Fintech Week in London last week saw U.K Chancellor Rachel Reeves announcing that firms offering cryptoasset services will be subject to new clear rules aimed at boosting investor confidence and driving growth.
It is estimated that 12 percent of U.K. adults now own or have owned crypto, up from just four percent in 2021, and the Government is concerned about the risks that cryptoassets present to retail customers, and in particular scams and fraud.
Reeves said, “Through our Plan for Change, we are making Britain the best place in the world to innovate — and the safest place for consumers. Robust rules around crypto will boost investor confidence, support the growth of Fintech and protect people across the U.K.”
Crypto firms with U.K. customers will also have to meet clear standards on transparency, consumer protection, and operational resilience, just like firms in traditional finance.
The long-awaited new rules, published by HM Treasury just before Fintech Week, are being deployed as a Statutory Instrument (SI) under the Financial Services and Markets Act 2023 are currently in draft and open for comments until 23rd May.
The new rules were shortly followed by the Financial Conduct Authority’s (FCA’s) DP25/1: Regulating cryptoasset activities, which is also open for public comment until June 13th.
It is expected that industry will put forward strong responses to both given the mixed feedback on the proposals around the virtual water cooler.
The Chancellor also announced that the U.K. and U.S. will use the upcoming U.K. – U.S. Financial Regulatory Working Group for crypto and digital assets policy engagement. Industry anticipates a possible collaboration using cross-border industry sandboxes, leveraging the U.K.’s Digital Securities Sandbox.
This willingness to drive forward cross-border collaboration was followed by remarks from Bank of England (BoE) Deputy Governor Sarah Breeden who discussed next steps for the U.K. stablecoin regime during a panel session at the Point Zero Forum in Zurich this week where she also re-emphasised the importance of working across borders.
The proposed cross-border collaboration, on top of the first and newly announced U.S. trade deal with the U.K. leaves industry players with high expectations of a strong cross border “special relationship” on key policy and regulation for crypto and digital assets.
“The clarity of purpose in the U.K. government, combined with new rules coming into force for digital assets, will undoubtedly play to strengths in the U.K. economy creating a key opportunity to forge U.S – U.K. regulatory harmonization and investment opportunities,” says Dante Disparte, chief strategy officer and head of global policy and operations at Circle.
Looking Across The Channel
The SI is directed at regulating cryptoassets and stablecoins and sets out some key important provisions. The proposals include the creation of a new category of specified investments which will cover qualifying cryptoassets and stablecoins.
The SI also includes a new specified activity of stablecoin issuance, and requirements for the authorization for issuers includes a delineation between crypto and traditional securities and the exemption of pure DeFi, further clarifying the U.K.’s regulatory perimeter.
While there are some similarities between the proposed U.K regulations to other global regimes such as the E.U.’s MiCA, the pending U.S. Senate Banking’s GENIUS Act and Abu Dhabi’s already established Fiat Referenced Token Regime, industry policy analysts point out some discrepancies which are a cause for concern for the U.K. from a competition perspective.
“The U.K.’s proposals are a step in the right direction and show clear intent to engage with the stablecoin market thoughtfully,” said Paolo Ardoino, the chief executive officer of Tether, “recognizing the role of overseas-issued tokens is a sensible move and reflects a more pragmatic approach than what we’ve seen in the EU under MiCA.
“However, it’s important that the U.K. doesn’t replicate some of MiCA’s flaws which risk stifling innovation and undermining financial stability. We look forward to continued dialogue to help shape a framework that supports both innovation and user protection.”
While some are concerned about MiCA’s shortcomings, it is notable that MiCA is widely seen as the one of the most comprehensive global frameworks for cryptoassets. The regulatory certainty and legal clarity it brings means that large institutional players have already started to scale there.
Jean-Marc Stenger, chief executive officer of Societe Generale – FORGE says, “Europe has been at the forefront in terms of regulation. The entry into force of the MiCA regime reshapes the market in the E.U. and opens up a window of opportunity. This is the first time that we have a clear, homogeneous, relatively broad, and ambitious framework that is directly applicable throughout the E.U.
“For Societe Generale – FORGE, offering a MiCA-compliant stablecoin is definitely a game-changer. This development is in line with the evolution of the crypto ecosystem itself entering a new dimension in terms of adoption, the increasing institutionalization and growing interest for stablecoins with record volumes. As stablecoins continue to gain ground, we are confident in their capacity to play a central role in the future of finance.”
There is a risk that if the U.K. diverges too widely from the E.U., or indeed, from other jurisdictions such as U.A.E. and Singapore, as they introduce their own stablecoin regulatory regime, it will cause operational inefficiencies that make it an unattractive market for global firms to either base themselves or expand into.
