The British Government this week announced that stablecoins - a form of cryptocurrency that is typically pegged to a fiat currency, such as the US dollar - will be brought within regulation, meaning that it could soon potentially be used in the UK as a recognized form of payment.
A series of announcements relating to cryptoassets, and more broadly distributed ledger technologies (i.e. Blockchain), were made by the Treasury this week, with the aim of positioning the UK as a ‘global hub’ for crypto business.
The measures come shortly after US President Biden signed an executive order on a whole-of-government strategy for digital assets, in order to “reinforce American leadership in the global financial system and at the technological frontier”.
However, as Chris Middleton highlights in his diginomica piece on Biden’s strategy, the US is a long way behind the curve when it comes to Central Bank Digital Currencies (CBDC) - which are the stablecoin equivalents of their sovereign currencies - with China leading the way.
The UK too has started to explore the possibility of a CBDC, which could be developed by the Bank of England, but concerns have been raised about the potential consequences for state surveillance and people’s spending choices.
However, it’s clear from the announcements this week that the UK sees cryptocurrency and digital assets as technologies that will significantly shift the landscape of financial systems over the long term - and it wants to be at the forefront of that.
John Glen, Economic Secretary to the Treasury, gave a speech this week where he said:
Never in the history of commerce has there been an invention as hyped and misunderstood as Distributed Ledger Technology and Blockchain.
For simplicity’s sake, I’m going to use the catch-all term ‘crypto’ or ‘crypto-technologies’. But what I mean is the extraordinary, mercurial, underlying technology which makes ‘crypto’ possible… and which we can be pretty sure is going to have profound effects across multiple domains.
And that doesn’t happen very often. We want this country to be a global hub - the very best place in the world to start and scale crypto-companies.
If there is one message I want you to leave here today with, it is that the UK is open for business - open for crypto businesses.
However, Glen did acknowledge that there isn’t yet a consensus on the implications of crypto, whether we will ever reach some kind of steady state, or even whether “crypto itself is a good thing”.
But that’s never stopped the UK, has it? So despite concerns around harm to consumers, providing a platform for illicitly activity free from government oversight, or the huge potential harm to the government, the name of the game is now crypto! Glen said:
That leaves us here in the UK with a big question to answer: How are we going to respond?
Our answer is this: If crypto-technologies are going to be a big part of the future, then we – the UK – want to be in, and in on the ground floor.
We hear the concerns… some of which are valid.
We aren’t going to lower our standards, but we are going to maintain our technologically-neutral approach. Having robust and effective regulation won’t hinder innovation, it’ll actually boost it - by giving people and businesses the confidence they need to think and invest for the long-term.
Glen said that the UK will focus on what the government is calling ‘dynamic regulation’, which means that it should be able to adapt and change as necessary, depending on what input and advice is received from the Treasury, regulators and the Cryptoassets Taskforce.
What has been announced?
As noted above, the government intends to legislate to bring stablecoins within the payments regulatory perimeter, creating conditions for stablecoins issuers and service providers to operate and invest in the UK. It is hoped that this will ensure financial stability through regulatory standards, so that the technologies can be used reliably and safely.
The UK will also “proactively explore” the benefits of distributed ledger technology in UK financial markets, which essentially allows data to be synchronized and shared in a decentralized manner. Proponents of the technology argue that it enables transparency and resilience, but widespread adoption has yet to be seen in many contexts and there are huge concerns about carbon emissions as a result.
The government will also legislate to establish a financial market infrastructure (FMI) ‘Sandbox’ that will allow firms to experiment and innovate in providing the infrastructure services that underpin markets, in particular by allowing distributed ledger tech to be tested.
A research programme will also be started to explore the feasibility and benefits of using distributed ledger tech for sovereign debt instruments.
Other measures announced include:
Exploring ways of enhancing the competitiveness of the UK tax system to encourage further development of the cryptoasset market in the UK. The government will review how DeFi (decentralized finance) 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.
The Chancellor has commissioned the Royal Mint to create a Non-Fungible Token this summer.
The Financial Conduct Authority will hold a two day ‘CryptoSprint’ in May with industry participants, seeking views directly from industry on key issues relating to the development of a future cryptoasset regime.
The Economic Secretary will establish and chair a Cryptoasset Engagement Group, convening key figures from the regulatory authorities and industry to advise the government on issues facing the cryptoasset sector.
Whether we like it or not cryptocurrencies and digital assets are a growing area of technology in the finance market and it is better for governments to be at the forefront of understanding the implications of their growth, using regulation to ensure an element of control and stability, rather than to ignore. Whether or not the British Government has the ability to influence that development, or the vision for what is possible, whilst not ignoring the risks, remains to be seen, however.