UK to regulate crypto, legalise stablecoins
Not content to allow the Americans to become global leaders in cryptoassets without a fight, the UK government announced on 4 April 2022 it will regulate the sector to allow consumers to use stablecoins and cryptoassets safely and legally.
“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,” said Chancellor Rishi Sunak in a statement.
In a keynote speech to UK Fintech Week, financial services minister John Glen said the UK’s tax code would not need “major surgery” to make it work for crypto.
“If crypto technologies are going to be a big part of the future, then we in the UK want to be in, and in on the ground floor. We see enormous potential in crypto and we want to give ourselves every chance to take maximum advantage.”
Stablecoins like USDC are the lifeblood of the industry, providing on-ramps for consumers from fiat (state-backed) currencies like the US dollar and the British pound into cryptoassets such as Bitcoin and Ethereum.
They are pegged 1:1 to a reference asset such that they maintain stable value relative to traditional currencies, or to commodities like gold or silver, thereby bypassing the day-to-day volatility evident in large sections of the industry.
The stablecoin market cap is increasing by around $100m daily, and most recently hit a total of $180bn, according to The Block Crypto data.
To date the UK government has been relatively cautious around cryptoassets in general, with the Bank of England and the market regulator, the Financial Conduct Authority, regularly warning consumers that trading cryptoassets could mean they will lose all of their money.
And while since 2016 the UK has run a fintech sandbox programme, which contains multiple crypto custody and trading businesses, it has never before put forward a framework for legalising the whole sector.
Part of the Chancellor’s plan includes:
- Ordering the Royal Mint, which supplies all of the nation’s coinage, to create an NFT
- Using blockchain to issue sovereign debt or UK Gilts, the equivalent of US Treasury bonds
- Extending the Investment Manager’s Exception (IME) to cryptoassets
This latter point is particularly impactful. London has long been a centre of the fund management industry globally and UK tax treatments are designed to attract foreign investment funds to use UK fund managers: regulated funds are not considered to be UK tax resident even if their central management “abides” in the UK.
But The City has been badly hurt by Brexit, with the finance sector losing most of its access to the European Union, its largest export partner, Square Mile policy chief Catherine McGuinness told Reuters earlier this year.
The IME effectively aims to cut the UK tax take on investment transactions and attract foreign investment funds to London.
Make no mistake: Rishi Sunak’s long-term plan is to attract the world’s largest cryptoasset investment funds to The City (and hence, pull them away from Dublin, the EU, Singapore, Hong Kong and New York) by offering significant tax incentives.
John Glen added in his speech that the UK government would amend IME “to remove disincentives to UK fund managers including cryptoassets in their portfolios…[and]position the UK as a pro-innovation jurisdiction.”
Get ready. The nation state battle for crypto supremacy has begun.
