that HM Treasury puts in place a regulatory framework for fiat-backed stablecoins including when used as a means of payment.”
The regulatory landscape will involve the Bank of England, Financial Conduct Authority (FCA), and Payment Systems Regulator (PSR). The phased introduction of regulation will first see the legislation for fiat-backed stablecoins in early 2024.
According to the recent update, the government seeks to facilitate and regulate the use of fiat-backed stablecoins due to their potential widespread use for retail payments. It described stablecoins as those maintaining a stable value by referencing a fiat currency and holding that currency as “backing”. On the other hand, fiat-backed stablecoins were defined as crypto assets that maintain a stable value by referencing a fiat currency and holding fiat currency as backing.
The Payment Services Regulations 2017 (PSRs 2017) will be amended to regulate the use of fiat-backed stablecoins in the UK payment chains. Here, the FCA’s regulatory perimeter will be expanded to include activities related to fiat-backed stablecoins.
The latest update also talked about how the government has already acted to implement this regime. This goes back to the introduction of the Financial Services and Markets Act 2023 (FSMA 2023) into the Parliament in July 2022.
The next stage of implementation will include the introduction of a secondary legislation as soon as possible, aimed for early 2024. However, this is subject to available parliamentary time. The FCA will also consult on an authorisation regime for crypto companies.
The government document also gave clarifications on the treatment of crypto assets that it already considers traditional financial instruments as well as non-fungible tokens (NFTs). It said that the “proposed regime does not intend to capture activities relating to crypto assets which are specified investments that are already regulated”.
This meant that traditional securities, including unique NFTs that are similar to collectibles or artwork “should not be subject to financial services regulation.” However, NFTs used as an exchange token, like when a large number are released at once and do not vary much in price, might fall within future financial services rules.
The government also does not intend to ban decentralised finance (DeFi) because it thinks that it is premature to regulate that aspect of the industry.
The document also set out that the issuance or custody of stablecoins backed by fiat currency will become regulated under existing 2001 rules designed for financial services. However, this will come along with additional rules to ensure that any digital payment system can safely fail without bringing down the financial system.
This issue has been previously argued in the House of Commons’ Treasury Committee where lawmakers expressed that regulating cryptocurrencies, like Bitcoin ($BTC) and Ether ($ETH), similar to the way conventional financial services are regulated could potentially give users a false sense of security.