On 7 January 2021 HM Treasury published a call for evidence on a proposed expansion of the UK’s regulatory perimeter to stablecoins, whilst also seeking input on investment and wholesale use cases for cryptoassets (the CfE). The CfE is a further step in HM Treasury’s broader policy approach to cryptoassets, following the close of its consultation on 26 October 2020 detailing measures to expand the UK’s financial promotions regime to a wide constituent of cryptoassets.

The CfE confirms that the FCA’s broad approach to the categorisation of cryptoassets as detailed in its existing Cryptoassets Guidance (PS 19/22) will be maintained as far as possible. That guidance segments cryptoassets into three main categories: security tokens, which fall within the UK’s regulatory perimeter as a form of specified investment under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001; e-money tokens which satisfy the definition of electronic money under the Electronic Money Regulations 2011; and unregulated tokens, which are not currently within the scope of the perimeter. Unregulated tokens primarily comprise of utility tokens and exchange tokens. Stablecoins can take any form, but to date they have largely comprised of either e-money tokens or unregulated tokens.

However, in order to expand the regulatory perimeter to address stablecoins, HM Treasury is considering whether to create a new category of regulated tokens called stable tokens. A “stable token” would be a form of cryptoasset which stabilises its value by referencing one or more assets, such as fiat currency (i.e. by pegging itself to a particular currency) or a commodity (such as gold).

What then, is the starting point for the new regime? The Government is cognisant that any expansion of the regulatory perimeter with respect to cryptoassets needs to be taken on a phased basis. On that basis, HM Treasury confirms that unregulated tokens and associated activities relating to speculative investment purposes could initially remain outside the scope of the perimeter, with utility tokens also remaining unregulated. HM Treasury considers that the first step is to bring stable tokens used as a means of payment within the scope of regulation, which would cover those assets themselves and their issuers and other firms providing services in relation to them. The Government will keep this approach under review and may bring other forms of cryptoasset within the scope of this regime in the future.

A summary of the proposals for the new regime is set out below:

  • It is currently proposed that “algorithmic stablecoins” (i.e. those cryptoassets which maintain a stable value through control of supply via algorithms and not reference assets) should not be included within the scope of this regime at this time.
  • Security tokens are not included either, primarily as they’re already in scope of the perimeter.
  • For e-money tokens already subject to regulation under the Electronic Money Regulations 2011, the proposed position is that those existing requirements should continue to apply. However, e-money tokens which are also stable tokens may be subject to enhanced requirements under this new regime if they have “significant potential” to become systemic.
  • The FCA would be responsible for authorising firms under the regime and supervising them.
  • A firm issuing, creating or destroying stable tokens would fall to be regulated under the new regime.
  • In addition, key services such as value stabilisation and reserve management, transaction validation, facilitating access, transmitting fund, providing custody services, executing transactions in stable tokens and exchanging stable tokens for fiat currency or fiat currency for stable tokens are all activities which the Government considers could fall to be regulated under the new regime.
  • In terms of baseline obligations for those firms falling within the regime, the CfE highlights the following necessary requirements: authorisation requirements and threshold conditions, prudential requirements, requirements on the maintenance and management of any reserve of assets, orderly failure and insolvency requirements, safeguarding requirements, systems, controls risk management and governance requirements, notification and reporting obligations, record-keeping requirements, a conduct regime, financial crime requirements, outsourcing requirements, operational resilience and security requirements.
  • In addition to these requirements, UK authorities continue to consider how to specifically tailor requirements for reserves of assets, particularly where such reserves are deemed systemic. Providing access to central bank accounts is one method under consideration to ensure that firms establishing a reserve can do so by utilising “traditional” financial market infrastructure.
  • Where arrangements linked to stable tokens play a similar function to existing payment systems, the Government considers that it may be appropriate for such arrangements to be designated for regulation by the Payment Systems Regulator. Similarly, for stable token arrangements that are systemic in their scale, then it may be appropriate for the Bank of England to regulate those arrangements via the exercise of its powers under the Banking Act 2009. In addition to the operator of a systemic payment system, the Government is of the view that service providers that form part of the chain of actors involved in a systemic stable token arrangement could themselves be subject to Bank of England regulation. The example given in the CfE is that of wallet providers, who may hold the reserve of assets underpinning the systemic stable token.

The takeaway from the CfE is that the regulatory environment for cryptoassets continues to evolve. These proposals, if implemented, would expand the scope of the UK’s regulatory framework when it comes to cryptoassets, but would be unlikely to significantly expand it in this first phase given the currently low level of prevalence for stablecoins versus other forms of cryptoassets. What is clear, however, is that the CfE represents the commencement, and not the culmination, of a trend in UK financial services policy that is likely to see increasing focus placed on cryptoassets and their relationship with regulation, which will no doubt bring changes that the industry will need to adapt to. The CfE closes on 21 March 2021.