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UK’s Future Crypto and Stablecoin Regulation

Crypto Regulation | Nov 1, 2023

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Herbet Smith Freehills Unpacks the UK's Progressive Stance on Cryptoasset and Stablecoin Regulation

The UK government has recently published a series of policy papers, shedding light on its future regulatory approach towards cryptoassets and fiat-backed stablecoins.

Herbert Smith Freehills law firm, expertly outlines the UKs forward-thinking regulatory framework and explores the delicate balance between nurturing innovation while ensuring financial integrity in the digital asset space.

Fiat-Backed Stablecoin Regulation (Phase 1)

  • The UK's Financial Services and Markets Act 2023 has set the stage for the regulation of fiat-backed stablecoins, with secondary legislation expected to be introduced by early 2024.
  • This legislation aims to bring activities related to fiat-backed stablecoins within the regulatory perimeter, empowering the Financial Conduct Authority (FCA) to oversee these digital assets.
  • The government's policy update delineates the objectives of this upcoming legislation, ensuring a clear regulatory framework for stablecoins.

Wider Cryptoasset Regulation (Phase 2)

  • The UK government has also published its response to the February 2023 consultation on the broader cryptoasset regulatory regime.
  • This response clarifies and modifies some of the original proposals based on feedback received.
  • The implementation of this broader regulatory framework is anticipated to commence post-2024, following the completion of Phase 1.

See:  UK Releases Digital Asset Consultation Results

Managing Systemic Digital Settlement Asset (DSA) Firms

  • The UK government intends to apply a modified Financial Market Infrastructure Special Administration Regime (FMI SAR) to manage the failure of systemic DSA firms, including stablecoin entities. This approach aims to ensure the stability and integrity of the digital asset ecosystem.
  • Here's the link to the UK government response on 'Managing the failure of systematic digital settlement asset firms' (including stablecoins)

Further Notes:

  • The government acknowledges the need for a precise legal mechanism to define and categorize cryptoassets, ensuring clarity for industry stakeholders.
  • The UK's regulatory approach may diverge from the EU's MiCA and other jurisdictions, as portfolio management and investment advice on cryptoassets will not be regulated at this stage.
  • Mining will remain unregulated, while the government plans to expedite exploratory work to clarify the regulatory treatment of staking activities.

See:  FCA’s Expectations for UK Cryptoasset Businesses and the Travel Rule

  • Delineation between Phases 1 and 2: The government provides greater clarity on the definitions and distinctions between regulated stablecoins and broader cryptoassets.
  • Firms dealing directly with UK retail consumers will be required to obtain authorization, irrespective of their location.

The UK government's policy papers reflect a thoughtful and progressive approach to cryptoasset and stablecoin regulation, balancing innovation with consumer protection and financial stability.

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