The UK government has announced it is working towards passing regulations on crypto assets in a bid to make the UK a global hub for crypto technology and investments. Blockchain technology and its different applications represent a great technology innovation that can significantly impact the financial sector. But to see further adoption of the technology among consumers and businesses, regulations that support investments and research in the sector are necessary.
Part of this initiative will involve the creation of an NFT project in collaboration with the Royal Mint. This move aims to take advantage of the momentum around NFTs to drive attention to the government’s broader crypto strategy. Currently, 2.3 million UK consumers own a crypto asset, suggesting the space is still limited to early adopters and crypto enthusiasts. Yet the government expects more consumers to get involved in the future.
Regulation will boost uptake and reduce risk
The introduction of regulation should help drive consumer uptake while reducing risk exposure. In 2021, Barclays, Monzo, and Starling Bank temporarily suspended transactions to crypto exchange platforms such as Binance and SwissBorg due to growing cases of fraud. Consumers who fell victim to fraud were not protected under the Financial Services Compensation Scheme as Binance and other similar crypto exchanges fall outside the scope of the Financial Conduct Authority (FCA). Introducing regulations will bring crypto trading companies under the supervision of the FCA.
Regulation will also address the status of stablecoins. Unlike cryptocurrencies, stablecoins are digital currencies backed by a fiat currency, which on paper makes them more stable that cryptocurrencies such as Bitcoin.
The stablecoin market has gained a lot of interest in recent years, with CoinGecko stating that its market cap went from just under $5bn in early 2020 to over $190bn in April 2022. Stablecoins are a great crypto asset for consumers who want to access the market while limiting exposure to volatility. Individuals can easily transfer out of cryptocurrencies into stablecoins without having to use a fiat currency.
Stablecoins issues require regulatory action
However, stablecoins are not without their own issues. The stablecoin Tether raised concerns of its dollar reserves when it failed to prove that it was backed 1 to 1 to the US dollar. This led to the US Commodity Futures Trading Commission imposing a $41 million fine on Tether in 2021. Establishing regulations around stablecoin capital reserve and liquidity requirements should make the sector more stable and incentivize institutions to invest in the space.
MoneyGram and JP Morgan have already made moves in the cryptocurrency market. JP Morgan created its own digital coin, JPM Coin, which enables corporate clients to make international transfers. Indeed, cryptocurrencies and stablecoins have the potential to disrupt the remittance space, as they can offer instant international transactions at a lower fee than traditional providers such as MoneyGram and Western Union. To address this, MoneyGram partnered with Stellar Lumens in 2021. By integrating Stellar’s blockchain into its infrastructure, MoneyGram will use Stellar’s stablecoin, USDC, for instant remittance transfers. This will enable MoneyGram customers to instantly transfers funds at a lower fee.
Regulation of the UK crypto sector is long overdue. New rules should protect consumers’ exposure to the sector and bring crypto exchange platforms under FCA supervision. Meanwhile, companies that have been sceptical about investing in the sector due to the lack of regulation will be more likely to take the plunge.