Introduction
On 7 January 2021, HM Treasury (“HMT”) published a consultation paper with a call for evidence on its review of the UK’s regulatory approach to cryptoassets and stablecoins.
Stablecoins are digital representations of value that are linked to less volatile underlying asset(s) such as ‘fiat’ currency (for example the US Dollar) or to exchange traded commodities such as gold. Examples include Tether and USD coin. Stablecoins are becoming increasingly adopted to counteract the instability (actual and perceived) of cryptocurrencies that are not benchmarked against real world assets.
The mainstream adoption of cryptoassets and stablecoins requires a regulatory regime to provide that necessary layer of accountability, credibility and trust. The publication of the consultation appears to tally with the UK government’s stated focus on fintech and fast growing tech companies in the ‘post-Brexit’ economy.
Summary
HMT’s consultation outlines its proposals for a new regulatory regime covering stablecoins and its approach to regulating cryptoassets more generally.
Many cryptoassets do not come within the regulatory perimeter which means that consumers have a low level of protection. The proposals detailed in this consultation are aimed at tackling that.
The consultation also seeks to address the growth in the prevalence of, and the regulatory uncertainty around stablecoins.
The consultation is said to be the first step towards developing an “agile, risk-led approach to regulation” to assist the UK to preserve its status as a world leader in financial technology and innovation.
Objectives and Principles
HMT has identified the following objectives and principles to guide the Government’s approach to regulating cryptoassets and invites stakeholders’ comments.
Key objectives:
- protecting financial stability;
- providing robust consumer protections; and
- promoting competition and the UK’s competitiveness.
Principles to guide the UK’s approach to cryptoassets:
The current proposal is that high level objectives and principles would be set by the Government and HMT with the detailed rules and codes of practices to be set by the relevant financial regulators including the Financial Conduct Authority (“FCA”). The intention is to maintain the current division of UK regulatory responsibilities as far as possible.
Focus on Stablecoins
The FCA in 2019 published guidance on cryptoassets which described three broad categories of token: e-money tokens, security tokens and unregulated tokens. The consultation invites views on whether a new category of regulated tokens may be needed – stable tokens.
New regulatory regime for stablecoins
Given the increased use of stablecoins and their application in retail and cross-border payments, HMT proposes to initially introduce regulation to address the key risks from stablecoins with a broader set of regulations on cryptoassets to be considered in the future. The key risks identified are risks to financial stability and market integrity, risks to consumers and risks to competition.
The consultation paper includes suggestions that firms which are engaged in certain activities in relation to stablecoins would be required to comply with a new regulatory regime and depending on the specific activities being carried out by a firm, firms may be required to comply with (among others):
- authorisation requirements with associated threshold conditions;
- prudential requirements, including capital, liquidity, accounting and audit requirements;
- a requirement to maintain and manage a reserve of assets;
- orderly failure and insolvency requirements;
- financial crime requirements;
- requirements to safeguard the token; and
- systems, controls, risk management, governance and conduct requirements.
Central market participants which are likely to fall within the scope of 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. Due to the digital, decentralised and cross-border nature of stable tokens, the government and UK authorities are considering whether firms actively marketing to UK consumers should be required to have a UK establishment 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 Distributed Ledger Technology in wholesale markets.
The Consultation remains open for comments from stakeholders until 21 March 2021.
Rosenblatt can help
We have a wealth of experience across diverse sectors and closely collaborate with institutions, large and small companies (both public and private), start-ups and individual entrepreneurs. The regulatory regime which applies to cryptoassets and stablecoins is increasing in complexity. Rosenblatt advises on all aspects of cryptoassets and regulatory law.
Contact us
Should you have any questions about the consultation and or wish to discuss its impact on your business please contact your usual contact at Rosenblatt or the authors named below.
Authors: Robert Bell, Partner (Robert.Bell@rosenblatt-law.co.uk), Laura Clatworthy, Partner
(Laura.Clatworthy@rosenblatt-law.co.uk) and George Kestel, Trainee Solicitor (George.Kestel@rosenblatt-law.co.uk)
