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The UK is pushing ahead with plans to regulate the crypto industry, starting with stablecoins, as it seeks to strengthen oversight of the digital assets market.
The Treasury on Monday published its response to a consultation on the future of crypto industry rules, which comes as the government tries to bolster protections for investors while also attracting investment in digital tokens to London.
Fiat-backed stablecoins are a type of crypto token that are pegged to an existing currency and can be used to make digital payments.
Prime Minister Rishi Sunak has championed the UK as a global crypto hub but faces increasing tensions with the Financial Conduct Authority as the regulator tries to beef up safeguards for consumers.
In the past year, the demand for tougher regulation has grown following the collapse of high profile exchange FTX, which resulted in huge financial losses for thousands of investors.
The Treasury said its proposals were informed by recent events “including the failure of FTX” and that it planned to lay out secondary legislation for the new rules in early 2024.
Under the proposals, stablecoins will be regulated under the same umbrella as existing rules for traditional payment service providers known as Payment Services Regulations.
Tether’s USDT token, which is linked to the dollar, is the world’s biggest stablecoin in circulation with a current market capitalisation of $85bn.
The issuance and custody of stablecoins, in cases where the coin is issued from the UK, will be brought under the regulatory perimeter of the Financial Services and Markets Act.
“Certain stablecoins have the potential to become a widespread means of retail payment, driving consumer choice and efficiencies” the Treasury said.
The government is also seeking to regulate the wider crypto industry, including custodians who hold crypto assets on behalf of investors, and mandating exchanges to disclose all tokens that they list.
But some financial regulation experts have raised concerns over whether the new proposals are workable. “It’s unlikely that crypto regulation will be easily shoehorned into the existing regulatory framework. Time, money and thought will need to be given on how this can be achieved quickly,” said Jonathan Cavill, a partner at law firm Pinsent Masons.
He added that the rules were “likely to create a change in the way in which the industry will be structured and developed,” adding that “becoming regulated and maintaining regulation and compliance is incredibly expensive, time-consuming”.
The crypto industry “should follow the standards expected of similar existing financial service activities, commensurate to the risks they pose,” the government said.
It added that the regulations will “stimulate growth and innovation in the sector . . . whilst mitigating financial stability risks and ensuring consumer protection”.
