The government plans to regulate stablecoins cryptocurrency as part of a wider aim to make the UK a hub for digital payment companies.

Alongside the publication of its consultation response, the Treasury has set out a framework to recognise stablecoins as a valid form of payment in the UK.

The Treasury stated that by regulating the cryptocurrency with high regulatory standards, the government will be able to ensure the financial stability of stablecoins which would allow the UK to take advantage of the technology and open its doors for crypto traders and investors.

This is part of the government’s plans to make the UK a global hub for cryptoassets technology and investment.

The Treasury will regulate stablecoins, which are designed to have a stable value linked to traditional currencies or assets like gold and are considered to be less volatile than cryptocurrencies such as Bitcoin. The consultation document claimed that the use of stablecoins in June 2020 outperformed the use of Bitcoin for the first time.  

The Treasury stated that with appropriate regulation, they could provide a more efficient means of payment and widen consumer choice, however, Bitcoin will initially remain outside the perimeter for conduct and prudential purposes.

The regulatory framework will cover companies issuing stable tokens and businesses providing services in relation to them both directly and indirectly. Going forward, the Treasury is to expand the regularity perimeter to a further range of digital currencies later this year.

The Treasury stated that the new regulation under the proposed regime would ‘draw on the UK’s existing rules on e-money and payments as far as possible’ with the Financial Conduct Authority (FCA) named as the oversight body to authorise companies within the sector.

The documents state that the tokens which will be used for retail or wholesale transactions are subject to ‘minimum requirements and protections as part of the UK authorisation regime with the tokens out of the scope being subject to restrictions around marketing and promotion for retail use’.

The documents also list the companies that may fall into the regulatory scope, these include companies that issue, create or destroy asset linked and single fiat linked tokens, value the stabilisation, those that manage reserve assets backing the value of a stable token, provide services for stable assets to ensure stabilisation, validate transactions, and those that transfer the funds of transactions.

The regulations will include requirements that need to be adhered to in order to trade. Companies will have to be authorised before operating, there will be requirements on the management of capital and liquidity, and for the maintenance and management of a reserve of assets which includes the obligation to have reserve assets underlying the token’s value to certify quality and safekeeping. 

The regulations will also include rules that are to ensure that issuers and providers are prepared for administration or insolvency, the requirement relating to a company’s disclosure to regulators and customers, and strict rules on the internal record keeping process of the company.

It also proposes introducing a ‘financial market infrastructure sandbox’ to enable firms to experiment and innovate and to establish a cryptoasset engagement group to work more closely with the industry.

The government also proposes that the Bank of England’s (BoE) regulation of payment systems and service providers should also extend to stable token arrangements that perform a payment system function as well as for location requirements for systemic stable token arrangements.

UK financial services minister John Glen said that the UK saw ‘enormous potential in crypto’ and had a ‘detailed plan for harnessing the potential of blockchain and supporting the development of a world-best crypto ecosystem’.

Chancellor Rishi Sunak said: ‘It’s my ambition to make the UK a global hub for cryptoasset technology, and the measures we’ve outlined will help to ensure firms can invest, innovate and scale up in this country.

‘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.’

The Treasury also announced that it will ask the Royal Mint to create a non-fungible token (NFT) this summer to represent its 'forward thinking approach' and commitment to cryptocurrency.

NFTs first emerged in 2014 and can be thought of as certificates of ownership for virtual assets, such as digital artwork, or physical assets, such as art, music, and videos. They have a unique digital signature so they can be ‘tokenised’ to create a digital certificate of ownership that can be bought and sold using traditional currency or crypto.