In January 2021, HM Treasury launched a consultation and call for evidence on the regulatory approach to cryptoassets and stablecoins and the use of distributed ledger technology (DLT) in financial markets.
It set out the position that certain cryptoassets and DLT could drive transformational changes in financial markets and offer consumers new ways to transact and invest, but could also pose risks to consumers, market integrity and the stability of the financial system. It sought views about how the UK could ensure that its regulatory framework is equipped to support the adoption of cutting-edge technologies, while mitigating the potential risks. Through its consultation, the government proposed a staged and proportionate approach to cryptoasset regulation, aiming to be sensitive to risks posed and responsive to new developments in the market.
The government has now confirmed that it intends to take the necessary legislative steps to bring activities that issue or facilitate the use of stablecoins used as a means of payment into the UK regulatory perimeter, primarily by amending existing electronic money and payments legislation. Its rationale for doing this is that certain stablecoins have the capacity to potentially become a widespread means of payment including by retail customers, driving consumer choice and efficiencies.
It also plans to consult later this year on regulating a wider set of cryptoasset activities, in view of their continued growth and uptake worldwide.
The government welcomes the work happening at international level on the regulation of cryptoassets, including stablecoins, and the UK is taking part in international forums. The government plans to ensure sufficient flexibility is built into the UK’s regulatory framework to allow regulators to adapt rules and requirements as international work concludes, benefiting too from the agility that will be afforded to UK financial services legislation by the Future Regulatory Framework.
The basis of the government’s proposal to bring stablecoins where used as a means of payment within the UK regulatory perimeter is broadly as follows.
The Electronic Money Regulations 2011 and Payment Service Regulations 2017 regulate payment firms in the UK. Although they do not currently provide an explicit regime for regulating stablecoins, the government considers that an amended e-money framework can deliver a consistent framework to regulate stablecoin issuance and the provision of wallets and custody services. It says that establishing a regulatory environment for stablecoins used as payment simultaneously creates a basis to enable market entry to support innovation, while ensuring that appropriate regulatory standards apply for the benefit of customers, market integrity and stability.
In addition, the government plans to extend the applicability of Part 5 of the Banking Act 2009 to include stablecoin activities, to apply where the risks posed have the potential to be systemic and so the threshold for Bank of England supervision is met. For entities authorised by the Financial Conduct Authority and recognised under the Banking Act, the Bank of England will be the lead prudential authority.
To ensure effective competition is a central aspect of the UK’s approach to financial services and future technological innovation, the government says that it is also necessary to extend the scope of the Financial Services (Banking Reform) Act 2013 to ensure relevant stablecoin-based payment systems are subject to appropriate competition regulation by the Payment Systems Regulator.
Taken together, the government says that these changes will permit issuers and service providers of stablecoins used as a means of payment to operate and grow in the UK, in line with the government’s commitment to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation. For consumers, bringing stablecoins into the regulatory framework means they will be able to use stablecoin services with confidence. The government will introduce this legislation when parliamentary time allows.
Call for evidence on DLT
The government also conducted a call for evidence on the investment and wholesale uses of DLT in financial markets. The government recognises the substantial benefits and transformative impact that could be delivered by DLT when adopted in Financial Market Infrastructures (FMIs), although the process of adopting these technologies needs to be managed carefully to ensure that any new risks arising are appropriately addressed. The government intends to support industry in ensuring that regulations can accommodate tokenisation and DLT in FMIs, and is developing an FMI Sandbox (planned for 2023) to support firms wanting to innovate, including by using these technologies to provide FMI services.
The government intends to work collaboratively with regulators and industry to identify and manage any issues relating to the adoption of DLT.
The government also posed broad questions on the role of other forms of cryptoassets used primarily as retail investments and the growth of decentralised finance. The government’s planned consultation on cryptoasset regulation will set out proposals for these innovations, reflecting feedback received.
