Last week, the Chancellor of the Exchequer Rishi Sunak reiterated the UK government’s intention to turn the UK into a global cryptoasset technology hub. The Treasury confirmed it is looking to recognise stablecoins, digital assets pegged to the price of real world assets, as a valid form of payment in the near future.
The government has also suggested it will explore ways to make the UK’s tax system more competitive in order to encourage further development of the cryptoasset market in the UK, whilst strengthening its regulatory processes.
Highlights of the announcement
The initiative to accept stablecoins as a recognised form of currency is part of a broader effort by the UK government to “lead the way” in cryptoassets globally. The intention behind this decision to update payment regulations is to establish the UK as a jurisdiction that welcomes decentralised forms of payment, and hopefully to entice the pioneers of the digital economy to set up businesses in the UK.
Alongside this initiative, the government outlined other measures that aim to encourage the development of the UK cryptoasset market. These include legislating for a financial market infrastructure sandbox to help firms innovate, and commissioning the Royal Mint to create a Non-Fungible Token (NFT) this summer; the latter has received a lot attention as NFTs, a token of ownership attached to a blockchain, is a particularly popular topic amongst retail investors at this moment in time.
Perhaps even more important from a finance perspective, the Treasury will begin to “explore ways of enhancing the competitiveness of the UK tax system”, looking at the possibility of more favourable treatments for decentralised finance loans and extending the investment manager exemption to include cryptoassets. This would allow UK investment managers to buy cryptoassets with funds they manage for non-resident investors without incurring UK tax.
What exactly are stablecoins?
A stablecoin is a type of cryptocurrency that is designed to maintain a stable market price. Recently, this type of digital currency has grown in popularity, with numerous stablecoin projects in operation. Although the exact mechanisms vary from one coin to another, stablecoins are supposed to be somewhat resistant to market volatility, meaning they are less likely to experience significant price changes.
Many stablecoins have their values fixed by pegging them to the price of another asset. While most of them are pegged to the US dollar, there are stablecoins pegged to the price of other cryptocurrencies, or even commodities. By being pegged to real-world assets, these coins avoid the wild price swings caused by the high levels of volatility, very common in cryptocurrency markets.
These characteristics make stablecoins a viable option as a form of currency. Furthermore, with appropriate regulation, they could prove to be a more efficient means of payment in the future, whilst also widening consumer choice.
How will crypto regulatory processes be strengthened?
Establishing a framework for the oversight and regulation of stablecoins in the UK will most likely shape the development of the asset class, perhaps around the world. In an attempt to quell public concern surrounding the safety of cryptocurrencies, the minister announced a number of steps the UK will take to bring digital assets under more regulatory scrutiny. These include plans to consult on a “world-leading regime” for regulating trade in other cryptocurrencies, examine the tax treatment of decentralised finance (DeFi) loans and “staking”, and establish a Cryptoasset Engagement Group that will be chaired by ministers and host members from the UK regulators and cryptoasset businesses.
Upon announcing these plans, Rishi Sunak said “We want to see the businesses of tomorrow – and the jobs they create – here in the UK, and by regulating effectively we can give them the confidence they need to think and invest long-term”. By recognising the potential of cryptocurrencies and regulating them now, the government can ensure financial stability and high regulatory standards so that these new technologies can ultimately be used both reliably and safely.
The Financial Conduct Authority (FCA) built upon the aforementioned plans by announcing three key areas of commitment: reducing and preventing serious harm, setting and testing higher standards and promoting competition and positive change. The FCA also recently confirmed plans for a CryptoSprint later this year which will help to bring regulation up to speed with developments in the crypto space. Evidently, the focus is on improving investor and consumer protection in the long-run.
