HM Treasury stablecoin regulation proposals aimed at positioning UK as global crypto hub

'....[W]e want this country to be a global hub - the very best place in the world to start and scale crypto-companies.'

(John Glen MP, Economic Secretary to the Treasury, at the Innovate Finance Global Summit 2022)

Key points from the government’s response to the consultation and call for evidence include:

Stablecoins used as a means of payment will be brought within the UK regulatory perimeter

• The government has confirmed its intention 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 e-money and payments legislation.

• The government considers that an amended e-money framework (under the Electronic Money Regulations 2011 and Payment Service Regulations 2017) can deliver a consistent framework to regulate stablecoin issuance and the provision of wallets and custody services. The FCA will be provided 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.

• 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 Bank of England (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 scope of the Financial Services (Banking Reform) Act 2013 will be extended to ensure relevant stablecoin-based payment systems are subject to appropriate competition regulation by the Payment Systems Regulator (PSR).

• The government will introduce the above legislation ‘when Parliamentary time allows’.

Government support to industry in ensuring that regulations can accommodate tokenisation and DLT in FMIs

• The government is developing an FMI Sandbox to support firms wanting to innovate, including by using tokenisation and DLT to provide FMI services. The Sandbox will be up and running in 2023.
• The government intends to work collaboratively with regulators and industry to identify and manage any issues relating to the adoption of DLT.

Regulatory flexibility to be built in

• The government will make sure that sufficient flexibility is built into the UK’s regulatory framework to allow regulators to adapt rules and requirements as international work in this area concludes. It will also benefit from the agility that will be afforded to UK financial services legislation by the Future Regulatory Framework.

Further consultation on other cryptoasset activities planned

• The government will work collaboratively with the UK financial regulators and industry to consider appropriate future regulation. It will also continue to work closely with international partners to ensure common standards which enable innovation and harmonise guidance and concepts.

• A further consultation on regulating a wider set of cryptoasset activities is planned for later this year. This will include proposals relating to other forms of cryptoassets used primarily as retail investments and the growth of decentralised finance (DeFi), following feedback to the call for evidence.

As well as announcing the publication of the government’s response to the cryptoasset and stablecoins consultation, in his keynote speech at the Innovation Finance Global Summit 2022 John Glen MP also referred to the fact that the new national fintech body, the Centre for Finance, Innovation and Technology, has just met for the first time. Creation of the Centre was one of the Kalifa Review’s central recommendations. The terms of reference for the Centre’s steering committee have also been published.

Next steps

Legislation to introduce the new regulatory regime for stablecoins used as a means of payment will be introduced ‘when Parliamentary time allows’. As mentioned above, the government is planning a further consultation on regulating a wider set of cryptoasset activities later in 2022. The new FMI Sandbox is due to be in operation in 2023.

“The direction of travel of the speech from John Glen and the government’s intention that the UK become “a global hub - the very best place in the world to start and scale crypto-companies” is very welcome as are references to trying to create dynamic, tailored and proportionate regulation for cryptoassets. It is also helpful that stablecoins will have their own regime, although slightly concerning that it will be within the scope of the existing e-money regime which has not so far worked well with cryptoassets. Let’s hope that the proposals for stablecoins and other cryptoassets are indeed regulated by a “dynamic, tailored and proportionate” regime which would position the UK firmly as one of the global leaders in this space.”

If you would like to discuss the impact of the government’s proposals on your business, please get in touch with one of the listed lawyers or your usual Hogan Lovells contact.

Authored by John Salmon and Virginia Montgomery