The U.K. Treasury has recently unveiled its regulatory approach to the crypto industry, signaling a significant milestone in the country’s journey towards establishing itself as a leading global destination for crypto-asset businesses. With a clear roadmap now in place, the crypto industry and stakeholders can anticipate a well-defined and regulated environment in the near future.
The first phase of the regulatory approach focuses on bringing fiat-backed stablecoins under the supervision of financial watchdogs. The U.K. Treasury, in its policy update, identified the potential for these stablecoins to become a prevalent means of retail payment. By defining fiat-backed stablecoins as those seeking to maintain a stable value by referencing one or more specified fiat currencies, the government aims to regulate their use within the country’s payment chains.
In order to regulate fiat-backed stablecoins, the Treasury will implement regulatory measures under the Payment Services Regulations 2017 and the Financial Services and Markets Act 2000. The Financial Conduct Authority (FCA) will have primary oversight of all activities related to stablecoins, while the Payment Systems Regulator (PSR) and the Bank of England will provide additional supervision as needed. These measures are designed to reduce potential harm to consumers and mitigate risks associated with the use of stablecoins in transactions.
Phase 2: A Broader Regulatory Framework
The second phase of the U.K.’s regulatory approach will extend the framework to encompass a broader range of cryptoasset activities within the country. This includes the regulation of exchange activities, custody activities, lending activities, and market abuse. By taking a phased approach, the government aims to provide flexibility for firms focusing on different aspects of cryptoasset activities.
The U.K.’s regulatory focus will primarily be on activities related to cryptoassets, such as trading, custody, and lending. The government aims to create a comprehensive regulatory framework that aligns with international standards and practices. In line with this, it will not classify unbacked crypto, such as Bitcoin (BTC) and Ethereum (ETH), under the same regulations as gambling.
The U.K. intends to formulate equivalence measures for overseas firms operating in the country, particularly crypto exchanges. This allows overseas-regulated trading venues to apply for authorization for their U.K. branches, with the FCA supervising the process. By incorporating overseas firms into the regulatory framework, the U.K. aims to foster a globally inclusive and competitive crypto industry.
Within the regulatory framework, the U.K. differentiates between unique non-fungible tokens (NFTs) resembling collectibles or artwork and NFTs used as exchange tokens. While NFTs resembling collectibles or artwork will not be subject to financial services regulation, NFTs used as exchange tokens, especially those with limited price variation, may fall within future financial services rules.
The U.K. government acknowledges the importance of supporting decentralized finance (DeFi) but believes that regulating the sector prematurely may stifle growth and innovation. As such, the regulatory framework does not currently encompass DeFi activities. The government aims to strike a balance between fostering innovation and ensuring consumer protection.
With the final regulatory framework published, the U.K. is taking significant strides in establishing itself as a leading global destination for crypto-asset businesses. The phased regulatory approach, along with clear oversight from key regulators, aims to create a well-defined and regulated environment for the crypto industry. By recognizing the potential of stablecoins, differentiating between various cryptoassets, and supporting overseas firms and innovation, the U.K. is positioning itself at the forefront of the rapidly evolving crypto landscape.