The UK Government Publishes Final Framework for Cryptocurrency and Stablecoin Regulation
In response to industry concerns about a sluggish regulatory process, the UK government has unveiled its comprehensive regulatory framework for the cryptocurrency sector. The government aims to establish the UK as a preferred destination for the cryptocurrency industry.
The regulatory framework outlines a phased approach to regulation, with legislation for fiat-backed stablecoins slated for introduction in early 2024. Subsequently, regulations for other crypto areas, including algorithmic stablecoins, will be developed. These regulations will incorporate activities like lending and trading into the existing conventional financial regulatory framework, placing them under the oversight of the Financial Conduct Authority (FCA).
These measures align with the government’s previously articulated vision, outlined by Rishi Sunak in April 2022 when he was the finance minister (now the prime minister), to position the UK as a prominent hub for crypto assets. This move is likely to be well-received by the crypto industry, which has expressed concerns about delays in regulatory progress.
In an accompanying statement, Treasury Minister Andrew Griffith expressed his satisfaction in presenting the final proposals for regulating crypto assets in the UK. The finalized framework is expected to make the UK the preferred choice for establishing and scaling crypto asset businesses.
The UK government initiated a crypto consultation in February, which concluded in April. In June, Parliament passed the Financial Services and Markets Act 2023, granting regulated status to crypto activities.
The government has explicitly stated its intent to subject crypto assets to traditional financial service regulation. However, Griffith has provided additional clarity by distinguishing crypto assets that are already considered traditional financial instruments from non-fungible tokens (NFTs).
The proposed regulatory regime is not intended to encompass activities related to crypto assets classified as specified investments, which are already subject to regulation, such as traditional securities. The government document emphasizes that unique NFTs resembling collectibles or artwork should not fall under financial services regulation. However, NFTs used as an exchange medium, especially when large numbers are released simultaneously with minimal price variations, may be subject to future financial services rules.
The document also indicates that the FCA will soon initiate a consultation on an authorization framework for crypto companies. Furthermore, the government intends to establish equivalence measures for overseas firms. Overseas-regulated trading venues can apply to authorize their UK branches, although the specific criteria will be determined by the FCA.
The government explicitly states that it has no intention to ban decentralized finance (DeFi) and believes that it is premature to regulate this aspect of the industry.
Additional government documents detail the regulation of stablecoins backed by fiat currency. Such stablecoins will be regulated under existing 2001 rules designed for financial services. Further rules will be introduced to ensure the safe failure of any digital payment system without posing a systemic risk to the financial sector. The central bank initiated its consultation on a regulatory framework for systemic stablecoins in May.
The government’s regulatory plans have faced controversy. Members of the House of Commons’ Treasury Committee have argued that regulating cryptocurrencies like bitcoin (BTC) and ether (ETH) under the same regulatory framework as conventional financial services might create a false sense of security for users. Additionally, the government has rejected calls to classify crypto as gambling.
Meanwhile, the crypto industry has raised concerns about delays and inadequate feedback from the FCA. The recent introduction of rules restricting crypto promotions has led some prominent firms to discontinue their services in the UK.
