The News: The UK has committed to creating legislation to regulate stablecoins as a means of payment and released an open consultation for resolution mechanisms when they fail as part of that effort. Read the open consultation from the UK Treasury here.
UK Commits to Stablecoins as a Form of Payment Including Consultation Paper for When They Fail
Analyst Take: The goal for any stablecoin is to be as good as money. With the UK’s strong regulatory push, that goal may well become a reality.
For any company that issues a stablecoin or uses such instruments as a cash substitute, such regulatory clarity must come as a relief. In the world of regulations, uncertainty is among the few things possibly worse than poorly written regulations. The UK is taking meaningful steps to amend that.
For the avoidance of doubt, the UK Treasury has been clear in what it considers to be excluded from the new regulatory regime. Algorithmically balanced stablecoins, like terraUSD which infamously blew up in May 2022, will not be considered a form of payment. Nor will those supposed stablecoins backed by other crypto assets. Such language indicates that the Treasury will likely require eligible stablecoins to be majority backed by and redeemable for cash.
Among the key and often underappreciated concerns with any asset is what happens in bankruptcy. The newly released consultation looks to jumpstart that conversation.
The Consultation Balances Creditor Rights with Systemic Stability
Consultation balances credit rights with systemic stability. If a relatively small stablecoin were to become insolvent, creditors’ rights take priority. The goal is to return the maximum amount of money to the credits.
But the situation gets stickier if the unwinding of the stablecoin, its issuer, or any other related systemically important payment system could destabilize the financial industry at large. In that event, the primary goal is to limit fallout and collateral damage.
The UK already considered such systemic risk scenarios in the wake of The Great Financial Crisis and created Special Administration Regimes to handle such situations. The challenge is that stablecoins seem to bridge two different Regimes – one for financial market infrastructure and another for e-money.
Without further clarification, it could lead to confusion in a crisis. To further complicate matters, the two regimes are overseen by two different regulatory bodies.
The consultation proposes that stablecoins and the related companies be covered under the financial market infrastructure regime. The choice brings stablecoin issuers within the regulatory perimeter of the Bank of England, the primary regulator for the regime.
It’s a nuanced and thoughtful approach that places emphasis on using existing regulators, existing regulations, and establishing the minimum amount of additional clarity needed to achieve the intended goals. In short – it does was it needs to without rocking the boat.
It’s all part of a larger, competitive plan.
The UK Is Positioning Itself as a Leading Jurisdiction for Crypto
It’s clear that the UK is positioning itself as a leading jurisdiction for crypto. Lest anyone think otherwise, Rishi Sunak, the Chancellor of the Exchequer stated that it was his “ambition to make the UK a global hub for cryptoasset technology.”
That would be a powerful statement from any high-ranking government official. Coming from the UK, it’s particularly remarkable. Financial services makes up over 8% of the UK’s GDP, the third largest in the OECD by proportion. To see such a statement from such a prominent official in such an important jurisdiction for financial services is a surprisingly strong invitation.
Here in the U.S., I’m particularly excited about what it means. Not necessarily because I will benefit directly, but because such pronouncements will not go unnoticed here at home. The U.S. will have to do the same or cede leadership in the industry.
Disclosure: Futurum Research is a research and advisory firm that engages or has engaged in research, analysis, and advisory services with many technology companies, including those mentioned in this article. The author does not hold any equity positions with any company mentioned in this article.
Analysis and opinions expressed herein are specific to the analyst individually and data and other information that might have been provided for validation, not those of Futurum Research as a whole.
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Image Credit: OMFIF
Author Information
Jared is an Analyst in Residence at Futurum Research, where he helps guide our practice in all things Web3, the Metaverse, and cryptocurrencies so as to help business leaders understand how they work, why they matter, and how they can not only get involved, but become market leaders along the way.
Jared previously co-founded and served as President and Board Member of Triple Point Liquidity, a blockchain-based fintech startup serving alternative asset managers, their investors, and fund administrators. Prior to Triple Point, he held multiple roles at IBM including leading Digital Assets at IBM Blockchain, leading corporate development for Industry Platforms, and founding Watson Risk & Compliance.
Jared is author and podcast co-host at Fat Tailed Thoughts and serves as a trustee for The Williams School.
Jared holds an AB from Dartmouth College.
