UK Government Announces Plans to Boost Cryptocurrency and Fintech Hub | Skadden, Arps, Slate, Meagher & Flom LLP
The UK government has unveiled its plans to position the UK as the leading global hub for cryptocurrencies and fintech.
John Glen, the Treasury Secretary for Business, presented detailed proposals to support the development of the crypto market in the UK, including measures aimed at making the UK a more attractive place to trade while also taking consumer protection into account.
The plan contains a number of important proposals.
Following the Treasury Department’s consultation on the regulation of stablecoins to be backed by assets or fiat currencies to achieve greater price stability, Mr Glen confirmed that the government would legislate to include certain stablecoins in the UK payments framework. This is intended to facilitate growth and expansion for issuers and providers, and to give the market confidence that stablecoins are a recognized form of currency.
This is said to be the first step in an expanded effort to bring a broader range of crypto activities into the UK payments framework.
Legal Commission consultation on DAOs
Decentralized Autonomous Organizations (DAOs) are organizations represented by rules embedded in a protocol that is transparent and controlled by organization members rather than a central government. As a result, DAOs in certain jurisdictions have faced uncertainty about their legal and operational status. To examine this issue in the UK, the Legal Commission will conduct a consultation on the legal status of DAOs with the aim of putting the UK at the forefront of these discussions and laying the legal foundation for DAOs internationally.
Tax treatment of DeFi and crypto assets
Mr. Glen also announced closer cooperation with companies on tax issues that could cause some difficulties for decentralized finance (DeFi) and crypto assets.
The UK government doesn’t think the tax code needs to be changed much, and there are already publications from HM Revenue and Customs (HMRC) on the capital gains tax treatment of crypto assets. Mr Glen acknowledged that some issues regarding DeFi lending and staking (where a liquidity provider transfers control of tokens to a DeFi lending platform and thereby generates revenue) have yet to be resolved given HMRC’s recent statements on DeFi had been criticized by some market participants. Crucially, the government also expects to add categories of digital assets to the list of permitted transactions for UK managers of offshore fund portfolios, to resolve doubts about the availability of the equivalent UK tax exemption for funds trading in such assets. This consultation is expected to start very soon.
This year, the UK Financial Conduct Authority (FCA) will also launch the Financial Market Infrastructure Sandbox, which the Chancellor announced in 2021. Sandboxes allow companies to test innovative ideas in the market with consumers. The aim is to enable companies to experiment and innovate in the provision of services that underpin financial markets. Mr Glen specifically stressed that “this will make that possible [firms] test new technologies that could transform financial markets by making them more efficient, improved liquidity, more transparent and more secure.”
Foundation of the Cryptoasset Engagement Group
Mr. Glen announced that the Cryptoasset Engagement Group, a newly formed group of senior officials from the FCA, the Bank of England and key industry figures, will meet regularly to discuss the development of the cryptoasset industry and the best way to support it the growth of the industry.
Impact of the Announcements
Many have hailed the initiatives Mr Glen announced as a game changer for the UK crypto industry, with the proposals representing an opportunity for the UK to become a leading crypto hub. CryptoUK Chief Executive Ian Taylor welcomed Mr Glen’s announcements and “the Government’s plans to be pro-crypto innovation and their recognition of the opportunities and potential of the UK crypto sector.” Innovate Finance CEO Janine Hirt described it as “a landmark speech setting out a vision for the UK to be the leading hub for technology that will transform payments, capital markets infrastructure and ESG safety”.
Although Mr Glen’s speech was well received, industry leaders have warned that implementing these proposals will be the real test over the coming months. We will continue to report on developments as the government program rolls out.