Stable and Sound: UK to regulate Stablecoins

April 20, 2022

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3 min read

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What's going on here?

The Treasury has confirmed that the UK will legislate to make stablecoins a valid means of payment within the remit of UK regulation as part of the Government’s wider plan to make Britain a “global hub for cryptoasset technology and investment”.

What does this mean?

Stablecoins are a type of cryptocurrency that are designed to maintain a stable price by linking to traditional fiat currencies (money backed by the resources of the Government that issues it as opposed to a physical commodity), such as the US dollar, or alternatively making use of algorithms to preserve a stable value. The stability that comes from being linked to a stable external source makes stable tokens a viable payment mechanism. Stablecoins are considered to be significantly less volatile than other cryptocurrencies such as Bitcoin or other digital tokens which are often subject to wild fluctuations and therefore deemed impractical for commerce.

Bringing stablecoins within the “regulatory perimeter” of the UK paves the way for stablecoin issuers and service providers to operate and expand within the UK. This, in turn, could facilitate cheaper and more efficient payments whilst broadening consumer choice as stablecoins become a widespread and recognised means of payment. This is in line with the UK Government’s commitment to place the UK financial services sector at the “forefront of technology and innovation”.

What's the big picture effect?

The plans to tighten the regulation of stablecoins follow a 2021 consultation on the UK regulatory approach to cryptoassets and the Government’s previous announcement in 2020 of a move towards bringing cryptoasset exchange and custodian wallet providers within the scope of the Money Laundering Regulations.

Stablecoins will be brought under the regulatory net by expanding the scope of the UK’s current e-money framework. Amendments will be made to the Electronic Money Regulations 2011, the Payment Services Regulations 2017, the Banking Act 2009 and the Financial Services (Banking Reform) Act 2013. These changes will ensure that stablecoins comply with existing payment rules in the UK and reduce the risk of issuers going bust leading to users losing their money. Firms undertaking activities in relation to stablecoins for payment will become subject to numerous regulatory hurdles, including rules for ensuring the quality and safekeeping of reserve assets, financial crime requirements and orderly failure and insolvency requirements for issuers and service providers. The regulators – the Financial Conduct Authority, the Bank of England and the Payment Systems Regulator – will set out detailed requirements in individual rulebooks.

The legislative changes have the potential to benefit a large number of consumers. For example, those who complete cross-border transactions could eliminate the expense of pricy interbank fees and forex trading costs through the use of a system where both parties use the same stablecoin. Furthermore, stablecoins could be useful for micropayments, where traditional card payments are not cost-effective, as well as smart contracts and wholesale payments.

If only fiat-backed stablecoins are regulated there is a danger that this legislation could encourage firms to issue riskier types of unregulated cryptoassets. However, a further phase of legislation in the UK is already anticipated; the Government has confirmed that it intends to consult on creating regulations for a wider set of crypto activities including the trading and investment of cryptocurrencies such as Bitcoin and Ether. If the UK continues to rewrite and redefine the law in relation to cryptoassets, it is possible that the Government’s wish to “see the cryptocurrency businesses of tomorrow – and the jobs they create – here in the UK” may materialise.

Report written by Lucy Reynolds

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