Is the UK about to begin regulating cryptocurrencies?

The growing popularity of cryptocurrencies has started to catch the attention of governments. In Britain, reports suggest that the Treasury (the UK’s finance ministry) is about to announce new plans to regulate the crypto market. These new regulations are intended to better protect UK crypto investors and close some of the loopholes being used by fraudsters and criminals.

Starting with stablecoins

Like most technologies, the cryptocurrency market has developed considerably faster than governments have been able to regulate it. Now that crypto coins have matured, they have been forced to act.

The Treasury has been working with several companies and trade groups to better understand how the market works and what help they need. Because of the complexities of the various crypto platforms, initial regulations will focus on “stablecoins”.

What is a stablecoin?

One of the problems with popular cryptocurrencies like Bitcoin and Ethereum is that their value is tied directly the coin itself. This is why the value of these coins fluctuates so much; fortunes can be made and lost in a matter of hours.

Stablecoins, like Tether, Diem and Digix Gold Tokens, are slightly different. The value of these coins is determined by a physical asset or fiat currency, like the US Dollar or Euro. This offers two significant benefits for investors.

First, you always know exactly how much your coin is worth. You can sell your Tether coin and withdraw its value in US Dollars whenever you want. Second, the stablecoin market must have large enough reserves of the supporting currency to cover every coin in circulation. These reserves ensure that investors can always get their cash back out of the system.

Although ‘safer’ than pure cryptocurrencies, there are still risks associated with stablecoin investments. If the value of the Dollar or other supporting asset crashes, the coin’s value will also be affected. And this is why regulators in the UK are focusing on stablecoins first.

What will regulation change?

The most significant change will be official government recognition of regulated cryptocurrencies for payments. Stablecoin transactions will be afforded many of the same protections that traditional fiat payments enjoy.

Regulation offers protection for investors and platform operators, with legal processes to follow in the event of disputes, insolvency or criminal activity. And the UK government hopes that these safeguards will prove attractive to crypto companies, encouraging them to invest in the local economy. Eventually it is hoped that Britain will be established as a global center for cryptocurrencies, as it already is for other financial services.

The Treasury is due to make their announcement very soon, at which point the plans will be clearer. The framework proposals will also provide some guidance about how other, non-stablecoin cryptocurrencies may be regulated in future too. We will watch how the situation develops with interest.