UK's first crypto asset regulatory framework

As the UK government announces plans for the country to become a global crypto asset technology hub, the Bank of England has started making plans for the UK’s first crypto asset regulatory framework. So, what do these plans involve?

Just as the UK government has announced its plans for the UK to become a global crypto asset technology hub, the Bank of England has started making plans for the UK’s first crypto asset regulatory framework. The move has come in the wake of warnings about risks associated with the sector’s rapid growth. 

Digital assets on the rise 

In December 2021, the Bank of England's deputy governor estimated that around 0.1% of UK wealth was currently held as digital assets. Statistics show 6.1% of Brits say they currently own cryptocurrency. This number has surged by 103% since the beginning of 2018.  

The sector is now worth an estimated £1.7 trillion and more than 100 countries are currently exploring or piloting the use of digital currencies by central banks. 

Left unregulated, this fast growth sector could pose a significant risk to financial stability, especially as crypto assets become more interconnected with the wider financial system.  

Crypto concerns

The sector has long been associated with financial crime, but one key concern is cryptocurrencies could be used to dodge sanctions on Russia following its invasion of Ukraine.

A joint statement from The Office of Financial Sanctions Implementation (OFSI), the Financial Conduct Authority (FCA) and the Bank of England agreed that, “Financial sanctions regulations do not differentiate between crypto assets and other forms of assets. The use of crypto assets to circumvent economic sanctions is a criminal offense under the Money Laundering Regulations 2017 and regulations made under the Sanctions and Anti-Money Laundering Act 2018.” 

From 31 March 2022, firms operating crypto services in Britain must be registered with the Financial Conduct Authority.  

Change in the law

However, crypto assets are still largely unregulated so a change of law is needed to actually bring them within the scope of UK securities rules. And the Bank of England has launched a survey of banks' existing exposures and future crypto plans, with a June 3rd deadline for submissions.

After this point, the Bank of England and the FCA have said they will carry out more work on rules and consult on a regulatory "model" for systemic stablecoins in 2023.  

What are Stablecoins? 

Stablecoins are a "type of crypto asset pegged to a fiat currency" (such as the euro or dollar) that should maintain a stable value. They are less volatile than other cryptocurrencies such as Bitcoin. 

The UK government hopes a stablecoin could provide a more efficient means of payment and a wider choice for consumers – with appropriate regulation. The government wants to bring stablecoins within the payments regulatory landscape, thereby creating conditions for stablecoin issuers and service providers to operate and invest in the UK. 

The most well-known and popular stablecoin is Tether and this is popular among investors who want to avoid the volatility of other cryptocurrencies. However, as stablecoins have grown so fast, regulators are worried they may not be backed by an equivalent number of reserves. 

Implications of the regulation

What could these regulations mean for investors or traders? As they’re likely to include things like liquidity requirements and extra auditing and accounting, the regulations could favor the larger crypto firms who have the resources and infrastructure in place to manage them. Conversely, this could have an impact on smaller firms. 

Some critics believe increased regulation could hinder innovation and undermine the decentralized purpose of crypto. However, for investors it could mean greater stability in an historically volatile and risk-prone market. 

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