The UK government has fired the starting gun on the race for the UK to become a leading global hub for crypto-asset technology. Recognising that the UK is already the second biggest market in the world for fintech investment, $11.6 billion in 2021 alone, the Chancellor of the Exchequer, Rishi Sunak has stated his ambition for Great Britain to be at the forefront of crypto technology and innovation.
HM Treasury has set out a package of initiatives including the regulation of some stable-coins under e-money rules, consultation on regulating the wider crypto market and a sandbox to encourage innovation in infrastructure.
Underpinning all this is the messaging that the UK intends to regain it’s position as an innovation-friendly powerhouse.
The recent announcement follows last year’s consultation where HM Treasury flagged its intention to regulate stablecoins where used as a means of payment. As such, stablecoins will come under the auspices of existing-money and payment services regulations.
Legislative evolution … not revolution.
An amendment to The Electronic Money Regulations 2011 (EMRs) will capture any crypto currency where the price is referenced to one or more fiat currencies and or is issued to finance payments.
The government also proposes extending Part 5 of the Banking Act 2009 to cover stablecoin and will empower the Bank of England to supervise where risks are considered systematic. The Financial Services (Banking Reform) Act 2013 will be extended to facilitate greater competition to subject stablecoin payment systems to competition regulation by the Payment Systems Regulator (PSR).
This is of course more evolution than revolution but is a clear statement of intent from HM Treasury and will bolster the UK’s determination to be the global home for crypto-asset technology.
Sandbox online in 2023
The FCA and Bank of England will partner to launch a sandbox next year. The aim is to encourage testing of Distribution Ledger Technology (DLT) in Financial Markets Infrastructures (FMIs) to achieve better understanding of further legislative requirements to tackle the ambiguities of DLT adoption.
Contributors will involve firms planning to test new technologies or structures (not limited to DLT) and will be provided with regulatory flexibility. Forbearance, will include the ability to apply for exemptions or modifications to current legislation.
This approach reflects the government’s agnostic approach to regulation, concentrating its emphasis on regulating the activity, not the underlying technology.
More to come
The government has also hinted that it will explore ways of enhancing the attractiveness of the UK tax system to foster more innovation in the crypto-asset market. Tax treatment around the commercial lending of crypto-assets, so called DeFi loans, is being reviewed, alongside a consultation on extending the scope of the Investment Manager Exemption to include crypto-assets.
Concurrently, the Chancellor has tasked the Royal Mint with creating a Non-Fungible Token (‘NFT’) this year and the FCA will hold a two day “CryptoSprint” this month with industry participants. Further, a Crypto-asset Engagement Group will also be formed, made up of key figures from the regulatory authorities and industry.
Some commentators fear the dominance of the US dollar as the peg to the most successful stablecoins and lack of detail around the recent government proposals as a hinderance to the long-term objective.
However, as the US and EU take a tougher stance on cryptocurrencies, the position of the global leader may well be within reach.
