The United Kingdom government has proposed several measures to promote stablecoins as a recognised means of payment, and technology powering crypto assets, according to a consultation paper released by the government. The paper specifically focuses on stablecoins which are a form of crypto assets that are typically pegged to a fiat currency such as the dollar and are intended to maintain a stable value.
Moreover, the UK government is working with the Royal Mint to issue a non-fungible token (NFT) likely to be released post-June, a government press release revealed. It added that the UK government is considering the following:
- Explore enhancement of the UK tax system’s competitiveness to promote the development of crypto assets
- Review how Decentralized Finance (DeFi) loans are treated for tax purposes
- Consult on extending the scope of the Investment Manager Exemption to include crypto assets
“…the measures we’ve outlined today will help to ensure firms can invest, innovate and scale up in this country. We want to see the businesses of tomorrow— and the jobs they create— here in the UK, and by regulating effectively, we can give them the confidence they need to think and invest long-term.” — UK Chancellor of the Exchequer Rishi Sunak
The country also plans to establish a Cryptoasset Engagement Group chaired by the Economic Secretary to work closely with the industry and regulatory authorities to “advise the government on issues facing the crypto asset sector,” the release said.
The government’s efforts toward making the UK a hub for crypto-asset technology and investment signals its intent to regulate the sector instead of washing its hands off with a ban. It clears up any regulatory uncertainty and can go a long way in setting a precedent for other countries to follow should they choose to embrace the sector.
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What are the proposed measures to regulate stablecoins?
The government wrote that the regulatory framework for crypto-assets and classifications ought to be “designed with flexibility in a fast-growing and nascent area of financial services since static classification or definitions could quickly become outdated”.
“With respect to stablecoin used as a means of payment specifically, the government proposes that the regulation should capture all stablecoins that reference fiat currencies, including a single currency stablecoin or stablecoin based on a basket of currencies,” read the consultation paper viewed by MediaNama.
Promote stablecoins as means of payment: “…the government will continue to focus the first phase of legislative changes on bringing stablecoins used as a means of payment into the UK’s regulatory perimeter. The use of stablecoins in retail payments is emerging, and the government considers that with appropriate protections, stablecoins could play an important role in facilitating improvements and competition in payments.” as per the paper.
- Extend regulatory framework: “However, the government notes that stablecoins are currently predominantly used to facilitate trading and investment activities in unbacked crypto assets, like Bitcoin, and also play a critical function in emerging DeFi applications. The government is of the view that this will need to be considered under a further extension of the regulatory regime to include activities beyond stablecoins used as a means of payment,” the paper suggested.
Amendment to existing laws: “…amending existing legislation governing electronic money and payments (and other relevant legislation) at the earliest available opportunity. Bringing these stablecoins into the regulatory perimeter for payments therefore critically meets the government’s stated objective of ‘same risk, same regulatory outcome’. The government also considers that this approach avoids opportunities for regulatory arbitrage between traditional e-money and stablecoins and provides greater clarity for firms and consumers,” the paper disclosed.
Which laws will require an amendment?
- Electronic Money Regulations 2011,
- Payment Services Regulations 2017,
- Parts 5 of the Banking Act 2009, and the Financial Services (Banking Reform) Act 2013.
Empowering the Financial Conduct Authority (FCA): “The government’s proposed regulatory approach will entail changes to the e-money and payment services regimes to provide the FCA 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,” the paper explained.
- Develop definitions for payments-based crypto: The government wrote that it is looking to develop a “definition for ‘payment crypto asset’ that brings into scope any cryptographically-secured digital representation of monetary value which is, among other things stabilised by reference to one or more fiat currencies and/or is issued and used as a means of making payment transactions.”
- Unacceptable for customers to not have legal claim: “..it would be unacceptable for there to be no legal claim at all for the customer, as this would fail to deliver the level of consumer protection necessary and would not provide equivalence between traditional e-money and stablecoin used as a means of payment.
- Regulating wallets: “The government considers that regulation is required to ensure the custody or arranging the custody of the token is subject to appropriate regulation. It would be intended to capture wallet providers or any firms (e.g. exchanges) offering similar services. The government will set out in legislation how that new activity will be brought within the regulatory perimeter and the FCA’s powers.
