The UK Government's proposals to regulate cryptocurrency and stablecoins

In November 2023 the UK Government outlined its regulatory intentions for the cryptocasset industry. In this blog, we summarise the UK Government’s plans for the future regulation of cryptoassets and explain the next steps.

Background

In February 2023, the UK Government published a consultation on the future financial services regulatory regime for cryptoassets. The UK Government defines a cryptoasset as ‘a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored, or traded electronically.’ On 30 October 2023, the government published a summary of responses to the consultation and outlined its next steps.

The UK Government proposes a two-phase approach to the regulation of such assets. In phase one, the government will introduce regulations for so-called fiat-backed stablecoins (defined below). In phase two, the UK plans to regulate a broader range of cryptoasset activities.

Regulation of fiat-backed stablecoins

A fiat-backed stablecoin is a cryptoasset with its value pegged to specific government-issued fiat currencies (currencies which are backed by government order or ‘fiat’ as opposed to physical commodities such as gold or silver). These may be backed by reserves of the fiat currencies themselves, by other cryptoassets, by specific commodities, or their value may be determined algorithmically.

The UK Government wants to facilitate and regulate the use of stablecoins in UK payment chains. This is because the government believes that certain stablecoins have the potential to become a widespread means of retail payment, expanding consumer choice and driving efficiencies. In order to achieve this, the government must bring the regulation of certain activities relating to fiat-backed stablecoins within the UK’s financial services regulatory framework.

In practical terms, the UK Government needs to do two things. Firstly, it must bring the use of fiat-backed stablecoins in payment chains into the Payment Services Regulations 2017. Secondly, it must bring the activities of issuing and having custody of fiat-backed stablecoins in the UK within the Financial Services and Markets Act 2000. The government plans to use measures within the Financial Services and Markets Act 2023 to achieve both of these objectives.

The wider regulation of cryptoasset activities

The government has outlined which crytpoasset activities will be brought within the remit of financial services regulations as part of phase two. These activities include issuing cryptoassets, operating a cryptoasset exchange, dealing in cryptoassets as a principal agent, operating a cryptoasset lending platform, and safeguarding and/or administering a cryptoasset other than a fiat-backed stablecoin. The proposed regime does not intend to capture activities related to cryptoassets which are specified investments that are already regulated, such as security tokens. It also confirms that truly unique assets which are more related to artworks, such as some kinds of non-fungible token, should not be subject to financial services regulation.

Next steps

The government has said that a proper regulatory framework for fiat-backed stablecoins will stimulate growth and innovation in the sector by giving responsible actors regulatory certainty whilst mitigating financial stability risks and ensuring consumer protection. It has pledged to bring forward secondary legislation as soon as possible and by early 2024 at the latest.

The Financial Conduct Authority, the UK’s financial services regulator, published a discussion paper on phase one of regulating cryptoassets in early November 2023. The consultation is open until February 2024. Given the limited remaining parliamentary time before the next election, it seems unlikely that the government will make legislative progress on phase two. Therefore, there will be an extended opportunity for firms in the space to establish relationships with civil servants and regulators in advance of any further developments on the subject.

If you have any questions about this blog, or would like to discuss the regulation of cryptoassets further, please contact matthew.niblett@inlinepolicy.com.