The growth potential is a key incentive for the U.K. to make a competitive offering as it bids for its piece of the global crypto and digital assets pie.
Keep Your Eyes on the Prize
Chainalysis reports that the stablecoin market has matured significantly across the world, overtaking BTC, and is a preferred asset for everyday transactions. Driving this growth is stablecoin transactions under $1 million, which they classify as retail (or non-institutional), though it is noted that institutional use of stablecoins is also on the rise.
Chainalysis notes that regions like Latin America and Sub-Saharan Africa are embracing USD stablecoins as a hedge against local monetary instability, offering a more reliable means of transacting and preserving value. In these regions, retail adoption of stablecoins is largely driven by their practicality for low-cost remittances, secure savings in regions with volatile currencies, and accessibility to DeFi services like lending and staking.
Matthew Osborne, Ripple’s U.K. & Europe policy director say, “Thriving crypto hubs like Singapore and the U.A.E shows what’s possible when ambition meets urgency. We look forward to the U.K Government and regulators working at pace to get this rulebook live, providing the regulatory clarity that is essential for serious institutional participation in the sector and the U.K.’s continued global leadership in financial services.
“We’re especially encouraged by the proposed U.K. stablecoin regime, which recognises the global nature of blockchain by allowing overseas-issued tokens, as well as the proposed U.K. – U.S. sandbox. International cooperation like this is critical to scaling the real world benefits of digital asset technology.”
The Good, The Bad, and The Stable
Globally, stablecoin legislation has been a priority for many major jurisdictions. The key factors that most firms compare between jurisdictions are the regulatory perimeter, legal classification, who can issue, reserve requirements, who supervises, and KYC/AML requirements.
Other important factors considered include disclosure and transparency requirements, reporting frequency, redemption, dispute mechanisms, passporting/reciprocity, requirements for non-local issuers, systemic vs non systemic classification, and cyber and operational resilience.
The FCA’s Discussion Paper explores these and many other risks, in relation not only to stablecoins but also to in-scope cryptoassets more broadly and proposes ideas and solutions for industry to feed back on.
There is a notable willingness to address and accept the realities of cryptoassets and stablecoins as being global in nature, as well as the global structures of the firms issuing and providing services in them. A proposed dual branch / subsidiary model aims to enable cryptoasset trading platforms (CATPs) to pool liquidity at a global level while servicing retail clients from a local, regulated entity.
Nevertheless, there remain a number of areas awaiting clarification. The treatment of payment systems using stablecoins remains uncertain, pending updates to the Payment Services Regulations (PSRs) at some as-yet unspecified future date, as do the impacts of issuers of these “payment stablecoins”.
Proposed bans on retail participation in certain activities, or severe restrictions on certain activities, run the risk of isolating the U.K. in its approach and reducing competitiveness.
The recent publications are but the beginning of a lengthy and complex process of consultations, feedback and revisions of the proposals, and it will be essential for the U.K. industry ecosystem to participate and feed into this process collaboratively both amongst firms themselves as well as with the regulators if it is to be successful within the short timelines envisaged.
Jannah Patchay, a leading industry policy consultant and executive in residence at Global Digital Finance says, “HM Treasury and the FCA have signalled a clear intent and enthusiasm for engaging in constructive discussion with industry around these proposals, which we very much welcome. There are some crucial design choices being made at this stage of the regulatory framework’s development, which will have a significant bearing on the future direction of cryptoasset and stablecoin market development in the U.K.
“It’s critical that we work together to get the foundations right for a future regulatory regime that promotes the objectives of consumer protection and market integrity whilst also positioning the U.K. as an attractive, competitive destination – and global hub for innovation!”
Mind The Gap
For the U.K. to be an attractive crypto jurisdiction for stablecoins, both locally issued and those backed by other currencies, it will need to close the gap with other regimes to deliver cooperative agreements with jurisdictions where frameworks already exist, and focus on driving and delivering growth in digital assets.
“At the end of the day the successful digitization of financial markets depends on global scalability,” says Elise Soucie Watts, executive director of Global Digital Finance, “Fragmented regulation leads to inefficiencies, duplication, loss of global market potential.
“To achieve functional equivalence in these markets jurisdictions need to shift their mindset. Reciprocity isn’t charity, it’s mutual self-interest and should be part of the growth strategy for any nation that wants to expand its digital markets.”
Overall, it is clear from the announcements during U.K. Fintech Week that digital growth is one of the Government’s goals. To achieve this, they will need to drive on quickly towards clarity.
The SI is one step forward, but now as more detailed proposals come through from the FCA and BoE it is time for continued and detailed industry engagement to both mind – and close – the gap with other regimes to make the U.K an attractive destination for crypto and digital asset growth.
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