U.K. Publishes Final Proposals for Crypto, Stablecoin Regulation

The U.K. government published its final rules for the crypto ecosystem, saying it plans a phased introduction of regulation, with legislation for fiat-backed stablecoins being introduced early next year.

Other crypto areas, such as algorithmic stablecoins, will follow as the government brings activities like lending and trading into the fold of conventional financial regulation, according to an update published Monday. These rules will bring relevant activities under the purview of the Financial Conduct Authority (FCA).

The plans are in line with an April 2022 policy set out by Rishi Sunak, then finance minister and now prime minister, to make the U.K. a crypto-asset hub and are likely to be welcomed by an industry that has complained the government has been dragging its feet.

In a statement accompanying the document, Treasury Minister Andrew Griffith said he was "very pleased to present these final proposals for cryptoasset regulation in the U.K." The finalized framework would mean "the U.K. is the obvious choice for starting and scaling a cryptoasset business."

The Treasury, the government’s finance arm, published a crypto consultation in February and the consultation closed in April. Parliament passed the Financial Services and Markets Act 2023 in June, enabling crypto to be treated like a regulated activity.

The government has already set out that it wants to bring crypto within the fold of traditional financial service regulation – but Griffith has now modified some of his proposals clarifying the treatment of cryptoassets it already considers traditional financial instruments as well as non-fungible tokens (NFTs).

"The proposed regime does not intend to capture activities relating to cryptoassets which are specified investments that are already regulated," such as traditional securities, the government document said, adding that unique NFTs that are akin to collectibles or artwork "should not be subject to financial services regulation." However, NFTs used as an exchange token, for example when a large number are released at once and do not vary much in price, might fall within future financial services rules.

The FCA will soon consult on an authorization regime for crypto companies, the document said. And the government also plans on formulating equivalence measures for overseas firms: An overseas-regulated trading venue could apply to authorize its U.K. branch, the government proposed, but it will be up to the FCA to determine what this looks like.

The government also said it does not intend to ban decentralized finance (DeFi), pointing out it's premature to regulate that aspect of the industry.

Further documents published by the government set out that issuance or custody of stablecoins backed by fiat currency will become regulated under existing 2001 rules designed for financial services, with further rules to ensure that any digital payment system can safely fail without bringing down the financial system. The central bank first launched its consultation on a regime for systemic stablecoins in May.

The government's plans have not been without controversy. Lawmakers in the House of Commons' Treasury Committee have previously argued that regulating the likes of bitcoin (BTC) and ether (ETH) on the lines of conventional financial services could lull users into a false sense of security, and the government has previously rejected calls to treat crypto like gambling.

The crypto industry, meanwhile, has complained of delays and poor feedback from the FCA, while recently introduced rules restricting crypto promotions have led some well-known firms to cut U.K. services altogether.

UPDATE (Oct. 30, 10:36 UTC): Adds extra context, quote from Griffith, details of proposals in paragraphs 7-11.

UPDATE (Oct. 30, 11:49 UTC): Adds NFT info in seventh paragraph, FCA authorization regime plans and equivalence measures in eighth, DeFi in ninth.