Earlier this week, UK Treasury Secretary Rishi Sunak reiterated the UK government's intention to turn the UK into a global crypto-asset technology hub. Yesterday, the British supervisory authority FCA1 announced that it wanted to increase its enforcement options against problem companies. And it may well have been the temporal connection between Sunak's announcement and that of the FCA that caused a little public excitement.
What had happened? A core element of Sunak’s statement was the express intention of the UK government to subject so called stablecoins to regulation combined with the sidenote that this is aiming at “regulation paving their way for use in the UK as a recognised form of payment”. On the other hand, the FCA – as part of introducing their “Strategy 2022 – 2025” – announced three key areas of commitment: Reducing and preventing serious harm, Setting and testing higher standards and Promoting competition and positive change. The FCA also said it will ramp up infrastructure and staff to achieve these goals. The most important message however – at least for those who were interested in how crypto regulation is determined to develop in the UK – has been what the FCA has said with a view to this specific area of oversight. Here, the focus could hardly be more on investor and consumer protection.
What will have been perceived as positive news by the majority of people – be it as consumers, investors or financial industry representatives because it is now unlikely that standards will be lowered or that they significantly diverge between the UK and the European continent – may have come as a blowback for the supporters of an ultra-loose crypto regulation. And although a broad range of services in the context of trading crypto assets, such as buying or selling derivatives on payment tokens such as Bitcoin do already fall within the scope of regulation, this is an important development.
Stablecoins, that the Chancellor of the Exchequer intends to make a legal tender, are under some criticism. According to (upcoming) EU regulation, stablecoins are asset-referenced tokens or crypto-assets that are intended to serve as a medium of exchange and for which a stable value is assumed by referencing fiat currencies, commodities or other crypto values. And the most prominent example of a stablecoin is “Tether” which promises a fixed exchange rate of 1:1 to the US dollar and can be exchanged for other cryptocurrencies. Being exchangeable for, e.g., Bitcoin and pegging the value to the US dollar means that investors can enter into and out of Tether at any time to protect against fluctuations of volatile cryptocurrencies. This option has made Tether the most-traded crypto asset worldwide and by far the largest pair currency for exchanging Bitcoin.
The problem with stablecoins is their – unknown or insufficient or both – reserves. It’s not without irony that the greatest critics of a ‘Central Bank Establishment’ that blame the US Fed for unpegging the US dollar from gold or central banks in general for their currency monopolies do not have similar concerns with Tether. As most of us remember well from the Lehman collapse in 2008 – and its ramifications – it’s not the size of an asset class that is important for the potential impact on financial market stability and integrity but rather its interconnectedness. Given the increasing number of private households engaging in crypto-assets, this should be given some consideration.
In summary, discussions on the potential of the distributed ledger technology remind me a bit of Tesla. Publicly, it seems that there are just polarising camps of believers or haters while a quiet majority just makes decisions based on reason and preferences. This majority enjoys the protection of prudent regulation and in that context, I expressly welcome the FCA’s recent statements.
- Financial Conduct Authority
