The UK’s recent announcement that it aims to become a global hub for cryptocurrencies and services is a step towards effective regulation of stablecoins – digital tokens linked to the value of a fiat currency or reserve asset. 

That’s according to trade association UK Finance. “The purpose of the Treasury’s most recent consultation on Managing the Failures of Systemic Digital Asset Firms is to bring stablecoins into the UK’s wider regulatory approach for financial services,” it says.

UK Finance recently responded to the Treasury’s consultation and is engaging with its members to provide an ongoing response on behalf of the industry.  

“This consultation by HMT is incredibly significant in future-proofing the UK’s financial ecosystem as stablecoins and other digital settlement assets become adopted as a means of payment,” continues the organisation in a statement published on its website.

“Stablecoins are an attractive form of digital asset. Given the volatility of some cryptoassets such as Bitcoin, having an alternative mode of digital asset that is connected to a material object, such as a fiat currency, helps to increase the stability of an asset should a consumer wish to partake in the market.”

However, in the rout of cryptocurrencies and other digital tokens earlier this year, some stablecoins lost their currency pegging and values too, demonstrating that not all are immune to the rollercoaster changes that characterise this dynamic, high-risk market.

“While there is an appreciation that the UK government is driving forward to digital financial regulation, we are a while away from systemic stablecoins becoming a widespread reality for the majority of consumers,” acknowledges UK Finance.

“With the financial services industry increasingly under pressure from consumers to offer digital products and services, there is a need for regulators to come up with uniform definitions and a more transferable taxonomy for different types of digital assets so the industry can effectively plan for the future.”

More work is also needed on ensuring that consumers are refunded directly in the case of insolvency, it adds. 

“At present, the Financial Services Compensation Scheme (FSCS) is normally used to protect against the insolvency of a bank, and safeguarding for e-money, not loss of the right to the deposit (which in this case would be the stablecoin token).”