The UK Treasury has finalized its regulatory approach to the crypto industry, which will be carried out in multiple phases, with the first phase bringing fiat-backed stablecoins under the supervision of financial watchdogs.
In a policy update published on October 30, the Treasury Department outlined its strategy to regulate stablecoins, with an initial focus on fiat-backed stablecoins in the first phase. The second phase will tackle the overall crypto industry and the various service providers in the sector.
The phased introduction of regulations will begin in early 2024, with legislation for fiat-backed stablecoins.
The regulatory process will require close coordination between key regulators, including the Bank of England, the Financial Conduct Authority (FCA) and the Payment Systems Regulator (PSR).
The collaboration aims to minimize potential risks and overlaps in the regulatory framework. The regulatory powers will extend to systemically important and recognized payment systems and digital settlement asset (DSA) service providers.
Phase 1: Stablecoin regulation
The government’s primary objective in the first phase is to facilitate and regulate the use of fiat-backed stablecoins within the UK payment chains. This approach recognizes their potential to become a mainstream retail payment method.
Fiat-backed stablecoins are defined as coins that attempt to maintain a stable value by referencing one or more specified fiat currencies. Furthermore, the government will not recognize stablecoins that are not backed by traditional fiat currency.
Regulatory actions in this phase include the Payment Services Regulations 2017 and activities relating to the issuance and custody of fiat-backed stablecoins within the Financial Services and Markets Act 2000.
The FCA will have primary oversight of all activities related to stablecoins, with the PSR and the Central Bank providing additional oversight as necessary. This approach aims to reduce the potential harm to consumers and limit the risks associated with its use in transactions.
Phase 2: Crypto regulation
In Phase 2, Britain will extend the regulatory framework to a wider range of crypto asset activities in the country.
This phase includes the regulation of exchange activities, custody activities, lending activities and market abuse. The phased approach aims to provide flexibility to companies focusing on different aspects of crypto asset activities.
The Treasury Department said it will not classify unbacked cryptocurrencies – such as Bitcoin (BTC) and Ethereum (ETH) – under the same regulations as gambling, confirming that its position will remain consistent with international standards and practices.
The government will focus on regulating activities related to crypto assets, such as trading, custody and lending, to create a comprehensive regulatory framework.
The UK plans to formulate equivalence measures for foreign companies operating in the country, such as crypto exchanges. This includes the ability for overseas regulated trading platforms to apply for authorization for their UK operations, with the FCA overseeing the process.
Additionally, the document clarified that unique non-fungible tokens (NFTs) that resemble collectibles or works of art would not be subject to financial services regulations. However, NFTs used as exchange tokens, especially those with limited price variation, may fall within future financial services rules.
The government also emphasized its commitment to supporting decentralized finance (DeFi). However, it added that regulating the DeFi sector would be premature as it could stifle growth and innovation.
The publication of the final regulatory framework represents a significant milestone in Britain’s journey to establish itself as a leading global destination for crypto asset companies. With a clear roadmap, the crypto industry and stakeholders can anticipate a well-defined and regulated environment in the near future.