On 7 January 2021, HM Treasury published its consultation paper on the UK regulatory approach to cryptoassets and stablecoins. The paper aims to promote financial stability, market integrity and competition, and protect consumers by recommending the creation of a regulatory regime for “stablecoins” or “stable tokens. It paves the way for the future regulation of other types of cryptoassets. Stakeholders, including cryptoasset issuers, exchanges and wallet providers, have until 21 March 2021 to consider and respond to the consultation.
What are stablecoins?
Although “stablecoins” or “stable tokens” are not precisely defined, it is clear that the Treasury is targeting tokens that hold their value and can be reliably used to make retail or wholesale payments.
This will include: (i) tokens linked to a single fiat currency (e.g. GBP, USD) and (ii) tokens linked to certain other assets (e.g. gold or multi-currency). This will not include: (i) unregulated exchange or utility tokens, (ii) security tokens (i.e. tokens that have the characteristics of securities and are already regulated under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001) or (iii) algorithmic stablecoins (i.e. tokens that maintain a stable value through the use of algorithms to control supply, without any backing by a reference asset).
The Treasury recognises that whilst stable tokens are typically underpinned by DLT, they could be designed using other types of technology. The definition of “stable tokens” is therefore intended to be agnostic on the technology underpinning its use (e.g. whether it relies on DLT or not).
What activities will be regulated?
The following activities will be regulated under the new proposals:
Regulatory requirements are likely to include: authorisation requirements; prudential requirements (including capital and liquidity requirements, accounting and audit requirements; insolvency requirements; asset reserve requirements (i.e. the requirement to have reserve assets underlying the token’s value and requirements to ensure the quality and safekeeping on those assets); safeguarding requirements (principally impose on wallets and exchanges to ensure those entities are appropriately protecting users’ tokens and the privacy and security of keys to those tokens); systems, controls, risk management and governance requirements; conduct of business, notification and reporting, and record keeping requirements; financial crime requirements and outsourcing requirements, resilience and continuity requirements and security requirements.
See Table 1 here set out below which sets out Anticipated activities, entities and requirements.
The consultation notes that, where a stablecoin plays a similar function to existing payment systems, it may be appropriate for it to be regulated by the Payment Systems Regulator (“PSR”) and is considering whether legislative adjustments are required to clarify this. Designation of a system for regulation by the PSR gives the PSR powers to place requirements or take action on the participants in that system.
How will this impact me? What do I have to gain /lose?
The proposals are likely to impact a wide range of stakeholders including cryptoasset issuers, systems operators, exchanges, transmitters, stabilisers, wallet providers and custody and administration service providers. This area of regulation is in its infancy and there are still a number of potential issues to be considered and resolved (see below). Early involvement will provide an opportunity for firms to influence the future of their regulatory landscape: firms must engage in dialogue with the regulator to ensure that incoming regulations make sense from a technical perspective, but may even gain a competitive advantage by encouraging legislation that suits their business and (in some cases) basking in the legitimacy that regulation confers. Considering and responding to the consultation is likely to pay dividends in the long term.
Are there any potential difficulties that arise in the proposals?
The proposals are likely to create different issues for different firms, but there are a number of core areas for consideration
Definition of “stablecoin” or “stable token”
Identity of regulated entities
The regulatory proposals
Where can I get further information?
Please do get in touch if you require further information or if you have concerns on how the proposals could affect your business. You can contact the payments and fintech regulatory team at MMacGregor@FoxWilliams.com or CFinney@FoxWilliams.com.
Trainee solicitor Millie Pierce contributed to this article.
Table 1 – Anticipated activites, entities and requirements
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