UK Treasury release consultation paper on cryptocurrency

Looking at the growing adoption of cryptocurrencies and stablecoins, the UK government has released consultation paper to gather feedback from stakeholders concerning the government’s regulatory approach to cryptocurrencies and stablecoins.

The motive behing this consultation & feedback is to make sure that its regulatory framework is “equipped to harness the benefits of new technologies, supporting innovation and competition, while mitigating risks to consumers and stability,” and incorporates advice from the Cryptoassets Task Force.

With a large proportion of crypto assets falling outside regulatory oversight, the Treasury says they may pose a risk to consumers and lack financial safeguards.

The UK is planning a staged and proportionate approach to new crypto asset developments, taking a focus in the paper on stablecoins – cryptocurrencies that generally aim to have a stable value by being backed by assets such as the U.S. dollar that includes Tether, Paxos or USD coin.

Commenting on the paper, the Treasury’s economic secretary, John Glen said, “The landscape is changing rapidly. So-called stablecoins could pave the way for faster, cheaper payments, making it easier for people to pay for things or store their money. There is also increasing evidence that [distributed ledger technology] could have significant benefits for capital markets, potentially fundamentally changing the way they operate.”

The consultation focuses particularly on developing a sound regulatory environment for stablecoins, which the UK government considers have most urgent risks and opportunities.

After the announcement of the Facebook-backed libra project (now rebranded as diem), regulators and governments worldwide have raised concerns over the potential effects of so-called global stablecoins on financial stability and even monetary sovereignty.

The government’s Financial Conduct Authority (FCA) has already issued guidance on crypto assets that includes Bitcoin, Ether and XRP.

This new consultation will focus on the roles of crypto assets and stablecoins in payments and investment, as well as the use of blockchain or distributed ledger technology in financial markets. It will also look at additional regulatory actions that might be required in the space.

The paper also called for the evidence on investment and wholesale uses like security tokens and Security tokens distributed through initial coin offerings (ICOs).

The paper said that the use of tokens to facilitate securities transactions is an important development for the financial sector. The representation of traditional securities, such as equities or debt, on a distributed ledger (the ‘tokenisation’ of assets) could have substantial implications for the way assets are traded or capital is raised.

Security tokens that exist and are traded exclusively on the distributed ledger (and are therefore ‘digitally native’)are also playing an increasing role across markets.

It also pointed out the existing examples of security tokens include Santander’s ‘blockchain bond’ issued on the Ethereum blockchain.

Security tokens can sometimes be distributed through initial coin offerings (ICOs) which enable businesses to raise capital for their projects, by issuing digital tokens in exchange for fiat currencies or other cryptoassets, e.g. Bitcoin or Ether.

Though ICOs are viewed as high risk, it could be used as an alternative funding tool for new and innovative business models, products and services, while the use of DLT could make the capital raising process more streamlined, faster and cheaper and facilitate global interconnectedness of markets.

In 2018, the UK government has launched a cross-authority Taskforce with the aim of exploring the impact of a rapidly developing cryptoasset market.

During that period, the Taskforce found that distributed ledger technology (DLT) could have a significant impact across a range of industries, with the potential to deliver real benefits for financial services. It also judged that the cryptoasset market was at an immature stage of development, and that there was limited evidence of the current generation of cryptoassets delivering benefits.

The paper said as the landscape changed rapidly in the last two years, stablecoins could pave the way for faster, cheaper payments, making it easier for people to pay for things or store their money.

There is also more evidence that DLT could have significant benefits for capital markets, potentially fundamentally changing the way they operate.

Apart from this, it is also rapidly changing the landscape and these developments could pose a range of risks to consumers and, depending on their uptake, to the stability of the financial system. That is why, at the last Budget, the Chancellor announced that we would be consulting on our response to the challenges and opportunities posed by these innovations.

The UK has long been recognised as a world-leader in financial technology. We are committed to maintaining this position. In practice, that means creating a regulatory environment in which firms can innovate, while crucially maintaining the highest regulatory standards so that people can use new technologies reliably and safely, the paper noted.

The feedback on cryptocurrencies and stablecoins is essential for confidence in the financial system more broadly.

This is the first step in our consultative process with industry and stakeholders on our approach. The approach will be informed by evidence of potential take-up and where the most serious risks lie. In doing so, we will take an agile, risk-led approach to regulation, rooted in the principle of ‘same risk, same regulatory outcome’.

It is our near-term our priority to ensure the framework supports the safe use of stablecoins, the paper underlined, adding further, it said that the government will continue to actively monitor new and emerging risks as this market continues to mature.

The responses will help inform the government’s approach and ensure the UK’s regulatory framework is fit for the future, the paper said.

Responses to the consultation paper are being accepted until 21 March 2021.