On 7 January 2021, HM Treasury (“HMT”) published a consultation and call for evidence on the UK’s regulatory approach to cryptoassets and stablecoins, which sets out HMT’s proposals for a new regulatory regime covering stablecoins and its approach to regulating cryptoassets more generally. The proposals follow HMT’s July 2020 consultation on bringing certain cryptoassets within the scope of the financial promotions regime (see our blog post here).

Principles for UK regulation of cryptoassets

In his introductory comments, John Glen MP (Economic Secretary to the Treasury) explains that the consultation paper is intended to be the first step towards developing an “agile, risk-led approach to regulation” that maintains the highest regulatory standards while preserving the UK’s position as a world leader in financial technology and innovation.

To deliver its key objectives of protecting financial stability, providing robust consumer protections and promoting competition and the UK’s competitiveness, HMT has developed three principles to guide the UK’s regulatory approach to cryptoassets:

  • “maintaining the division of regulatory responsibilities” (including as between the Bank of England, the FCA and the Payment Systems Regulator) and “applying the principle of ‘same risk, same regulatory outcome’” (i.e. applying existing law and regulation with adjustment where necessary);
  • ensuring the regulatory approach is proportionate and focused on the most acute risks and opportunities; and
  • ensuring the regulatory approach is agile and aligned to the future government approach to financial services.

In line with the recently published Future Regulatory Framework Review (see our blog post here), the consultation paper explains that detailed regulation will be issued by regulators in rules or codes of practices, within a framework of objectives set by HMT and Parliament.

The consultation paper sets out proposals for a “first phase” of proposed legislative changes in relation to cryptoassets. This “first phase” focusses principally on stablecoins, with HMT to consider the case for bringing a broader set of cryptoasset market actors and assets into the regime in the future.

New regulatory regime for stablecoins

Given the rapid growth in the use of stablecoins and their application in retail and wholesale transactions, HMT proposes to introduce regulation to address the key risks from stablecoins.

The consultation paper proposes that firms carrying out certain activities related to stablecoins would be subject to a new regulatory regime and, depending on the activities being carried out in each case, may be required to comply with (among various others):

  • authorisation and threshold requirements;
  • prudential requirements, including capital and liquidity requirements;
  • a requirement to maintain a reserve of assets;
  • insolvency requirements;
  • financial crime requirements;
  • requirements to safeguard the token; and
  • systems, controls, risk management, governance and conduct requirements.

Key market participants likely to fall within the new regime include issuers, systems operators, cryptoassets exchanges and wallets.

HMT also intends to bring systemic stable token payment systems within the existing systemic payments regulation, and is considering whether firms actively marketing to UK consumers should be required to have a UK presence and be authorised in the UK.

Call for evidence and next steps

Alongside the consultation on a regulatory regime for stablecoins, HMT has issued a call for evidence on the investment and wholesale uses of cryptoassets, including whether existing regulation could be clarified to support the use of security tokens and how regulation can be optimised for the adoption of DLT in wholesale markets.

The consultation and call for evidence will close on 21 March 2021. If HMT decides to progress the proposals, regulators will then consider and consult on detailed firm requirements and HMT will begin preparing legislation to implement the regime.

 

Clive Cunningham

Clive Cunningham
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Mark Staley
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