UK Unveils Regulation Proposals For Crypto Industry, Stablecoins

Updated: 30 October 2023

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The UK government has revealed its long-anticipated framework for regulation of the crypto ecosystem with new rules to be implemented on a phased basis.

The initial focus is on legislation targeting fiat-backed stablecoins to be introduced in early 2024, with plans to extend regulatory oversight to various other crypto activities gradually.

This move aligns with the government’s ambition, as proposed by Rishi Sunak in April 2022, to position the UK as a thriving crypto-asset hub.

The finalized rules for crypto assets, published on Monday, aim to bring certain crypto activities under the oversight of the Financial Conduct Authority (FCA), aligning with the government’s efforts to bring crypto activities within the purview of traditional financial regulations.

“With the future regulatory framework now taking clear shape and the Financial Services and Markets Act now passed, the UK is the obvious choice for starting and scaling a crypto asset business,” said Treasury Minister Andrew Griffith.

BREAKING

🔹The 🇬🇧 government unveils final crypto regulations, with plans to legislate fiat-backed stablecoins in 2024
🔸Aiming to make the UK a crypto hub, the measures align with the FCA oversight, exempting unique NFTs and certain cryptoassets from financial service rules

— House of Chimera (@HouseofChimera) October 30, 2023

Phased Approach To Crypto Regulation

The approach outlined by the government involves a strategic rollout. The legislation for fiat-backed stablecoins will kickstart the regulatory process, and subsequent phases will include other areas such as algorithmic stablecoins, lending, and trading.

“The proposed regime does not intend to capture activities relating to crypto assets which are specified investments that are already regulated – e.g. security tokens,” the document read.

The proposal also differentiates non-fungible tokens (NFTs), indicating that those resembling collectibles or artwork won’t fall under financial services regulation. However, NFTs used as exchange tokens may potentially fall within future financial service rules.

The government’s stance remains firm on not banning decentralized finance (DeFi) outright, deeming it premature to regulate this aspect of the industry.

“It would be premature and ineffective for the UK to regulate DeFi activities currently,” the document said. “Instead, the government will support efforts at the international level through work at both the FSB and standard setting bodies (SSBs) to inform a future domestic framework.”

Stablecoins Brought Under Existing Financial Services Rules

The government intends to bring stablecoins backed by fiat currency under existing financial service rules. Measures are being devised to ensure that any digital payment system can experience failure without causing harm to the entire financial system.

The regulations aim to bring fiat-backed stablecoins under the jurisdiction of key financial authorities, including the Bank of England (BoE), the Financial Conduct Authority (FCA), and the Payment Systems Regulator (PSR). This will help ensure financial stability and prevent regulatory overlaps, according to the proposal.

The guidelines issued by the Treasury specify how stablecoins will be regulated, from the assets used in the chains to controlling the activity related to issuance and custody.

Lawmakers Concerned About Regulating Crypto Industry

The government’s plans have sparked debate. Lawmakers have expressed concerns about regulating cryptocurrencies like Bitcoin and Ether in line with traditional financial services, fearing a false sense of security for users.

On the other side, the crypto industry has voiced frustration over delays and insufficient feedback from the FCA, with some prominent firms halting their services in the UK due to recently introduced restrictive crypto promotion rules.