UK announces plan to adopt stablecoins as valid form of payment

The UK government has announced plans for stablecoins to become a recognized form of payment in the country, as part of a wider plan to boost the UK’s reputation as a hub for digital payment companies.

In a statement Chancellor of the Exchequer Rishi Sunak said: “The government intends to legislate to bring stablecoins – where used as a means of payment – within the payments regulatory perimeter, creating conditions for stablecoin issuers and service providers to operate and invest in the UK.”

“By recognizing the potential of this technology and regulating it now, the government can ensure financial stability and high regulatory standards so that these new technologies can ultimately be used both reliably and safely, Mr. Sunak said.

It is not yet known which stablecoins will be regulated, and adoption in other global markets hasn’t been problem-free. In 2021, Tether, a Hong Kong-based stablecoin company, was fined $41m by the US Commodity Futures Trading Commission for allegedly misstating its reserves. 

Crypto industry guidance

The adoption of stablecoins is part of a host of new measures proposed by the UK government following the results of a consultation into cryptoasset and stablecoin regulation. About 2 million people in the UK have invested in cryptoassets, and 0.1% of the UK’s wealth is currently held as digital assets, with that proportion growing rapidly.

The announcement also signals a further acceleration of announcements from UK financial and regulatory bodies on the regulation of cryptocurrencies more widely, which is only likely to accelerate in the months ahead. 

In January, the FCA strengthened its promotion rules for high-risk and crypto firms. In March, the Bank of England, the Office of Financial Sanctions Implementation (OFSI), and the Financial Conduct Authority (FCA) jointly offered guidance for the cryptoasset sector relating to sanctions evasion.

March also saw the Bank of England publish a report on cryptoassets and decentralized finance, which identified key risk channels that could stem from cryptoassets and associated markets. These include risks to systemic financial institutions and core financial markets, the ability to make payments, and the impact on real economy balance sheets.

Meanwhile, a March 31st deadline for crypto firms to register with the FCA led to a significant exodus, which some analysts called a “total disaster” for the industry. While 33 firms registered, 12 remain in temporary registration and more than 60 were rejected or withdrew their application.

Globally, competition to establish a compelling, stable regulatory framework for cryptoassets is heating up. Australia launched its own significant statement of intent regarding crypto assets in recent weeks with the launch of its Digital Services Act consultation.

Additional cryptoasset measures

In addition to stablecoin regulation, six key measures were announced by the government as part of its plans to make the UK a global hub for cryptoasset technology and investment: 

1. Exploring ways to enhance the competitiveness of the UK tax system to encourage further development in the cryptoasset market. Including a review of how DeFi loans – where holders of cryptoassets lend them out for a return – are treated for tax purposes. The government will also consult on extending the scope of the Investment Manager Exemption to include cryptoassets
2. A financial market infrastructure sandbox will be introduced to enable firms to experiment and innovate
3. The Royal Mint is to create a Non-Fungible Token this summer
4. The FCA will hold a two day ‘CryptoSprint’ in May with industry participants, seeking views directly from the industry on key issues relating to the development of a future cryptoasset regime
5. Establishment of a Cryptoasset Engagement Group, convening key figures from regulatory authorities and industry to advise on issues facing the cryptoasset sector. This represents a step forward from the government’s 2018 Cryptoasset Taskforce into engagement with the industry
6. Exploring the benefits of Distributed Ledger Technology (DLT) in the UK’s financial markets, which enables data to be synchronized and shared in a decentralized way to potentially achieve greater efficiency, transparency and resilience

The government is to consult on wider regulation of the cryptoasset sector later in 2022.