UK Government coming round to cryptoassets

The UK Government has announced moves that will see stablecoins recognised as a valid form of payment as part of wider plans to make the UK a global hub for cryptoasset technology and investment.

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This is positive news for the development of the UK’s cryptoasset market. UK firms have been moving overseas in light of severe FCA delays and lack of regulatory certainty.  The new measures, and the change in tone from the top, should encourage more firms to establish a base in the UK.

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Key announcements

• Stable coins to be brought within regulatory perimeter for use in the UK as a recognised form of payment.
• Financial Market Infrastructure sandbox to be set up to enable FMI firms to experiment with DLT applications.
• Cryptoasset Engagement Group to be established to work more closely with the industry
• UK tax system to be enhanced to encourage further development of the cryptoasset market in the UK, in particular, how DeFi loans are treated for tax purposes.
• Investment Manager Exemption: The Government will consult on extending the scope to include cryptoassets.
• Royal Mint to issues a Non-Fungible Token (NFT) this summer as an emblem of the forward-looking approach the UK is determined to take.

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Stablecoin Regulation

The Government published its Consultation Response on the UK regulatory approach to cryptoassets, stablecoins, and distributed ledger technology in financial markets.

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HMT Consultation Response

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The response document confirms the Government’s intention to take the necessary legislative steps to bring activities that issue or facilitate the use of stablecoins used as a means of payment into the UK regulatory perimeter.

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This will be achieved by amending existing electronic money and payments legislation.

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The rationale for doing this is that certain stablecoins have the capacity to potentially become a widespread means of payment including by retail customers, driving consumer choice and efficiencies.

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Changes to existing regimes to incorporate Stablecoin arrangements

The basis of the Government’s proposal to bring stablecoins where used as a means of payment within the UK regulatory perimeter is broadly as follows:

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(A) The framework in the UK for e-money through the Electronic Money Regulations 2011 and Payment Service Regulations 2017 provides a robust foundation for payment firms in the UK. Although it does not today provide an explicit regime for regulating stablecoins, the Government considers that an amended e-money framework can deliver a consistent framework to regulate stablecoin issuance and the provision of wallets and custody services.

(B) Part 5 of the Banking Act 2009 will be extended to include stablecoin activities, to apply in cases where the risks posed have the potential to be systemic and so the threshold for Bank of England supervision is met.

(C) Stablecoin-based payment systems are subject to appropriate competition regulation by the Payment Systems Regulator (PSR).

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Taken together, these changes will create the conditions for issuers and service-providers of Stablecoins to operate and grow in the UK, in line with the Government’s stated commitment to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation.

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Next steps

The Government will introduce this legislation when Parliamentary time allows, to deliver a “world-leading” regulatory regime for stablecoins.

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The FCA will be tasked with producing the detailed regulatory requirements in due course.

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Most importantly for the wider crypto market, the Government intents to consult later this year on regulating a wider set of cryptoasset activities (e.g. dealing with Bitcoin and Ether) in view of their continued growth and uptake worldwide.

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It is highly possible that Bitcoin itself is brought into the regulatory regime on a longer timetable.