Stablecoins: The first phase of the UK’s crypto regulation

With stablecoins making up only 11% of the crypto market cap, one might wonder why the UK are pressing ahead with implementing a regime for stablecoins rather than for Bitcoin or the rest of the unbacked crypto ecosystem?

There has been some commentary on the UK needing to speed up their crypto legislative and regulatory regime to achieve its stated goal to be a global crypto hub. So why are stablecoins coming first? In this blog we consider the possible reasons why stablecoins are being regulated first and the benefits they may bring to the UK economy.

First and foremost, out of all the types of tokens across the cryptoasset ecosystem, stablecoins appear to be the most suitable to be used as a method of payment. There seems to be more of an appetite from consumers and businesses to use stablecoins as a payment method given its near instant settlement capabilities, record keeping using blockchain and alignment in value with fiat currencies. Leading payments businesses have begun to bring stablecoin products to the market in other jurisdictions. Accordingly, stablecoins primary use case as a means of payment seems to be one of the most pressing reasons why the UK is looking to establish a regulatory framework for stablecoins.

Another potential reason for the UK looking to shape its regime for stablecoins, is to keep pace with other jurisdictions who have already laid their regulatory proposals. The most significant example of this is with the EU’s Markets in Crypto Assets (MiCA) regulation. It is integral that the UK establishes a regime that is on par with the EU’s, whilst finding areas where the UK can make their own more appealing. This is especially true should stablecoins receive e-money status, where parallels between the UK’s regime and MiCA would be essential for businesses looking to trade and facilitate transactions across both jurisdictions.

It is possible that HMT is also factoring in the opportunity for consumer to use stablecoins to help to mitigate the volatility of other cryptoassets. Stablecoins might be used by some investors to convert unbacked cryptocurrency tokens into a less volatile token, that mirrors the value of a fiat currency. 

With central bank digital currencies still in development, some believe that stablecoins can fill the gap now and allow consumers and investors to use value from their crypto to buy products and services, as well as protect their investment gains or mitigate losses at times of extra volatility or during a bear market.

By bringing stablecoins into the regulatory perimeter, UK consumers will have the ability to pay for products by converting their crypto (or funding wallets via fiat deposits), and UK investors, both at a retail and institutional level, will have the opportunity to convert their unbacked crypto holdings into a stablecoin when their risk appetite changes.

However, a question remains as to the impact of the growing introduction of tokenised deposits. Tokenised deposits are likely to be the way that a much wider tranche of financial institutions get involved in the digital asset space. Given the financial institutions that may issue these tokens are already highly regulated and have a broad depositor base, these tokens might gain momentum and traction more quickly than stablecoins.

HM Treasury has now committed to their phased approach to regulating cryptoassets, with a plan to bring out a stablecoin policy statement soon, which will provide clearance for the Bank of England and the FCA to consult on their regime for stablecoins.

The final quarter of the year could prove to be an incredibly impactful period, setting the tone for the UK’s crypto regulatory regime – if you want to be part of the conversation and help drive the regulation and policy in this area, please do not hesitate to get in touch!