Expanding the scope of Banking Act 2009: “…the government considers that it is necessary to extend the scope of the Banking Act 2009 to capture relevant stablecoin-based payments systems. The government anticipates broadening the definition of a payment system to include arrangements that facilitate or control the transfer of ‘digital settlement assets’, which would be designed to capture stablecoin-based arrangements,” the paper suggested.
- Widening the net of service providers: “…the government proposes widening the application of the Banking Act to include a defined set of service providers to which regulation could apply, in particular wallets, but also other entities such as exchanges, or to custodians of stablecoin reserves.”
Need measures to manage risks: “…the government considers that arrangements will be needed to manage risks related to systemic stablecoin failure. Further work will be required to understand if there is a need for a bespoke legal framework for the failure of systemic stablecoin firms and, if so, its design. In the interim, it is important to ensure existing special administration regimes can be effectively applied to stablecoin firms. Amendments are needed to clarify which regime applies and ensure that there are no regulatory gaps in terms of consumer protection and financial stability,” the paper said.
Managing regulatory overlaps: “Under the government’s proposal to extend the existing payments and e-money regulatory frameworks to certain stablecoins, regulatory overlaps will apply. In this scenario, the government expects that the Bank of England will be the lead prudential regulator for systemic stablecoin entities that are also FCA authorised.” The government wrote that it will constitute a regime that allows for the clear identification of the applicable regulatory requirements. “In addition, the Bank of England, FCA and Payment Systems Regulator will be required to set out in a clearly accessible and publicly available means their approach to co-regulation,” the paper concluded.
How will the UK deal with Distributed Ledger Technology (DLT)?
“…the government recognises that existing financial services regulation and legislation were drafted without DLT in mind, meaning current legislative provisions may contain obstacles or ambiguities which hinder the adoption of DLT, or mean it is difficult to realise the potential benefits fully,” the paper underscored, “While legislative changes are likely to be required, it is not yet fully clear how and where these changes should be made.”
Paving way for Financial Market Infrastructure (FMI) sandbox: “…the Chancellor announced that HM Treasury would partner with the FCA and Bank of England to develop a Financial Market Infrastructure (FMI) Sandbox. This would support firms wanting to test new technologies or structures, in particular (but not necessarily limited to) DLT, to provide the infrastructure services that underpin markets (such as trading and settlement). Participants would still have to meet the high regulatory standards expected of existing FMIs, and regulatory outcomes, in particular those relating to financial stability and cyber security, should continue to be safeguarded.” the paper said. “The FMI Sandbox will be up and running in 2023. HM Treasury intends to legislate for powers that will enable it to set up the FMI Sandbox (and potentially multiple iterations of the Sandbox) when Parliamentary time allows,” read the consultation paper.
Explore changes to legislation for smart contracts: “The government will continue to assess, based on industry feedback, where changes could be made permanently to legislation, provided such changes do not undermine existing regulatory outcomes. Certain new features of DLT which are not covered by existing legislation may need new requirements, such as smart contracts, private wallets, and private keys. It will consider these issues within the wider context of the proposed Future Regulatory Framework, as well as via the FMI Sandbox,” the paper stated.
Facilitating CBDCs: “A number of respondents to the call for evidence noted the potentially important role central bank digital currencies (CBDC) could play in facilitating the adoption of DLT in financial markets. The government and the Bank of England have not yet made a decision on whether to introduce a CBDC in the UK and will engage widely with industry,” the paper said. The government, however, confirmed that it will initiate a research programme to explore the feasibility and potential benefits of using DLT for sovereign debt instruments.
Monitor unregulated crypto assets: “HM Treasury is continuing to assess the appropriate regulatory response to broader crypto assets. The government will continue to monitor this fast-growing area of financial services and will work collaboratively with the UK financial regulators and industry to consider appropriate future regulations. The government will also continue to work closely with international partners, to ensure common standards which enable innovation and harmonise guidance and concepts. HM Treasury will consult later in 2022 on its proposed approach,” the paper revealed.
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