The UK is to regulate ‘stablecoins’ as payment mechanisms, HM Treasury announced today, and the Royal Mint is to issue a collectable series of NFTs (non-fungible tokens). The announcements were made among a series of measures designed to make the UK a “global crypto asset technology hub”.
The measures send a “crystal-clear message”, said Amrit Dhami, associate analyst for thematic research at GlobalData. “Before crypto assets become part of British financial services, they’ll need to be well-cushioned by airtight regulation.”
Stablecoins to be regulated in the UK
A stablecoin is a cryptocurrency whose value is tied to that of a ‘fiat’ currency, such as the pound or US dollar. Stablecoins such as Tether and USDC are widely used within the cryptocurrency ecosystem as a ‘vehicle currency’ with which to exchange crypto and fiat currencies. But unlike Bitcoin, where value is subject to wild fluctuations, stablecoins are considered by some to be viable as a payment mechanism.
Following a consultation on the impact of various crypto assets on the financial services sector, the UK government has concluded that, “[w]ith appropriate regulation, [stablecoins] could provide a more efficient means of payment and widen consumer choice”.
The UK plans to regulate stablecoins by expanding the scope of its current e-money rules. These cover pre-paid payment cards, and require issuers to register with the Financial Conduct Authority to discourage money laundering.
“Bringing stablecoin within an expanded e-money framework feels like a sensible way to go and the most obvious starting point for defining [stablecoins] in the context of their use as a means of payment,” said Oliver Irons, a partner at law firm Simmons and Simmons.
However, he added, regulating stablecoins as ‘payments systems’ could require changes to a number of different regulations, meaning that multiple regulators would play various roles. “If these aren’t clearly defined from the outset, stablecoin issuers are going to find themselves pulled in lots of different directions.”
Stablecoins are a good starting point for the UK’s crypto regulation regime, said Dharmi. “Introducing them as a widespread payments option could be an ideal way to get the average consumer accustomed to the whole concept of crypto,” he said.
Zach Meyers, senior research fellow at the Centre for European Reform, agrees that well-regulated stablecoins could benefit consumers, especially for cross-border payments, “which are often among the most expensive types of transactions today, because of the interbank fees and forex costs involved. Much of that could be eliminated with a system where both parties use the same stablecoin,” Meyers explained.
“They could also be useful for micropayments, where traditional card networks are not cost-effective; in ‘smart contracts’ and other automated financial transactions; and in wholesale payments,” he added. “Other efforts to improve competition, such as open banking, have so far had limited traction.”
Expanding e-money regulations to cover stablecoins reduces one of the key risks: that a stablecoin issuers might go bust, resulting in user losing their money, Meyers said. “Regulation of stablecoin as e-money addresses this risk without overcomplicating the regulatory regime,” he said. “Stablecoin providers would be able to provide payment accounts for their users, but they would have to keep an equivalent amount of fiat currency ring-fenced in high quality, liquid assets.
But the approach is not without risks, Meyers added. “If only fiat-pegged stablecoins are regulated, then this could have some perverse effects, for example encouraging some firms to issue riskier types of unregulated cryptoassets,” he explained.
Royal Mint to issue NFTs
HM Treasury also announced that Chancellor Rishi Sunak had instructed the Royal Mint to create an NFT. The Royal Mint, a government-owned company that produces the UK’s coinage, confirmed to Tech Monitor that it is “currently developing our first NFT range. It will be available from summer 2022, and we will share further details in due course.
“The Royal Mint is one of the world’s leading providers of premium collectables, making this a natural progression for us,” it said in a statement. “By creating NFTs we plan to help customers own digital collectables in a secure and trusted way, while engaging a new audience with The Royal Mint.”
The Royal Mint may be joining the NFT boom too late to capture widespread public interest, however. Data from Google reveals that web searches for the term ‘NFT’ have fallen substantially since January this year.
Very few governments have issued NFTs so far, explained Meyers. "The main exception is Ukraine, which announced earlier this year that it would sell NFTs as a novel way to raise funds to support its defence against the Russian invasion."
The UK's proposed NFT series is, therefore, "a little unusual", Meyers said, but could be a useful experiment. "Given the UK government’s desire to be at the frontier of fintech regulation, it makes sense for the government to conduct these small-scale experiments and to become more familiar with blockchain technology."
However, it is unlikely to have implications for a potential central bank digital currency (CBDC), which the UK is reported to be working on, Meyer added. "First, it is described as a ‘collectable’, and it would not be backed by the central bank in any way, so it seems unlikely that it is targeted at large-scale revenue-raising," he explained. "Second, since [NFTs] are not fungible they are unlikely to need a blockchain that supports a large number of daily transactions, like a CBDC used for everyday payments would."
Dharmi agrees that the Royal Mint's NFT is unlikely to have significant financial implications. "On its own, the Royal Mint’s planned NFT is perhaps more of a symbol marking this particular new direction that the UK government is moving in than a significant asset in itself – much like a commemorative coin."
Crypto adoption in the UK
Despite the government's enthusiasm, the UK is a relative laggard in crypto adoption, according to a survey published today by crypto exchange Gemini. Out of 2,300 UK respondents in a survey, 18% have owned cryptocurrency, fewer than in countries including the US and India.
Crypto adoption boomed last year - nearly half (45%) of those who have bought cryptocurrency did so for the first time in 2021 - but this surge in interest may already have peaked. Only 8% of UK respondents who have not yet bought crypto intend to this year.
The government said it plans to launch a new consultation on regulating a broader range of crypto assets later this year. This will include consideration of the environmental impact of cryptocurrency, it said. "The government’s consultation later this year on regulating a wider set of cryptoasset activities will reflect green commitments and ensure that the approach is aligned to environmental objectives including the UK’s net zero target."