Introduction

On 4 April 2022, HM Treasury published a response to its earlier consultation and call for evidence on the UK regulatory approach to cryptoassets, stablecoins and distributed ledger technology (DLT) in financial markets.

Through its consultation, the government proposed a staged and proportionate approach to cryptoasset regulation, which is sensitive to risks posed and responsive to new developments in the market. In particular, the consultation highlighted that newer-developing forms of cryptoassets – stablecoins – had the potential to develop into a widespread means of payment, and potentially deliver improvements in payments transactions, especially for cross-border transactions.

Extension of existing payments regulatory regime

In the response the government confirms that there was broad support for its proposed approach and it intends to extend the existing payments regulatory regime to cover issuers of stablecoins and entities providing related services. The government will do this by amending existing legislation governing electronic money and payments, principally the Electronic Money Regulations 2011, the Payment Services Regulations 2017 and Parts 5 of the Banking Act 2009, and the Financial Services (Banking Reform) Act 2013. Among other things it believes that by taking this approach it avoids opportunities for regulatory arbitrage between traditional e-money and stablecoins and provides greater clarity for firms and consumers.

Definition

The government is mindful that the existing payments framework will need to be adjusted with appropriate amendments being made to, for example, the definition of e-money. Overall, the government is minded to develop a definition for ‘payment cryptoasset’ (or something similar) that brings into scope any cryptographically secured digital representation of monetary value which is, among other things stabilised by reference to one or more fiat currencies and/or is issued and used as a means of making payment transactions. It is proposed that a definition along these lines would capture all stablecoins  that reference fiat currencies, including a single currency stablecoin or stablecoin based on a basket of currencies. This would, intentionally exclude a number of existing stablecoin models, including stablecoins which stabilise their value by referencing other assets such as commodities.

Regulatory mandate to UK regulators

A regulatory mandate in relation to stablecoins will need to be developed for the FCA, the Bank of England (BoE) and the Payment Systems Regulator (PSR), as is the case for traditional payment services and e-money where there is a need to consider co-responsibility for regulation between the three authorities. The government proposes to make changes to the e-money and payment services regimes to provide the FCA with appropriate powers over stablecoin issuers and other entities, including wallet providers. The approach will ensure convertibility into fiat currency, at par and on demand. FCA guidance and rules will set out in detail the requirements that apply to specific activities.

Electronic Money Regulations 2011

The government intends that the key features of the Electronic Money Regulations 2011 (EMR 2011) will apply to stablecoin issuance with the intention to ensure consistency with traditional e-money regulation. In particular, the safeguarding requirements which exist under the EMR 2011 will apply to stablecoin issuance. Also, the government proposes to impose broadly the same set of exemptions which exist within the EMR 2011 to stablecoins. This includes, for example, the limited network exclusion.

Custody

The government is also of the view that regulation is needed to ensure the custody or arranging the custody of the token is subject to regulation. The government will set out in legislation how the new activity will be brought within the regulatory perimeter. Further detail on exclusions to this regime will be provided in due course. The FCA will create a detailed set of regulatory rules applicable to stablecoin custodians, covering for example: prudential and organization requirements, conduct of business requirements, operational resilience, reporting requirements and custody/safeguarding requirements. Where a firm is providing custody (or arranging custody) and is also recognized as systemic, it will be dual regulated by the FCA and the BoE.

Part 5 Banking Act 2009

The government plans to extend the applicability of Part 5 of the Banking Act 2009 to include stablecoin activities, to apply in cases where the risks posed have the potential to be systemic and so the threshold for BoE supervision is met. For entities authorised by the FCA and recognised under the Banking Act, the BoE will be the lead prudential authority.

The government considers that arrangements will be needed to manage risks related to systemic stablecoin failure. This was not included in the consultation but a previous BoE discussion paper, published in June 2021, highlighted the importance of appropriate backstop arrangements for these firms to meet the Financial Policy Committee’s expectations and ensure sufficient public confidence.

Financial Services (Banking Reform) Act 2013

The government is proposing to extend the scope of the Financial Services (Banking Reform) Act 2013 in order to ensure relevant stablecoin-based payment systems are subject to appropriate competition regulation by the PSR.

Call for evidence

In response to the call for evidence on the investment and wholesale uses of DLT in financial markets the government intends to support industry in ensuring that regulations can accommodate tokenisation and DLT in financial market infrastructures (FMIs), and is developing an FMI Sandbox (to be up and running in 2023) to support firms wanting to innovate, including by using these technologies to provide FMI services. The government will be working with regulators and industry to identify and manage any issues relating to the adoption of DLT.

The government’s planned consultation on cryptoasset regulation will set out proposals in response to the broad questions it posed on the role of other forms of cryptoassets used primarily as retail investments and the growth of decentralized finance