The UK has released new regulations for encryption assets, and the regulatory framework is undergoing a systematic upgrade.

FinTax

News Overview:

According to the UK Treasury's official website, on April 29 local time, the UK government released a draft of new regulations for crypto assets, formally incorporating activities such as operating crypto trading platforms, issuing stablecoins, custody, staking, market making, and facilitating transactions into the regulatory framework of the Financial Services and Markets Act 2000. Chancellor of the Exchequer Rachel Reeves stated: "Through our adjustment plan, we are making the UK the most innovative place in the world and the safest place for consumers." The release of this draft indicates that UK authorities aim to balance fintech innovation with consumer protection, facilitating a qualitative shift in crypto asset regulation from fragmented rules to a systematic framework.

FinTax Opinion:

The new regulations are issued in the form of an amendment to the Financial Services and Markets Act 2000, attempting to construct a comprehensive regulatory framework for crypto assets from multiple perspectives.

1. Related Concepts

The new regulations introduce the definitions of "qualified crypto assets" and "qualified stablecoins," clarifying which crypto assets fall under regulatory scope and providing a legal basis for regulation.

(1) Qualifying cryptoassets: Assets that are fungible and transferable, excluding electronic money, tokenized deposits, etc.

(2) Qualifying stablecoins: Pegged to one or more fiat currencies and holding reserve assets to maintain stable value.

2. Regulatory Scope

The new regulations amend the Regulated Activities Order (RAO) to include the following cryptocurrency-related activities within the scope of regulated activities:

(1) Issue qualified stablecoins: Issue stablecoins in the UK that are pegged to fiat currency.

(2) Custody Services: Provide clients with custody services for qualified crypto assets and specific investment crypto assets.

(3) Operating a cryptocurrency trading platform: Operating a trading platform that allows users to trade qualified cryptocurrencies.

(4) Conducting transactions as the principal or agent: Buying and selling qualified crypto assets in the capacity of principal or agent.

(5) Arrange cryptocurrency transactions: Arrange transactions for qualified cryptocurrencies for others.

(6) Crypto Asset Staking Service: Provides staking services for qualified crypto assets.

The service providers for these activities must obtain authorization from the Financial Conduct Authority (FCA) and comply with relevant regulatory requirements to ensure the transparency and security of activities related to crypto assets.

3. Transition Arrangements

The new regulations stipulate that a two-year transition period will be provided for cryptocurrency businesses that were operating in the UK before the new regulatory framework is implemented, ensuring a smooth transition:

(1) Schedule: From the date the new regulations officially come into effect, existing companies have 24 months to apply for and obtain FCA authorization.

(2) Regulatory Requirements: During the transition period, enterprises must gradually comply with the new regulatory standards, including but not limited to requirements regarding capital adequacy, risk management, consumer protection, and transparency.

(3) Regulatory Coordination: During the transition period, the FCA will work closely with businesses to provide guidance and support to ensure a smooth transition to the new regulatory framework.

This arrangement reflects the UK government's consideration of the practical needs of industry while promoting the regulation of crypto assets. In addition, the establishment of a transition period also helps regulatory authorities gradually build a comprehensive understanding and regulatory capacity for the crypto asset market, ensuring the effective implementation of new regulations.

4. Stablecoin Regulatory Framework

The new regulations for stablecoins include the following regulatory requirements:

(1) Reserve asset requirements: Stablecoin issuers must hold high-quality, highly liquid reserve assets equivalent in value.

(2) Redemption mechanism: Ensure that users can redeem stablecoins at face value.

(3) Governance and Risk Management: Comply with regulatory requirements such as governance, risk management, and anti-money laundering.

The new regulations establish independent supervisory activities for the issuance, redemption, and stabilization mechanisms of qualified stablecoins, incorporating them into the FSMA framework, and clarifying their nature as non-electronic money, non-deposits, and non-funds. This initiative fills the gap in the UK's regulation of stablecoins, enhancing market transparency and consumer protection.

