Treasury has plans for cryptoassets and stablecoins
The UK Financial Services and Markets Bill (FSMB) has been published today and includes provisions for the regulation of cryptoassets and stablecoins for the first time.
Chancellor Nadhim Zahawi said the legislation would help the government deliver on its “vision for an open, green and technologically advanced financial services sector” that would be globally competitive.
Among the changes in the legislation is a drive to regulate the cryptocurrency market, particularly around the use of so-called stablecoins, which are seen as a bridge between traditional markets and cryptocurrency.
Stablecoins are a type of cryptocurrency whose value is tied to the performance of a conventional fiat currency such as the US dollar. Because of this, they can usually avoid wild fluctuations in value while maintaining the privacy and instant payments that cryptocurrencies offer.
A “reserve” of fiat currency equal to the amount of stablecoin in circulation is held by the issuer as an additional level of security. However, stablecoins including Terra and Tether have run into trouble in recent months, with doubts about the size of their cash reserves.
Harry Eddis, global co-head of fintech at law firm Linklaters, said: “Bringing stablecoins into the regulatory scope is a significant milestone. It is the first time that the UK licensing regime will specifically take into account one type of crypto asset.”
The bill will require issuers of stablecoins used as means of payment to obtain a license from the Financial Conduct Authority (FCA). Some crypto businesses already have to use anti-money laundering rules, but this bill takes it a step further.
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“The limited scope of the new stablecoin regime minimizes the initial impact, but a consultation later this year will explore a more dramatic extension of the regulatory net into the crypto world,” says Eddis.
Crypto crash builds pressure on regulators
Governments have come under increasing pressure to regulate after a wave of crashes saw millions wiped from crypto investment portfolios.
Earlier this year, ahead of a consultation, HM Treasury officials said that stablecoins play such an important role in the payment process that they need extra protection. In the consultation document, officials said “the failure of a systemic digital settlement company could have wide-ranging financial stability as well as consumer protection effects”.
The legislation is likely to put stablecoins and their providers under greater scrutiny than is currently the case, including potentially more specific legislation in the future around the liquidation of failed stablecoins to protect investors and powers for the Bank of England to provide stability when a coin is in crisis.
As well as efforts to regulate stablecoins, the bill will also see a new sandbox created by the Bank of England and the FCA to provide a safe space for industry players to explore the use of blockchain technology.
UK crypto regulation to encourage ‘safe adoption’
Zahawi said in his Mansion House speech: “Our aim is clear: to keep the UK the most open, inclusive, welcoming, competitive, safe and transparent place to conduct financial services in the world.”
“We have the talent, the education system, the time zone, the deep and liquid capital markets. High quality regulation, globally respected institutions, a stable and renewed legal regime,” Zahawi added.
The chancellor claimed the UK’s research, fintech innovation and cyber security capabilities put it “in the driver’s seat”, adding: “This is where the world is coming to fund everything from infrastructure to innovation to the net zero transition.”
This is according to a spokesperson for the Ministry of Finance Tech Monitor The government is committed to putting the UK at the forefront of crypto-asset technology and innovation and will do so “by leveraging the freedoms gained by leaving the EU”.
“Our framework will support the safe adoption of crypto, while giving regulators the flexibility to respond to market developments, support innovation and protect consumers,” they added.
“The Financial Services and Markets Bill published today sets up the framework for the regulation of stablecoins in the UK and we will consult on a world-leading regime for the rest of the crypto market later this year.”
