At a glance
- The UK is behind the EU in finalising its regulatory regime, but this could be an advantage
- UK will expand its existing regulatory perimeter rather than build a new regulatory framework, as seen with MiCA
- Firms should adopt best practice now, ahead of final rules, say experts
The UK has taken a slower and more phased approach than the EU in terms of regulating crypto assets, which could give it a second-mover advantage, according to legal experts.
Unlike the EU, the UK does not yet have a finalised regulatory regime, but consultation documents indicate a phased approach building on existing legislation, with the first phase limited to fiat-backed stablecoins.
In force since June 2023, the EU’s Markets in Crypto-Assets Regulation, known as MiCA, is the first and only comprehensive regulatory framework for crypto assets in the world and covers a range of crypto asset categories, including, but not limited to, fiat-backed stablecoins.
“In taking a phased approach, the UK could be getting a second mover advantage. It is able to see what the EU is doing and see how it’s working in practice and perhaps fine-tune certain aspects,” said Olivia Murphy, managing associate in Linklaters’ financial regulation division.
The UK’s approach, which is articulated across two key discussion papers, one from the Financial Conduct Authority and the other from the Bank of England, is still some way from finalisation and implementation. Currently 2025 is the target, as set out in the cross-authority roadmap on innovation in payments, issued by the Bank of England.
UPDATE: On March 11th, the FT reported that the FCA said that it would “not object” to the creation of cryptoasset-backed exchange traded notes for professional investors. “With increased insight and data due to a longer period of trading history, the FCA believes exchanges and professional investors should now be able to better establish whether cETNs meet their risk appetite,” the regulator said in a statement. The news helped bitcoin to hit a fresh all-time high on Monday, with the world’s biggest cryptocurrency rising by over 4 per cent to pass $71,200.
Direction of travel clear
While the UK’s regime has still yet to be finalised, the direction of travel is clear, according to Murphy. “What we’ve got is a proposal and we’re waiting on an actual piece of draft legislation which gets into the details, but we do have a flavour of what they are thinking. From this we can see that, where possible, when it comes to stablecoins, the UK is going to fit them into existing regimes,” she said.
Jonathan Cavill, financial regulation partner at Pinsent Masons, said that this is a fundamental point of divergence from MiCA. “While MiCA echoes other EU regulations, it was nevertheless a new and standalone regulatory framework. By contrast the UK’s proposals involve bringing crypto assets within the scope of existing regulation,” he said.
He added that this will involve extending the scope of “regulated activities”, for which firms are required to be authorised and supervised by the FCA to lawfully operate in the UK, to include activities relating to crypto assets.
Focus on fiat-backed stablecoins
Another fundamental divergence from MiCA is the categories of crypto assets covered by the UK approach. “The UK has, to date, focused on fiat-backed stablecoins, with the regulation of other crypto assets to follow,” said Cavill.
MiCA instead came into effect with considerations for two types of stablecoins: those with fiat backing, which are considered to be e-money tokens, and those which reference a non-fiat-based asset which are termed Asset-Reference Tokens. MiCA also makes a provision for a third non-stablecoin category for “other crypto assets” that do not fall within either.
But even within the limited category of fiat-backed stablecoins, the UK makes important distinctions, said Keith Bear from the Cambridge Centre for Alternative Finance. “A key distinction is made between those stablecoins judged to be systemic, and those that aren’t. The former are potentially subject to regulation by the Bank of England and the Payments Systems Regulator and the latter by the FCA and the PSR,” he added.
In terms of expected discussion and feedback on these points, Bear said that there will be comments looking for additional clarity on what constitutes a “systemic stablecoin”. The Bank of England’s proposal states that this will depend on what HM Treasury judges to be systemic.
Bear, who was part of the team behind the Cambridge Digital Money Dashboard, which provides interactive visual representations of up-to-date data on stablecoins as reported by The Banker, highlighted that systemic stablecoins need to hold their reserves at the Bank of England in non-interest-bearing deposits, with subsidiaries needing to be set up in the UK. “The lack of interest on reserves clearly may have an impact on the business model for stablecoin issuers,” he said.
While it is difficult to speculate on the precise form of UK regulation that will emerge, it appears clear that the key topics of regulation of both non-systemic and systemic stablecoins will provide necessary certainty and clarity, said Bear.
“With the regulatory certainty that comes as a result, we might see an increase of offerings using stablecoins for payments in the UK," he adds. “Clear and effective requirements for reserves, redemption should have the effect of increasing confidence and hopefully increasing stability.”
Adopt best practice now
In terms of how market participants can best prepare, Cavill said he believes there is the expectation that the UK’s final regulatory regime will be extensive but will not include regulatory passporting or equivalence arising from prior authorisation under MiCA.
“Early adoption of regulatory best practice, particularly around governance, systems and controls and risk management, can stand firms in good stead, ahead of their impending integration into the UK’s financial regulatory framework,” he said.
Murphy said that she sees two big changes ahead for firms. “The first is regulating the use of fiat-backed stablecoins in UK payment chains,” she said. “The second is to introduce entirely new regulated activities for covering issuance, and then custody of these kinds of stablecoins when they’re issued either in or to the UK. The key takeaway is that there really is going to be a sea change.”
Stablecoins are designed to mirror the value of a fiat currency, typically in US dollars but in many other currencies as well including sterling and the euro, and maintain their peg by holding reserves, typically in cash and very liquid high-quality assets.