In fact, the UK is not alone in keeping a close eye on stablecoins. Recently, with the United States, Hong Kong and other countries and regions making significant progress in stablecoin regulation, as well as the successful listing of Circle in the United States, stablecoins have once again become a hot topic. On May 19, local time, the U.S. Senate completed the procedural legislative process of the National Innovation Act for Guiding and Establishing U.S. Stablecoins (GENIUS Act), clearing key obstacles for this bill specifically targeting the regulatory framework for stablecoins. For the first time, the GENIUS Act defines payment stablecoins as "digital assets with payment and settlement as their main function and anchored to a fixed monetary value". In terms of reserve management, the bill establishes strict 1:1 requirements for liquid asset reserves, limiting the scope of reserves to highly liquid targets such as US dollar cash, short-term US Treasury bonds and government money market funds, and explicitly prohibiting the use of algorithmic mechanisms or volatile crypto assets as support. The system will be deeply integrated into the U.S. payment system and the network of compliant financial institutions, promote the evolution of stablecoins from marginal financial instruments to mainstream currencies, and lay an institutional foundation for the compliance docking of digital finance and traditional finance. On May 21, the Legislative Council of the Hong Kong Special Administrative Region (HKSAR) officially passed the Stablecoin Bill. The Bill stipulates that, unless exempted, any person must be licensed by the Monetary Authority to carry on "regulated stablecoin activities". "Regulated stablecoin activities" include the issuance of "specified stablecoins" in Hong Kong; Issuance of stablecoins outside Hong Kong that maintain a stable value with reference to the Hong Kong dollar, etc. In other words, the draft improves the regulatory framework for virtual asset activities in Hong Kong by requiring issuers to hold sufficient reserves, use compliant blockchains and obtain licenses, so as to maintain financial stability and promote financial innovation. As a result, Hong Kong has become the first jurisdiction in the world to establish a comprehensive regulatory framework for fiat-linked stablecoins, and compliant Hong Kong stablecoins are expected to be officially launched by the end of this year.

The regulatory frameworks of stablecoins in the United Kingdom, the United States, and Hong Kong are significantly different, reflecting different strategic positioning and regulatory logic. Based on the concept of risk prevention and control + innovation-friendly, the new draft rules in the UK allow stablecoins to be pegged to a single or multiple fiat currencies, and reserve assets can include a combination of fiat currencies and other assets,1 and at the same time, the issuer is required to set up an entity in the UK and be authorized by the FCA, but does not set a hard capital threshold, aiming to balance innovation and security. The U.S. "GENIUS Act" is guided by sovereignty priority + U.S. dollar binding, restricting stablecoins to only be pegged to the U.S. dollar, reserve assets to U.S. dollar cash, U.S. bonds within 1 year or government money funds, and the issuer must be a regulated financial institution (such as a bank), with the strategic goal of consolidating the hegemony of the U.S. dollar in digital payments, and at the same time alleviating fiscal pressure by binding U.S. bonds to reserves. Hong Kong's "Stablecoin Ordinance" is characterized by compliance foundation + cross-border springboard, pioneering the principle of "value anchoring supervision", requiring overseas issuers anchored to the Hong Kong dollar to be licensed, setting a capital threshold of 25 million Hong Kong dollars, and aiming to build a Web 3 center and promote the pilot of offshore RMB stablecoins. The differences in the regulatory frameworks of the three places are essentially a game of financial sovereignty and innovation competitiveness in the digital era, showing their own characteristics and tendencies: the United Kingdom attracts global projects with openness and inclusiveness, the United States consolidates its dominant position through dollar binding, and Hong Kong builds a compliant cross-border hub by virtue of its geographical advantages.

5. Conclusion

According to a survey released by the UK FCA in November last year, about 12% of UK adults are holding crypto assets in 2024, which represents nearly a threefold increase from 4% in 2021, indicating a rapid promotion of crypto assets in the country. However, the UK government has stated that due to the lagging regulatory environment, its citizens often face the risk of high-risk companies and investment scams. The new regulations cover a wide range of regulated entities and activities in the crypto space, which can provide clear guidelines for crypto businesses operating in the UK, promote fintech innovation represented by stablecoins, and create a safe and sound investment environment for financial consumers, thereby reducing the risks of being deceived and incurring additional losses.

In summary, the recent draft regulation on crypto assets released by the UK Treasury marks an important step for the UK in the regulation of crypto assets, aiming to establish a comprehensive, transparent, and resilient regulatory framework. By regulating key areas such as exchanges and stablecoins, as well as critical activities like custody and staking, the UK is expected to play a more significant role in the global regulatory landscape for crypto assets.