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UK Treasury plans to regulate stablecoins but not cryptoassets

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Today the UK government published a 46-page consultation document inviting response on potential regulatory approaches for cryptoassets and stablecoins. It’s planning a relatively light-touch approach for cryptoassets, in part because the sector is currently still niche and consumers appear to be aware of the significant speculation risk. However, it plans to bring stablecoins into the regulatory perimeter. That’s because of the potential for mainstream usage resulting in financial stability concerns, risks to consumers and impact on incumbents.

“The UK has long been recognised as a world-leader in financial technology. We are committed to maintaining this position,” said John Glen MP, Economic Secretary to the Treasury, in the foreword. 

“In practice, that means creating a regulatory environment in which firms can innovate, while crucially maintaining the highest regulatory standards so that people can use new technologies reliably and safely. This is essential for confidence in the financial system more broadly.”

Her Majesty’s Treasury recognizes that the digital asset sector is fast-moving. So to have an agile approach, it aims for the Treasury and Parliament to outline broad objectives and considerations in legislation. Independent regulators will create detailed codes of practice. As various regulators have mentioned, it’s keen on the principle of ‘same risk, same regulatory outcome’.

Cryptoassets

The government plans a minimalist approach to cryptoassets leaving Bitcoin, other speculative tokens, and utility tokens outside the ‘perimeter’ requiring authorization. However, it wants to strengthen consumer communication and anti-money laundering (AML) regulation.

The consultation is focused on high-level principles and objectives rather than on the nitty-gritty details. Independent regulators will do the detailed rule consultations.

The latest research from the UK’s Financial Conduct Authority (FCA) concludes that the dominant purpose of cryptoassets is as a speculative investment, and consumers are aware of the risks. In the survey, 47% said they bought cryptocurrencies ‘as a gamble that could make or lose money,’ and 89% appreciated the lack of regulatory protection. This awareness and niche adoption are the reasons for the light approach.

Stablecoins

In contrast, the government wants to move stablecoins firmly inside the regulatory perimeter. It plans for oversight of both stablecoin issuers and firms providing related services, and both wholesale and retail stablecoins. The Treasury document outlines a broad array of organizations that will be regulated. Algorithmic stablecoins not backed by assets will likely be excluded.

That’s in part because it does not see it as a niche sector and views their broad use for payment as a financial stability risk. In particular, it has concerns over the ability to provide stable value and redeemability.

It envisages a broad array of risks to consumers in addition to price stability and redemption. They include excessive fees, complexity, the misuse of consumer data, cyberattacks and maladministration.

The principle of ‘same risk, same rules’ also means there should be a level playing field. The government is concerned that a stablecoin issuer could quickly reach scale and challenge incumbents without the same regulatory and compliance obligations. It doesn’t mention Diem (formerly Libra) directly but mentions global stablecoins.

The consultation runs until 21 March 2021.

The article has been extensively updated to add details.