The UK government has released the results of a consultation on the regulation of digital assets or crypto. The update includes information on fiat-backed stablecoins and managing “systemic digital settlement asset firms.” The consultation kicked off in February of this year and was completed at the end of April.
The regulatory proposals set in place a potential future regime for crypto and are the “next phase” in regulation as the UK government pursues an environment that can make the UK a leader in digital asset innovation.
To quote the announcement:
“The proposals seek to deliver on the ambition to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation and create the conditions for cryptoasset service providers to operate and grow in the UK, whilst managing potential consumer and stability risks.”
HM Treasury notes that they received a wide range of responses, with about half coming from firms interested in digital assets. The government said it also engaged with over 80 organizations to glean insight and information as it sets out to create landmark rules. Approximately 80% of the responses were “broadly supportive” of the proposals. The outliers were those who believed that crypto should not fall under a securities regime and should be banned or perhaps treated like gambling.
The document covers issuers, trading platforms, disclosure requirements, custody, and more. NFTs [non-fungible tokens] are deemed to be more of digital collectibles. Wholesale and retail customers are managed differently due to risk exposure.
Security tokens, or digital securities, will largely be managed under existing securities law, with the exception of custody.
The government will take differing approaches when managing crypto lending and staking, a new service that emerged from the crypto industry. Mining will not be regulated at this time.
Regarding DeFi, the government described decentralization as complex and currently rather small while acknowledging that DeFi could play an important role in the future of financial services.
“The government envisions a potential for fully decentralised DeFi service models, if achievable, to play a role in financial services in the future but this will require careful consideration on the management of future risks and extensive international collaboration. For safe and wider adoption of these models, the government would expect them to achieve equivalent regulatory outcomes to those performed in traditional finance.”
As for stablecoins that are fiat-backed, the Bank of England, Financial Conduct Authority (FCA), and Payment Systems Regulator (PSR), will coordinate on regulation.
“HM Treasury intend that the category of fiat-backed stablecoins will be defined in legislation and capture those stablecoins which seek to maintain a stable value by reference to a fiat currency.”
Regulated fiat-backed stablecoins will be permitted for use as payments in the UK. Non fiat backed stablecoins will be allowed but not be regulated at least for now.
The government said that due to the status of DeFi it would be “premature and ineffective” to regulate DeFi at the moment.
Andrew Griffith MP, Economic Secretary to the Treasury, states in the introduction of the document that the objective of making the UK a global crypto hum remains “steadfast.”
“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 cryptoasset business. The UK is the largest financial centre globally outside of the United States, and our tech industry is worth over $1tn; we are only the 3rd country to hit this valuation after China and the US. This combined with world-leading systems of law and financial regulation makes for a potent combination. Unsurprisingly the UK consistently ranks at or near the top of research reports on ‘crypto-readiness’ and ‘crypto-friendliness’
CI received a comment from Albert Weatherill, financial services regulatory partner at the law firm of Norton Rose Fulbright, who shared his thoughts on the documents released today:
“Today’s publications largely confirm what we already knew in February – regulation is coming to cryptoassets in a fairly expansive way. HMT’s engagement with the industry and its assessment of the responses to its proposals has seemingly done little to change the core features of the proposals announced in February. However, there remain many unknowns – when these rules will come into force, how applicants will be able to get authorised and what the substance of the rules will be. The key challenge for the regulators is to provide this certainty as soon as possible, such that the industry can begin to adapt to its new regulatory reality.”
The UK has long been viewed as a leading Fintech hub worldwide. The combination of a top financial services center, an entrepreneurial population and a supportive policy environment has helped the UK to maintain and support its status within the financial services world. Unlike the US, which has struggled to make custom rules for digital assets, be they securities or otherwise, should help the UK capture more investment and activity in this sector of Fintech innovation.