Our Financial Services & Products London team examines the UK’s foray into crypto-asset regulation as part of its drive to become a “global hub” for cryptocurrency companies.
- Stable coins used as a means of payment will be subject to the regulations in force
- Further consultations on other cryptocurrencies will take place later this year
- A regulatory sandbox to be established to explore the use of DLT in financial market infrastructures
- The Royal Mint has been urged to create a non-fungible token by summer
Earlier this month, HM Treasury published its UK regulatory approach to crypto-assets, stablecoins and distributed ledger technology in response to its January 2021 consultation and call for evidence.
The response confirms the government’s intention to bring activities that issue or facilitate the use of stablecoins used as a means of payment into the UK regulatory regime.
The stablecoins used as a means of payment must comply with the regulations in force
- The government intends to regulate activities that issue or facilitate the use of stablecoins as a means of payment, primarily by amending the Electronic Money Regulations 2011 and the Payment Services Regulations 2017.
- The government will change the definition of “e-money” and introduce a new definition for a “payment crypto-asset” (or something similar) that will include in the scope
any cryptographically secure digital representation of a monetary value which is, among other things, stabilized by reference to one or more fiat currencies and/or which is issued and used as a means of effecting payment transactions.
- The definition of “payment cryptoassets” refers to fiat-backed stablecoins. At this point, the government has intentionally excluded algorithmic stablecoins or those that can be tied to assets other than fiat currency (e.g. commodities).
- Authorization under the Electronic Money Regulations 2011 and the Payment Services Regulations 2017 requires entities to be located in the UK, and it is unclear whether issuers of payment crypto-assets will be required to do the same. Further review and consultation on this issue is awaited.
Legislation extended to stablecoin custodians and wallet providers
- The government will also warn companies that “provide services or arrange for the safekeeping of stablecoins used as means of payment on behalf of clients” in the UK regulatory landscape, meaning they will need to be authorized by the Financial Conduct Authority (FCA).
- The government will define in legislation how this new activity will be incorporated into the FCA’s regulatory regime and powers.
- The FCA will also establish a detailed set of regulatory rules that apply to stablecoin custodians, covering for example: prudential and organizational requirements, reporting requirements, business conduct requirements, operational resilience, custody requirements /safeguard and consumer protection.
Extension of the application of Part 5 of the Banking Act 2009
- Part 5 of the Banking Act 2009 deals with the Bank of England’s oversight of payment systems that are systemically important to the UK.
- The government plans to extend the applicability of Part 5 to include stablecoin activities where the risks posed have the potential to be “systemic” and therefore require oversight by the Bank of England.
Extending the scope of the Financial Services (Banking Reform) Act 2013
- The Financial Services (Banking Reform) Act 2013 established the roles, responsibilities and powers of a Payments Systems Regulator (a new regulator to increase competition in the payments industry).
- The government has stated that the scope of the Financial Services (Banking Reform) Act 2013 will be extended to apply to payment systems facilitating the transfer of new types of stablecoins to ensure that these payment systems are also subject to appropriate regulation of competition by payment systems. regulator. Further details on the operation of the legislation should be provided.
Financial Market Infrastructure Sandbox
- The government has recognized the substantial benefits and transformative impact that distributed ledger technology (DLT) could bring when adopted in financial market infrastructures (FMIs).
- The government is therefore developing an IMF sandbox (which will be operational in 2023) to support companies that wish to innovate, in particular by using these technologies to provide IMF services.
- As part of the MFI sandbox, participants can apply for exemptions or changes to existing legislation to facilitate DLT testing in MFIs and to enable UK authorities to better understand the legislative changes needed to meet their needs. adapt to the DLT.
- Further consultation with industry is expected before the UK Treasury introduces secondary legislation to set out the detailed legislative framework for the IMF sandbox.
- HM Treasury continues to assess the appropriate regulatory response to broader crypto-assets (i.e. beyond stablecoins used as means of payment).
- The government intends to continue to monitor this growing area and will work with UK financial regulators and the industry to consider appropriate future regulation.
- HM Treasury will consult later in 2022 on its proposed approach.
In addition to these proposals, the FCA has also announced that it will hold the first in a series of “crypto-sprints” involving industry experts next month. These sprints are intended to inform FCA policy thinking in real time, and participants will be tasked with examining some of the legal, technical and regulatory challenges facing the industry and suggesting solutions that the government will then seek to address. to advance.
It was also announced that the government will establish a high-level industry group, the Cryptoasset Engagement Group, which will include high-level representatives from regulators and industry to help guide the government on issues involving cryptoassets.
Finally, the Chancellor asked the Royal Mint to create a non-fungible token (NFT) to be issued by the summer, which was called by Economic Secretary to the Treasury John Glen “an emblem of the forward-looking approach that we are determined to take”.
All of these initiatives follow other developments affecting crypto-assets in recent years, including the integration of crypto-asset service providers into the UK’s anti-money laundering regime and, more recently, the introduction of proposals to integrate crypto-assets into the UK’s financial promotions regime.
In Glen’s words, the UK seeks to be “a global hub – the best place in the world to start and grow crypto companies.”
We will await legislation implementing the new regulatory regime for stablecoins, which will be introduced “when parliamentary time permits” and provide further updates as these proposals develop.
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