how new UK rules signpost the future of payments

The UK government has introduced the new Financial Services and Markets Bill, signalling the next stage of the country’s efforts to regulate digital assets. But what does this mean for payments?

Further regulations may be necessary to increase confidence in digital assets

One key implication of the bill relates to the signalled intent to explore alternative technologies for digital financial services infrastructure, such as distributed ledger technology (DLT), which potentially paves the way for broader crypto payment adoption.

Crypto was not originally intended to be an investment vehicle, but as a secure and censorship-resistant alternative to government-issued tender. However, despite huge price appreciation, confidence in the asset class has wilted periodically since its inception due to crashes, scandals, scams and ‘crypto winters’.

Stablecoins have emerged in recent years, in part as a solution to the problem of repeated loss of confidence in cryptocurrencies. But recent events show that despite the theoretical price stability stablecoins are supposed to offer, they are not always living up to their name.

This bill will hopefully go some way to restoring confidence in digital assets in the UK, by setting out a sensible regulatory framework for cryptoasset service providers and token issuers, particularly issuers of stablecoins. This could usher in a ‘stablecoin spring’ in which these tokens blossom into the spendable tender they have such enormous potential to become.

The bill, although still in its early stages, is a good next step and should allow the UK to move quickly to implement digital financial services infrastructure. Furthermore, the government announced in April its plan to maintain the UK’s position as a global financial hub. This bill is part of the package, but importantly, it makes public the government’s recognition that embracing crypto is necessary in its endeavour to maintain a dominant position in the financial world.

The immediate changes that will result from the bill will not necessarily be obvious to consumers carrying out day-to-day transactions. Changes will be mostly felt behind the scenes. New systems based on distributed ledger technology will be explored, potentially leading to significant improvements to the infrastructure on which payments run.

Blockchain-based payments can cut out many of the middlemen involved in traditional payment rails – banks, card schemes and other payment processors – so the new infrastructure has the potential to increase efficiency, reduce costs and allow for instant settlement, both domestically and cross-border.

The bill will also try to rebalance the innovation/regulation scale. This is currently skewed against innovation to some degree because of regulators’ conservatism and under-resourcing, rather than the content of regulation itself. For example, the FCA’s approach to crypto providers is arguably still quite frosty. Its money laundering registration process can be overly long and onerous – which holds firms back from reaching their potential.

The FCA has begun to address its lack of resources via plans to hire an additional 500 staff who will handle applications from firms seeking registration and authorisation. But still more needs to be done to support innovation.

The bill is an encouraging update from the Treasury, but the balance will not be fully addressed until a change of attitude has filtered through to the regulators. If the Treasury can deliver what it has promised, we can expect to see a shift from the FCA in coming years that will bring crypto payments through the metaphorical shrubs and into the sun.

We still need to make strides to rebuild public confidence in digital assets. Sound regulation and strong consumer protection is a good place to start – especially in the wake of multiple market crashes. The expectation is that stablecoin issuers will be brought into the same regulatory framework as e-money institutions – a smart decision, in my view.

If stablecoins are done right – securely backed one-to-one by the fiat currencies they represent – stablecoin issuers are effectively acting as EMI institutions anyway. If we legislate issuers with adequate safeguarding rules, we protect consumers.

We must also regulate to reduce contagion risk. If an issuer needs to sell a huge volume of assets to raise the funds to meet redemptions, we must consider how this will affect the wider financial market.

The quicker the bill is passed, the sooner the market receives clarity on the regulatory position, which should bring more digital asset service providers to the fore. At the end of the day, it will be these service providers that will drive the shift to widespread adoption as a means of payment.

As a sector, we must accept the fact that further regulations may be necessary to increase confidence in digital assets and ring in a new season. Nevertheless, it is exciting to see we are moving in the right direction and embracing crypto as part of the future.