Chancellor Nadhim Zahawi said the legislation will help the government deliver on its “vision for an open, green and technologically advanced financial services sector” that would be globally competitive.
Among the changes in the legislation is a drive to regulate the cryptocurrency market, particularly around the use of so-called stablecoins, which are seen as a bridging asset between traditional markets and cryptocurrency.
Stablecoins are a type of cryptocurrency which have their value attached to the performance of a conventional fiat currency such as the US dollar. Because of this, they can usually avoid wild fluctuations in value while still maintaining the privacy and instant payments which cryptocurrencies offer.
A ‘reserve’ of fiat currency equivalent to the amount of stablecoin in circulation is held by the issuer as an additional level of security. However, stablecoins including Terra and Tether have run into difficulties in recent months, with doubts being raised about the size of their cash reserves.
Harry Eddis, global co-head of fintech at law firm Linklaters, said: “Bringing stablecoins into the scope of regulation is a significant milestone. It is the first time that the UK licensing regime will specifically cater for a type of crypto asset.”
The bill will require issuers of stablecoins that are used as a means of payment to get a licence from the Financial Conduct Authority (FCA). Some crypto businesses already have to apply anti-money laundering rules, but this bill takes that a step further.
“The limited scope of the new stablecoin regime minimises the initial impact but a consultation later this year will explore a more dramatic extension of the regulatory net into the crypto world,” Eddis says.
Crypto crashes build pressure on regulators
Governments have come under increasing pressure to regulate after a spate of crashes that saw millions wiped out from crypto investment portfolios.
Earlier this year, ahead of a consultation, HM Treasury officials said stablecoins play such an important role in the payment process that they need extra protection. Writing in the consultation paper officials said that “the failure of a systemic digital settlement asset firm could have a wide range of financial stability as well as consumer protection impacts”.
The legislation is likely to place stablecoins and their providers under greater scrutiny than is currently the case, including potentially more specific legislation in the future around winding down of failed stablecoins to protect investors and powers for the Bank of England to provide stability when a coin is in crisis.
As well as efforts to regulate stablecoins the bill will also see a new sandbox created by the Bank of England and FCA to provide a safe space for industry players to explore the use of blockchain technology.
UK crypto regulation to encourage ‘safe adoption’
Zahawi said in his Mansion House speech: “Our objective is clear: to keep the UK the most open, inclusive, welcoming, competitive, safe, and transparent place to do financial services business, in the world.”
“We have the talent, the education system, the time zone, the deep and liquid capital markets. High-quality regulation, globally respected institutions, a stable and renewed legal regime,” Zahawi added.
The chancellor claimed the UK’s research, fintech innovation and cybersecurity capabilities put it “in the driving seat”, adding: “This is where the world comes to finance everything from infrastructure to innovation to the net zero transition.”
A Treasury spokesperson told Tech Monitor the government is committed to putting the UK at the forefront of cryptoasset technology and innovation and would do so “by capitalising on the freedoms gained by leaving the European Union”.
“Our framework will support the safe adoption of crypto whilst giving regulators the agility to respond to market developments, support innovation and protect consumers,” they added.
“The Financial Services and Markets Bill published today sets up the framework for regulating stablecoins in the UK and we will be consulting on a world-leading regime for the rest of the crypto market later this year. ”