Camomile Shumba is a CoinDesk regulatory reporter based in the UK. She previously worked as an intern for Business Insider and Bloomberg News. She does not currently hold value in any digital currencies or projects.
Sandali Handagama is a CoinDesk reporter with a focus on crypto regulation and policy. She does not own any crypto.
The U.K.’s crypto industry is hopeful the nation’s forthcoming stablecoin regulations will clear up “gray areas” for issuers.
Last Monday, the U.K.’s Treasury, the government’s finance arm, announced it would regulate stablecoins under its payments framework as a first step in a multi-stage process to establish a robust crypto regulatory regime.
This means stablecoin issuers would have to comply with the 2017 payment service regulations, which would require them to register with the Financial Conduct Authority (FCA) and follow rules on providing payment services, as well as meet specific requirements for payment transactions.
For Kene Ezeji-Okoye, co-founder of Millicent, a U.K. stablecoin provider, the move could clear up “gray areas” in how companies like Millicent can remain compliant with U.K. law. The company’s model fits under the FCA’s e-money system but because it also plans to hold custody of users’ cryptographic keys, Millicent could be classified as a crypto asset company as well.
E-money systems have to follow the electronic money regulations, while crypto asset providers have to register with the FCA, the U.K.’s financial regulator, and comply with its anti-money laundering (AML) regulations.
A welcomed move
Many companies welcome the U.K. government’s ambition to be a crypto hub.
“The increased use of stablecoins warrants the need for policymakers and regulators to establish the proper regulatory framework, and we applaud the U.K. for leading on this front,” a spokesperson for stablecoin provider Gemini said in a statement.
Similarly, a spokesperson for fellow stablecoin issuer Tether said the U.K. could become “one of the first countries” to issue clear guidance on this type of digital asset.
“We applaud [Rishi Sunak, U.K. chancellor of the exchequer] for recognizing the importance of rigorous regulation in the digital currency space,” said Simon Cohen, managing associate at Ontier LLP, a U.K.-based crypto law firm.
Regulators also welcome the move.
In 2019, the FCA published a report on crypto that said crypto firms with digital assets for cross-border payments could be subject to payment services regulations, but the tokens themselves wouldn’t be regulated. The Treasury’s announcement means this will change.
“We welcome the announcement of plans to develop a new regulatory regime for stablecoins and crypto activities, and we will continue to work closely with the government ahead of its consultation,” said Sarah Pritchard, executive director of markets at the FCA, in a statement. Pritchard referenced the fact that the government will consult on the wider regulation of the crypto asset sector later this year.
Stablecoins and the UK
The Treasury released its results on its 2021 consultation on stablecoins alongside its stablecoin announcement on April 4. The report said there was broad agreement that stablecoins backed by a single currency should be subject to e-money requirements, though it acknowledged that not all business models can meet those standards.
The Treasury’s plan is to not only amend the existing payments regulation, but also the 2011 electronic money regulations to factor in stablecoins. This should ensure companies are registered with the FCA and will require them to comply with record-keeping and safeguarding rules.
The detailed requirements for stablecoins have not been introduced yet and will be developed with the help of the U.K.’s Bank of England and Payment Systems Regulator, said Alpay Soytürk, chief regulatory officer at Spectrum Markets, a pan-European trading venue for securitized derivatives with offices in London, in a statement.
There was a general agreement in the U.K. government consultation report that systemic stablecoin issuers and wallets should be subject to regulation by the Bank of England. For example, if a firm providing custody meets the requirements of the Banking Act, the firm would be considered as systemic and be regulated by the FCA and the Bank of England.
Other regulations that need to be amended include the Financial Services Act 2013, Soytürk said. The act focuses on financial services and markets.
The consultation report said U.K. regulation should capture all stablecoins that include fiat currencies, such as a single currency stablecoin or stablecoins backed with a basket of currencies.
In its consultation, the government proposed that algorithmic stablecoins, or those that may be linked to assets other than fiat, should not be regulated at all.
An algorithmic stablecoin is one that in theory can keep its peg to fiat using only software and rules, meaning it is not necessarily backed by any collateral. Instead, the token’s programming, or smart contract, can increase supply if the price is going down or reduce it if the price increases.
“Where it’s going to become more difficult is with the algorithmic stablecoins, because obviously they’re a very different type of entity because they don’t touch the traditional banking sector – they’re decentralized,” said Ryan Shea, crypto economist at Trakx, a crypto trading platform headquartered in Paris and London.
He told CoinDesk that it would be difficult for regulators to apply existing rules to algorithmic stablecoins.
The U.K. government plans on establishing an FCA authorization and supervision regime for stablecoins that could be used as a means of payment, it said in its consultation report.
Crypto and the U.K.
U.K. regulators still have work to do. The 2022 report by YouGov, a research and data analytics group, showed that crypto adoption in Great Britain was low compared with a number of other markets, most notably those in the Middle East and Asia Pacific.
“Although adoption is projected to grow in Great Britain in the midterm, the primary barriers to growth stem from security and regulatory concerns,” Emma McInnes, global head of Financial Services at YouGov, told CoinDesk in an interview. “With recent announcements made by the U.K. government regarding regulation of businesses exposed to crypto assets, it remains to be seen whether these will be sufficient to provide consumer reassurance to allay these concerns.”
“Indeed, we have already seen some companies moving their crypto services operations from the U.K. to other markets, to ensure they can continue offering crypto services to Britons but from outside of the new U.K. regulatory regime,” McInnes said.
What is missing?
The lack of clarity around the U.K’s latest announcements leaves the crypto community wanting more to feel confident about operating in the country.
In its response to its recent consultation, the Treasury said the regulatory framework for crypto assets and its classifications should be designed with flexibility, since static definitions could “quickly” become outdated.
“[We are] really waiting to see what the U.K. says is the definition of a stablecoin and which stablecoins are allowed to be used for payments because under the current system, some stablecoins like the ones that we’re using, do fall under the e-money regulation so can already be used for payments,” Ezeji-Okoye said.
The U.K. government said in its consultation results it was considering whether it should also have a new definition for “payment crypto asset.” This would include any cryptographically secured digital representation of monetary value that is backed by one or more fiat currencies and/or is issued and used as a means of making payments.
“The big focus for me is to make sure that we’re clear with the definitions that are too broad in nature, that might be confusing for people in the U.K.,” Ian Taylor, executive director at CryptoUK, a trade body, said in an interview with CoinDesk.
UPDATE (April 20, 2022, 14:32 UTC): Corrects timeline of events.