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Crypto regulation in the UK: what are stablecoins?

01 May 2024

By Angus Irvine, Principal Consultant

In February 2023, the UK Government announced plans to legislate cryptoassets, with a view to make the UK the “most open, well-regulated, and technologically advanced capital markets in the world.” The rationale behind the legislative approach was, along with other jurisdictions, to bring cryptoassets into the same regulatory perimeter as other asset classes. Thus, attempting to bring some degree of confidence to the market.

We’ve produced a three-part series to discuss the status of crypto regulation in the UK and the consequences of the Financial Conduct Authority’s (FCA) DS23/4 discussion paper.

Under these new plans, the UK Government intends to regulate two specific areas: issuance and custody of regulated stablecoins, and the use of stablecoins as a means of payment. But what are stablecoins, and what does their regulation mean to the cryptoasset market?

What’s happened so far?

The Cryptoasset Registration regime was introduced by the insertion of the new Regulation 14A into the Money Laundering, Terrorist Financing and Transfer of Funds Regulations.

As a result, since 10 January 2021, UK domiciled cryptoasset exchange providers and custodian wallet providers have been required to register with the FCA for the purpose of anti-money laundering and counter-terrorist financing (AML/CTF) supervision (commonly known as 5MLD).

Since then, only  47 firms have secured their registration; an 86% failure rate.

Indeed, in the 12 months to April 2024 the FCA only received 28 registration applications.  During the same 12-month period only 13% of cases determined were successful. On 8 October 2023, firms marketing qualifying cryptoassets to UK customers were brought within the scope of the FCA’s financial promotions regime via the ‘Cryptoasset Financial Promotion Rules’.

Within this context, the next phase is to bring cryptoassets into the perimeter of the Financial Services and Markets Act 2000 (FSMA). To that end, on 6 November 2023, the FCA published DP23/4: Regulating cryptoassets – Phase 1: Stablecoins.

Under these plans, the UK Government intends to regulate in two specific areas:

1 (i) The issuance and (ii) custody of regulated stablecoins under the Act, and

2 The use of stablecoins as a means of payment under the Payment Services Regulations 2017 (the PSRs) and the Electronic Money Regulations 2011 (the EMRs)

Plans for the implementation of Phase 1 will now follow and are expected to be finalised by mid-2024.

Thereafter, in Phase 2, the plan is to bring other cryptoasset-related activities into the scope of the FSMA (Regulated Activities) Order 2001 (the RAO).

What exactly is a cryptoasset?

The UK Government defines a cryptoasset as “a cryptographically secured digital representation of value or contractual rights that uses a form of distributed ledger technology and can be transferred, stored or traded electronically”.

What is a stablecoin?

Per the discussion paper, a stablecoin is “a category of cryptoassets that aims to maintain a stable value relative to a specified asset, or basket of assets, providing perceived stability when compared to the high volatility of unbacked cryptoassets.”

Stablecoins are predominantly used to facilitate transactions between cryptoassets and are a key component of the functioning of the cryptoasset market. They also provide an opportunity for consumers to enter and exit the cryptoasset market.

What is a regulated stablecoin?

A regulated stablecoin constitutes a category of stablecoins that meet two cumulative conditions:

  • It seeks to maintain a stabilised value of the cryptoasset by reference to, and which may include the holding of, one or more specified fiat currencies, and
  • It’s issued by a firm which is authorised by the FCA

Regulated stablecoins may be used as a means of payment in UK payment chains.

What assets can back a stablecoin?

Usually, stablecoins are backed by fiat money in any currency (e.g., U.S. dollar). However, theoretically, any traded item can serve as their underlying asset, ranging from gold to real estate.

The global stablecoin market capitalisation is approximately USD 123.4 billion, of which 87% collectively comprises of Tether (USD) and Circle (USDC).

Next steps: the proposed regulatory perimeters

The aforementioned DP 23/4 regulation proposes two new activities relating to fiat-backed stablecoins: the issuance in or from the UK with custody activities carried out from the UK, and UK-based consumers for UK-issued fiat-backed stablecoins.

Read more about this proposal, what it means and how stablecoin issuers and custodians may be subject to the Consumer Duty in our next article: Stablecoin regulation: what does it mean for issuers and custodians?

If you’re interested in having an exploratory discussion about cryptoassets and their regulation, please feel free to reach out to us.

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