UK Government Outlines Definitive Proposals for Stablecoin Regulation

The UK government has released its conclusive guidelines for the crypto sector, marking a phased approach towards regulation. The primary focus will be on regulating fiat-backed stablecoins, anticipated to be introduced early next year, while progressively incorporating other crypto sectors, like algorithmic stablecoins, under conventional financial regulations.

In an announcement made on Monday, the UK government detailed its plans to establish comprehensive regulations. This approach aligns with the policy proposed in April 2022 by Rishi Sunak, the current Prime Minister and former Finance Minister, intending to position the UK as a crypto-asset center. 

The phased implementation seeks to address key segments within the crypto market, eventually placing activities such as lending and trading under the purview of the Financial Conduct Authority (FCA).

Treasury Minister Andrew Griffith expressed enthusiasm, emphasizing that the finalized regulatory framework positions the UK as an ideal space for initiating and scaling crypto-asset businesses.

The revised proposals made notable modifications regarding the categorization of specific crypto assets. The proposed regulations exclude crypto assets already under traditional financial instruments, such as traditional securities, from additional financial services regulations. 

Moreover, the document clarified that unique Non-Fungible Tokens (NFTs), akin to collectibles or artwork, would not be subject to financial services regulation. However, NFTs used as exchange tokens might fall within future financial service regulations.

“The proposed regime does not intend to capture activities relating to cryptoassets which are specified investments that are already regulated, such as traditional securities,”

the government document said.

The Financial Conduct Authority (FCA) is expected to introduce an authorization regime for crypto companies soon. Additionally, the government aims to establish equivalence measures for international firms. Overseas-regulated trading venues may apply to authorize their UK branches, a decision that will be within the FCA’s discretion.

Stablecoin Regulations and Decentralized Finance (DeFi)

The recent documents released by the government outline that the issuance or custody of stablecoins backed by fiat will fall under existing financial service rules. 

Furthermore, measures will be established to ensure the secure functioning of digital payment systems without threatening the broader financial system. The central bank had earlier initiated discussions on a regulatory framework for systemic stablecoins in May.

The government’s stance remains firm against the prohibition of decentralized finance (DeFi) activities. Recognizing the complexity of regulating this aspect of the industry, the government deems it premature to impose regulatory measures.

However, the government’s regulatory propositions have encountered resistance and concerns. Lawmakers have expressed apprehensions about treating cryptocurrencies like traditional financial services, fearing that it might create a false sense of security. 

On the other hand, voices from the crypto industry have criticized the delays and insufficient feedback from the Financial Conduct Authority. Additionally, recent regulatory amendments on crypto promotions have resulted in some prominent firms curtailing their services in the UK.