Headline: Cryptocurrency British style
Date: 9/13/2022 –
Body: Not too long ago, Queen Elizabeth II passed away. Her death has caused a cascade of changes in the governance of the U.K. Almost unnoticed was the announcement that the U.K. would be looking to begin accepting stablecoins in exchange for goods and services. Currently, there is a bill in Parliament that would do this, but the exact rules governing these activities continue to be amorphous. But, there does seem to be some impetus behind this, as cryptocurrency is expected to be a major portion of a post-Brexit economic plan. In the UK, these virtual currencies are referred to as “Digital settlement assets.” Most interesting to note will be the role each financial regulator will be assigned to play in regulating this new ecosystem.
What caused them to act now?
OK, there are at least 2 reasons that they are choosing to act now:
- The E.U. is already considering their own framework for stablecoin issues within the continent. Certainly, they don’t want to lag behind the EU for long.
- Even among the “stablecoins” which should be tethered to a fiat currency or a commodity, there have been problems. When Terra imploded, there was a $40 Billion hole in the economy.
Whatever the impetus, there seems to be real pressure to ensure that the UK could become a nexus for cryptocurrency transactions. “I see this as a key piece of legislation for financial services, which I hope can allow us to make the most of the opportunities of Brexit and to establish an approach to crypto regulation that is right for the U.K.,” said Lisa Cameron, a member of Parliament and chairwoman of the cross-party group for crypto. “By bringing stablecoins within the scope of regulation, the bill paves the way for further adoption in the U.K., and this will be a key area of focus for parliamentarians as part of our inquiry into the wider sector,” she added.
How is the legislation in the U.K. different from the legislation in the E.U.?
The E.U. legislation is somewhat more limited in scope. They have decided to focus upon the setting of standards that need to be met before an organization can issue stablecoins. The U.K. legislation attempts to go further and tries to define how various regulators would be required to interact with these issuers if they find themselves at risk of bankruptcy. Despite the larger scope of the U.K. legislation, it is important to note that it does not disallow any category of issuer from issuing these stablecoins in the first place. “The BoE will need to authorize any stablecoin, and there are due processes that firms will need to follow before being given authorization,” the PSR told CoinDesk in an emailed statement. (The PSR appears to be the equivalent to SWIFT within the U.S.) The FCA, which has already been authorizing crypto companies under the government’s anti-money laundering rules, will probably continue to focus on consumer protection, according to Alleyne, while the BoE is likely to focus on wider financial stability.
This timing appears to be very important, as the Tether cryptocurrency is preparing to launch a U.K. version. The U.S. based Tether is worth about $60 billion, so, it seems advisable that the system for regulation be there before the currency gets there. “We believe that the United Kingdom is the next frontier for blockchain innovation and the wider implementation of cryptocurrency for financial markets. We hope to help lead this innovation by providing cryptocurrency users worldwide with access to a GBP-denominated stablecoin issued by the largest stablecoin issuer,” said Paolo Ardoino, Tether’s chief technology officer.
OK, so what else will this legislation do?
Well, that is at present unclear, but there are a few things that appear to be important. First, this will be only the first of several pieces of legislation designed to make the U.K. a very productive place to do cryptocurrency investing and handling. Second, the FCA has pointed out that they would setup a “sandbox” designed to work with industry to introduce more stable currencies and NFTs that retain their value. Chancellor of the Exchequer (read Secretary of the Treasury) 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.”
Other measures include:
· The UK government will explore ways of enhancing the competitiveness of the UK tax system to encourage further development of the cryptoasset market in the UK. It will review how DeFi loans – where holders of cryptoassets lend them out for a return – are treated for tax purposes. The government will also consult on extending the scope of the Investment Manager Exemption to include cryptoassets.
· The Chancellor has commissioned the Royal Mint to create a Non-Fungible Token this summer.
· The Financial Conduct Authority will hold a two day ‘CryptoSprint’ in May with industry participants, seeking views directly from industry on key issues relating to the development of a future cryptoasset regime.
· The Economic Secretary will establish and chair a Cryptoasset Engagement Group, convening key figures from the regulatory authorities and industry to advise the government on issues facing the cryptoasset sector.
The government has started a Center for Finance, Innovation and Technology, and the steering committee has already met at least once.
And, as the Bank of England’s Financial Policy Committee recently noted, we’re also mindful that as crypto-technologies grow and become more interconnected with the core financial system we’ll need to ensure that regulators have the right tools to manage the associated risks. (It might be useful to consider the Bank of England to be equivalent to the Federal Reserve.) And it appears that “staking” with cryptocurrency will likely be taxed differently compared to other investments.
The Verdict
I fully understand that this entry goes over political activity within a country that is not our own. But, it appears that they are genuinely trying to take a leading role in cryptocurrency, and the U.S. might be able to avoid some mis-steps if only we pay attention to what is happening on the other side of the Pond. When the U.S. was setup, each state was seen as a laboratory of democracy, and lessons could be learned and mistakes avoided. In a similar way, the U.S. should be taking careful notes on what the U.K. is doing and learn what we can.
REFERENCES
UK Crypto Industry Welcomes New Stablecoin Rules, Awaits Guidance (coindesk.com)