UK Government Unveils Final Crypto Regulations, Prioritizing Stablecoins
The UK government has officially released its comprehensive rules for the cryptocurrency ecosystem, outlining a phased approach to crypto regulation. The framework includes plans for introducing legislation governing fiat-backed stablecoins early next year, with other aspects of crypto, such as algorithmic stablecoins, to follow. These regulations aim to bring various crypto activities, such as lending and trading, under the umbrella of conventional financial regulation and will place them within the purview of the Financial Conduct Authority (FCA).
This strategic move aligns with the objectives set out in April 2022 by Rishi Sunak, the former finance minister and current prime minister, to establish the UK as a prominent hub for crypto assets. It is likely to be welcomed by the crypto industry, which had voiced concerns about the government's sluggish response to crypto regulation.
In a statement accompanying the release of the regulations, Treasury Minister Andrew Griffith expressed his satisfaction with the final proposals for crypto asset regulation in the UK. These regulatory guidelines would make the UK the natural choice for initiating and expanding a crypto asset business.
The UK Treasury initiated a crypto consultation in February, which concluded in April. In June, Parliament passed the Financial Services and Markets Act 2023, enabling crypto to be treated as a regulated activity.
While the government has already signaled its intent to bring crypto activities within the framework of traditional financial service regulation, Griffith has made some amendments to the proposals to clarify the treatment of crypto assets. Notably, the proposed regime excludes activities related to crypto assets already classified as specified investments, which are subject to existing regulations, such as traditional securities. Additionally, non-fungible tokens (NFTs) that resemble collectibles or artwork are not subject to financial services regulation. However, if NFTs are used as exchange tokens, they might fall under future financial services rules, particularly if large quantities are released simultaneously, and their prices remain relatively stable.
The FCA is set to commence consultations on an authorization framework for crypto firms. The government also plans to create equivalence measures for overseas crypto businesses, permitting an overseas-regulated trading platform to apply for authorization of its UK branch. The specific details of this arrangement will be determined by the FCA.
The government has also clarified that it has no intention to ban decentralized finance (DeFi) at this stage, as it believes that regulating this aspect of the industry is premature.
The government's documents reveal that issuance or custody of stablecoins backed by fiat currency will be subject to existing 2001 regulations designed for financial services. Additional rules will be established to ensure that any digital payment system can fail safely without posing a risk to the broader financial system. The central bank initiated consultations regarding systemic stablecoins in May.
However, these government plans have not been without controversy. Lawmakers in the House of Commons' Treasury Committee have previously argued that subjecting cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH) to conventional financial services regulations could create a false sense of security among users. Furthermore, the government has rejected calls to categorize crypto as gambling. On the other side, the crypto industry has voiced dissatisfaction with delays and inadequate feedback from the FCA. Recently introduced regulations limiting crypto promotions have led some prominent companies to cease their services in the UK entirely.