The UK Unveils Comprehensive Plan to Become Global Hub for Cryptoasset Technology

On April 4, 2022, the United Kingdom unveiled its plans to become a global cryptoasset technology hub. The UK’s vision was set out in a speech by the Economic Secretary to the Treasury, John Glen, at the Innovate Finance Global Summit. “If crypto technologies are going to be a big part of the future, then we in the UK,  want to be in, and in on the ground floor,” stated Glen.

Stablecoin regulation is the first step major step toward realizing this vision. The UK government intends to bring stablecoins that are used as a means of payment within its regulatory ambit, creating conditions for stablecoins issuers and service providers to operate and invest in the UK. The HM Treasury stated that amending existing electronic money (e-money) and payment legislations to include stablecoins as a means of payment is just one part of a “package of measures” aimed at incorporating crypto assets and blockchain technology into the UK. The other measures include:

• Setting up a “financial market infrastructure sandbox” where crypto companies can experiment and innovate.
• Establishing a Cryptoasset Engagement Group that will guide the next steps in cryptoasset regulations. The chairman of that group will be at the ministerial level, and the group will include senior representatives from the FCA, BOE, and the crypto industry.
• Explore ways to make the UK tax system more competitive in relation to the crypto-asset market.
• Work with the Royal Mint to create a non-fungible token (NFT) which is to be issued by the summer.

The Chancellor of the Exchequer, Rishi Sunak, said, “it’s my ambition to make the UK a global hub for cryptoasset technology, and the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country.”

John Glen, in his speech at the Finance Global Summit, announced the UK will proactively explore the potentially transformative benefits of Distributed Ledger Technology (DLT) in UK financial markets. The UK government will also initiate a research program to explore the feasibility and potential benefits of using DLT for sovereign debt instruments. In addition, the UK government will ask the UK Law Commission to consider the legal status of blockchain-based communities known as decentralized autonomous organizations (DAOs).

UK regulatory approach to cryptoassets and stablecoins: outcome of the consultation and call for evidence

On April 4, 2022, the HM Treasury also published a response to its January 2021 consultation and call for evidence on the UK’s regulatory approach to cryptoassets and stablecoins. The consultation response confirmed the UK government’s intention to impose regulatory control over (a) issuance of stablecoins and (b) activities that facilitate the use of stablecoins used as a means of payment. To this end, existing e-money and payments legislation will be amended. 

The principal legal instruments that will require amendment are the Electronic Money Regulations 2011, the Payment Services Regulations 2017 and Parts 5 of the Banking Act 2009, and the Financial Services (Banking Reform) Act 2013. In addition, regulatory mandates related to stablecoins will be developed for Financial Conduct Authority (FCA), Bank of England (BOE), and Payment Systems Regulators.

The UK government plans to amend the e-money and payment services regimes, primarily to provide the FCA with appropriate powers over stablecoin issuers and other entities, including wallet providers.

The UK government also plans on amending the definition of e-money. Moreover, the UK government will also develop a definition for ‘payment cryptoasset’, which will apply to fiat-backed cryptocurrencies. The HM Treasury stated this definition will include “any cryptographically secured digital representation of monetary value which is, among other things stabilized by reference to one or more fiat currencies and/or is issued and used as a means of making payment transactions.”

Commodity-backed stablecoins have been intentionally excluded from this definition. The HM Treasury stated that, depending on the particular structure of the arrangements, some commodity-backed stablecoins are already being regulated as specified investments.

The government also intends to extend the scope of safeguarding requirements that are laid down in the Electronic Money Regulations 2011 to include customer funds received in exchange for issuing a stablecoin. Safeguarding rules are designed to protect customer funds if an institution becomes insolvent and includes, for example, the requirements that funds are either held in a separate account from the institution’s working capital, invested in high-quality liquid assets or are covered by an appropriate insurance policy or comparable guarantee. 

How Can Merkle Science Help?

To enable access to potential benefits of stablecoins while mitigating the risks they pose to users, investors, and the financial system, the regulatory oversight over stablecoins is increasing. In order to protect themselves from exposure to the AML/CFT risks, crypto businesses should proactively put compliance frameworks in place to monitor all transactions surrounding stablecoins and mitigate AML/CFT risks.

Merkle Science provides a predictive crypto risk and intelligence platform, setting the standard for the next generation of financial safeguards and criminal detection. We are creating the infrastructure necessary so that a full range of individuals, entities, and services may transact safely with crypto. Merkle Science’s highly customizable platform and proprietary Behavioral Rule Engine is easy-to-use, allowing institutions to detect illicit activity beyond the blacklists and detect suspicious activity that could have previously been undetected.