The UK has finally released its policy for the regulation of fiat-backed stablecoins, marking a significant milestone in its effort towards crypto regulation. The release of this policy makes way for inclusion of these stablecoins in the UK payment chains.
The new policy which will come into place by 2024 aims to incorporate stablecoins into the existing financial regulatory framework. This approach is entirely different from the rest of the European Union which is bringing an entirely new regulatory framework for crypto known as the Markets in Crypto-Assets (MiCA).
Stablecons are cryptocurrencies that are pegged to fiat currencies or other forms of external commodity from which they derive value. Their value is therefore relatively stable, with the value of a USD-backed stable coin being roughly 1 USD at all times.
This quality of relative stability has made stablecoins widely popular among investors and for payments, since they retain the speed and low transaction cost that characterize cryptocurrencies in general.
The UK has seen the potential of stablecoins becoming even more popular for payment, hence the need to regulate them and bring them under existing financial regulations. They will be subject to the Payment Services Regulations 2017 and the Financial Services and Markets Act 2000.
“Certain stablecoins have the potential to become a widespread means of retail payment, driving consumer choice and efficiency,” HM Treasury stated. “In order to deliver this, the government intends to bring the regulation of certain activities relating to fiat-backed stablecoins within the UK’s financial services regulatory perimeter.”
Fiat-backed Stablecoins Under FCA
The financial conduct authority (FCA) is the foremost agency for financial regulation in the UK, and is also a key player in the regulation of stablecoins and crypto in general.
After the first phase of the regulatory implementation, HM Treasury intends to bring fiat-backed stablecoins into the Financial Conduct Authority’s remit via secondary legislation. This will empower the FCA to ensure that fiat currencies backing stablecoins held in a statutory trust as insurance for customer funds in case of a bank run.
The regulation is however restricted to fiat-backed stablecoins. While other types of stablecoins will still be in the UK’s payment chain, they will not be regulated, except for algorithmic stablecoins which will be captured in subsequent regulation.
This is because of the concerns around algorithmic stablecoins following the collapse of TerraUSD (UST), an algorithmic stablecoin issued by Terra. Because of the unstable nature of this class of stablecoins, the UK will capture them in a follow-up regulation.
“This is because their under-collateralised nature means they share characteristics with unbacked crypto assets and crypto-backed tokens are only as stable as the underlying crypto asset,” stated the Treasury.
Experts Weigh in
Crypto regulation has been long awaited in the UK, but what will be the outcome of the stablecoin policy? Financial services regulatory partner at Norton Rose Fulbright Albert Weatherill weighs in.
“Today’s publications largely confirm what we already knew in February – regulation is coming to crypto assets in a fairly expansive way,” said Weatherill.
He further stated that major questions such as “when these rules will come into force, how applicants will be able to get authorized and what the substance of the rules will be” remain unanswered.
Head of investment analysis at AJ Bell, Laith Khalaf also commended the regulation of stablecoins under existing financial framework, saying “the apparatus and resources for supervision are already there and working in tandem with regulators worldwide”.