On 7 January 2021, HM Treasury issued a consultation document on the Government’s approach to cryptoasset regulation, with a focus on stablecoins and a call for evidence on investment and wholesale uses.

In the March 2020 Budget HM Treasury outlined two measures as part of the UK’s response to cryptoassets:

• Consulting on bringing certain cryptoassets into scope of the financial promotions regime to enhance consumer protection.
• Consulting on the broader regulatory approach to cryptoassets, including new challenges from stablecoins.

HM Treasury’s consultation on the financial promotions regime concluded on 26 October 2020 and HM Treasury will be setting out further detail in due course.

This latest consultation document relates to the second commitment and seeks views on how the UK can ensure its regulatory framework is equipped to harness the benefits of new technologies, supporting innovation and competition, while mitigating risks to consumers and stability. It reflects advice from the UK’s Joint Cryptoassets Taskforce, which was established in 2018 with a mandate to consider the risks and benefits posed by cryptoassets and distributed ledger technology (DLT) in the UK, and to advise on the appropriate regulatory response.

Table 3.A of the consultation document summarises the tokens that the Government proposes to bring within scope of the proposed regime for stable tokens and table 3.B provides a summary of the proposed activities, entities and requirements.

The Government proposes to ensure that tokens which could be reliably used for retail or wholesale transactions are subject to minimum requirements and protections as part of a UK authorisation regime. The Government is considering whether those tokens deemed out of scope from these minimum requirements should be subject to restrictions with respect to marketing or promotion for use in retail or wholesale payments activity.

The Government proposes to introduce a regulatory regime for stable tokens used as a means of payment. This would cover firms using stable tokens and firms providing services in relation to them, either directly or indirectly to consumers. To a longer timetable, the Government will consider the case for bringing a broader set of cryptoasset market actors or tokens into the UK authorisation regime (discussed further in chapter 4 of the consultation document). The Government will also seek to ensure that its approach provides flexibility to enable new activities to be brought into the UK authorisation regime in the future in an agile way, subject to appropriate consultation and scrutiny. Should new risks emerge or if presented with evidence of significant consumer harm, the Government will take further action.

In its approach the Government is considering that the use of currently unregulated tokens and associated activities primarily used for speculative investment purposes, such as Bitcoin, could initially remain outside the perimeter for conduct and prudential purposes. At the same time, these would be subject to more stringent regulation in relation to consumer communications via the financial promotions regime (if adopted) and anti-money laundering / countering the financing of terrorism regulation. Utility tokens – those used to access a service – would also remain outside the perimeter.

In terms of ‘algorithmic stablecoins’ (stablecoins that seek to maintain a stable value through the use of algorithms to control supply, without any backing by a reference asset) the Government judges that these tokens more closely resemble unbacked exchange tokens and may pose similar risks in relation to their ability to maintain stability of value and so may no be suitable for retail or wholesale transactions. For this reason, algorithmic stablecoins are currently outside the scope of the proposals for stable tokens. For the same reason, the Government proposes that security tokens (as defined in chapter 1 of the consultation document) should be excluded from the scope of the proposals. The Government adds that utility tokens will also likely fall outside the scope of the proposals.

The Government also discusses location requirements in the consultation document. For firms carrying on payment services, the requirement to be authorised or regulated by the FCA applies in relation to activities that are carried on by way of regular occupation of business activity in the UK. Whereas, powers in relation to recognised payment systems under the Banking Act 2009 (BA 2009) apply on an extraterritorial basis. Due to the digital, decentralised and cross-border nature of stable tokens, the Government and UK authorities are considering whether firms actively marketing to UK consumers should be required to have a UK establishment and be authorised in the UK. The Government states that the options include: requiring UK presence and UK authorisation for stable token issuers, system operators and service providers when marketed in the UK; defining the activity conducted in the UK and determining whether UK authorisation is required as a result; or no location requirements. The Government is also considering the case for location requirements for systemic stable token arrangements under the BA 2009.

The call for evidence on investment and wholesale uses is further described in chapter 4 of the consultation document. Among other things the Government wants to understand more about what the benefits of DLT may be to financial markets. In particular, the Government would like to understand what the specific advantages are to adopting DLT in different parts of market value chains including whether DLT could lead to more efficient trading, clearing or settlement, and if so what the nature of the efficiencies realised would be.

The consultation closes on 21 March 2021.