On October 30, 2023, HM Treasury released a policy update announcing its intention to bring forward secondary legislation to introduce regulatory measures for specific cryptoassets known as stablecoins by early 2024. The policy update outlines the proposed framework for regulating the issuance, custody, and utilization of fiat-backed stablecoins by amending existing financial services legislation. In order to assess the UK’s regulatory roadmap for stablecoins, it is imperative to understand the key aspects of this regulatory proposal and explore its implications and the potential impact it could have on the crypto industry in the United Kingdom.
Stablecoins are a type of cryptoasset that are designed to maintain a stable value by anchoring their worth to fiat currencies such as the British Pound or the US Dollar. Their stability makes them an attractive choice for various financial transactions, from investments to everyday purchases.
Proposed Regulatory Framework
The core of HM Treasury’s regulatory proposal concerns regulation of the issuance and custody of stablecoins conducted within or from the United Kingdom. The key elements of this framework are as follows:
- Regulation under the Financial Services and Markets Act
Firstly, the proposed legislation would classify the issuance and custody of UK issued fiat-backed stablecoins as regulated activities through their inclusion in the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (“RAO”). This legal categorization would empower the Financial Conduct Authority (“FCA”) to authorize firms engaging in these activities and to set forth rules governing the sector. This change will allow the FCA to take steps to establish a secure and compliant environment for the issuance and management of stablecoins.
- Inclusion in Payment Services Regulations
Secondly, the use of stablecoins in payments chains would also be brought under regulatory oversight by means of amendments to the Payment Services Regulations 2017. This adjustment would encompass payments made by both consumers and businesses using stablecoins, whether they are issued within the United Kingdom or overseas. This move is intended to ensure that all transactions involving stablecoins are subject to regulatory scrutiny, promoting transparency and security.
- Oversight by the Bank of England
Thirdly, to safeguard financial stability the Bank of England will be granted the authority to monitor systemic stablecoin systems and service providers, including those using stablecoins issued both in, or from, the United Kingdom or issued overseas) that pose potential threats to the integrity of the financial system. This proactive approach is aimed at preventing any adverse impact on the broader financial landscape that could result from the unchecked growth of these cryptoassets.
- Regulation of Systemic Stablecoin Payment Systems
Lastly, the Payment Systems Regulator would also be responsible for overseeing systemic stablecoin payment systems. This regulatory oversight ensures that the payment infrastructure underpinning stablecoins operates efficiently and securely, minimizing the potential for systemic risks.
Balancing Risks and Rewards
The UK’s approach to stablecoin regulation is part of a broader strategy to position the United Kingdom as a global hub for cryptoassets. The regulatory framework seeks to strike a balance between mitigating risks associated with the rapidly evolving crypto industry while harnessing its potential benefits. This equilibrium is crucial to encourage innovation and investment in the crypto sector while protecting the interests of consumers and the stability of the financial system.
The proposed regulatory measures will now undergo the standard parliamentary procedures before being enacted into law. The UK government anticipates that the regulatory framework for stablecoins will be fully operational by 2024.
The impending regulation of stablecoins in the United Kingdom is a significant development that underscores the UK government’s commitment to fostering a secure and dynamic environment for cryptoassets. By bringing these cryptoassets within the regulatory fold, the United Kingdom aims to balance innovation and stability, ultimately positioning itself as a leading player in the global crypto industry. As these proposals move closer to becoming law, stakeholders in the crypto sector should remain vigilant and prepare to adapt to the evolving regulatory landscape. For more information on these developments, contact the authors of this post, Alexandra Melia or Elliot Letts, in Steptoe’s Anti-Money Laundering team in London.