Based on their fundamental characteristics, seven major types of crypto assets have piqued the interest of European and UK officials. These categories differ in terms of how (if at all) their worth is underpinned, their economic position, and who issues them.
Some crypto assets incorporate elements from different categories or shift from one category to another over time, necessitating legal interpretation of regulatory treatment. These are the most frequent categories of crypto assets that have affected regulatory classifications:
- Utility tokens
- Exchange tokens
- Security tokens
- Stablecoins
- E-money crypto
This blog will discuss stablecoins, which are crypto assets with a value tied to one or more financial funds. The underlying benchmark asset might be fiat cash, a commodity, or a bundle of assets/currencies, for instance. A stablecoin that is widely embraced and used across states might become fundamentally essential, for example, for payment.
Significant Points Came out of the Country's Study on Stablecoins:
- There is widespread consensus on the importance of international regulatory coordination and strong engagement with other countries.
- There was broad consensus that a UK regulatory structure for crypto assets needed to be sufficiently flexible to adapt to digital innovations; however, some participants desired a more precise taxonomy in light of the various uses of stablecoins.
- There is an agreement that systemically significant companies (e.g., fundamental stablecoin providers and wallets) ought to be susceptible to Bank of England regulations, with respondents requesting further information on the thresholds for attaining central classification.
- There was a compromise that stablecoins linked to a single currency should be subject to the same regulations as e-money, while a few individuals noted that some current or prospective business models just wouldn't presently fulfill these legal criteria.
- There was a broad range of opinions on how to address unsupportable crypto assets other than stablecoins, such as Bitcoin, with some calling for more control (for instance, market manipulation and proxy statement restrictions), while others maintained that unsubstantiated digital currencies should not be dependent on additional financial services legislation due to its unique characteristics.
What’s at stake?
The Consultation makes it clear that the federal government believes that properly crafted legislation may improve productivity and growth prospects by allowing responsible sector players to develop and promote consumer trust. However, it has been rightly stated that in the lack of suitable regulation and control, stablecoins may represent a number of concerns, including:
- Consumer risks: There is fear that customers may lose money due to fluctuations in the worth of the stablecoin or corporate collapse. Threats are likely to escalate if safeguards are restricted, such as when a redemption claim is questionable or fails. Customers may also be unfamiliar with the product or service. Furthermore, there are worries about the dangers of fraud, criminality, cyber-fraud, or incompetence, all of which have the possibility to do damage if there is poor access or inefficiency.
- Risk to economic stability and fair trading: Where such coins are extensively utilized as a form of payment, they may endanger financial stability and the actual economy. Individuals and companies must be able to make & collect fees safely and confidently in order to maintain stability. Moreover, a breakdown or interruption in the virtual currency network might prevent customers from accessing their cash and making payments. Stablecoins might be used to store value as well. Uncertainty in the asset's value might pose comparable concerns to financial stability.
- Competition risks: Some efforts may boost rivalry by disrupting incumbent financial firms' market dominance. However, given their potential to grow and integrate with current online businesses, certain stablecoin arrangements may reach market domination, delivering a comparable system to a controlled firm although not yet possessing the same regulatory and legal monitoring and duties. This would result in an uneven playing field, yielding an unfair competitive advantage.
Compromises on Legalizing Crypto Assets and Consultation:
In recent years and after the study of most issues and risks, the UK Government finally revealed its intention to make the UK a worldwide center for crypto asset innovation and capital. The following are some predominant points included in its strategy:
- Establishing a sandbox for financial market infrastructure to allow enterprises to experiment and innovate with innovative methods of settling transactions using digital ledger technology.
- Creating a Cryptoasset Engagement Group to collaborate with the sector more closely.
- Exploring measures to improve the competitiveness of the UK tax system in order to stimulate further growth of the crypto asset market, with a focus on the taxability of decentralized finance, particularly crypto asset loans.
- Launching a Non-Fungible Token (NFT) in Summer 2022 with Royal Mint.
The shift in tone from the UK government is noteworthy. So, although previously the emphasis was on warning consumers, implementing anti-money laundering and counter-terrorism safeguards, and differentiating the crypto asset environment from the legislated financial industry, the UK Government is now aiming to integrate a portion of the crypto asset ecosystem into the UK legal regime.
Crypto asset regulation evolved alongside the phenomena. Overall, UK authorities have strived to strike a compromise between encouraging innovation and safeguarding consumers' and financial stability.
In 2018, the Treasury, the Financial Conduct Authority (FCA), and the Bank of England formed the Crypto Assets Taskforce to coordinate actions. The government declared its ambition to make the UK a "Global Crypto Asset Technology Center" in April 2022.
To safeguard consumers, the Financial Conduct Authority (FCA) has taken a number of steps, including providing warnings about the dangers involved and prohibiting the retail sale of certain financial products. The government intends to give the FCA additional authority to supervise financial advertising involving crypto assets.
Including Stablecoin Operations in Payment Systems and Digital Money Regulations
The UK Government outlines in the Response that it will incorporate a new definition of a "payment crypto asset," which would include any cryptographically secure graphical depiction of monetary value that is, among other things, stabilized by reference to one or more fiat currencies and/or issued and utilized as a method of performing money transfers.
This includes stablecoins that are based on fiat currencies, such as a single currency, stablecoin, or a basket of currencies. It would also include stablecoins that are connected to fiat currency or any other asset.
