UK’s Approach to Cryptocurrency Regulation
On October 30, 2023, the UK unveiled updated regulations for fiat-backed stablecoins, with plans to implement phased legislation beginning in 2024. These regulations will place oversight of fiat-backed stablecoins under the jurisdiction of the Financial Conduct Authority (FCA).
According to the UK's Treasury Department (HM Treasury), the FCA will gain authority to mandate that issuers of standard stablecoins maintain reserve funds within a statutory trust. As reported by Cointelegraph, specifics regarding this trust, including redemption obligations in the event of a firm's failure, will be detailed in the FCA's rules under which local companies authorized by the FCA will act as "arrangers of payment," responsible for ensuring that foreign stablecoins comply with local standards.
Milestones & Distinctions
This regulatory framework builds upon a series of prior milestones following a comprehensive crypto study conducted in February 2023 culminating in the passing of the Financial Services and Markets Act 2023 in June. This change was crucial in enabling cryptocurrency activities to be treated and regulated in a manner similar to other established financial activities.
Notable through this regulatory process, according to CoinDesk, is the important distinction between crypto assets that already fall under the category of traditional financial instruments and non-fungible tokens (NFTs). While the former will continue to adhere to existing financial services regulation, the latter will see different treatment. NFTs utilized as collectibles or artistic assets will not be subject to financial services regulation. However, NFTs used as exchange tokens, particularly in scenarios involving substantial releases with minimal price variations, may come under the purview of future financial services rules.
The UK government has, likewise, indicated its intention not to impose a ban on decentralized finance (DeFi). Instead, it will exercise caution in regulating this aspect of the cryptocurrency industry, acknowledging the need for careful and considered oversight in the evolving DeFi sector.
Coindesk reports the government's regulatory plans have not been without controversy. Some lawmakers within the House of Commons' Treasury Committee have voiced concerns. They worry that applying traditional financial service regulations to cryptocurrencies like Bitcoin and Ethereum might inadvertently mislead users into a false sense of security. The government has also rebuffed calls to categorize cryptocurrencies as forms of gambling. Additionally, within the cryptocurrency industry, there have been complaints about delays and inadequate feedback from the FCA. Recent rules, particularly those restricting cryptocurrency promotions, have prompted some well-known firms to curtail their operations within the UK market.
UK’s Future with Crypto
These regulatory measures are in line with the government's larger ambition, which was initially set out by Rishi Sunak, former Finance Minister at the time and now current Prime Minister. The overarching goal is to establish the UK as a prominent hub for crypto assets. These measures are anticipated to be well-received by an industry that has been vocal about the government's perceived delays in implementing regulatory guidelines.
The crypto industry is expected to welcome the regulatory framework, as it provides a clearer path for conducting business within the UK's crypto ecosystem. According to Blockworks, Treasury Minister Andrew Griffith expressed satisfaction with the final proposals while remaining open to modifying certain features as it relates to new evidence.