HM Treasury Publishes Response to Consultation on Managing Failure of Systemic Digital Settlement Asset Firms

HM Treasury has published a response to its consultation on managing the failure of systemic digital settlement asset firms. DSAs are defined broadly under the Financial Services and Markets Act 2023 as digital assets that can be used for payment, can be transferred, stored or traded electronically and use technology (e.g., distributed ledger technology) to record or store data. The FSM Act (discussed in our client note, A Boost for UK Financial Services) granted HM Treasury powers to supervise certain activities related to DSAs. This included the power to apply the Financial Market Infrastructure Special Administration Regime to systemic DSA firms (other than banks, which are covered by existing regulatory frameworks).

HM Treasury's response confirms it will implement its proposed approach, extending the application of the FMI SAR to recognized systemic DSA payment systems operators; recognized service providers to DSA payment systems; and non-systemic service providers to recognized systemic DSA payment systems that have been designated by HM Treasury. Certain amendments will be made to the FMI SAR as it applies to DSA systems and service providers, including:

• an additional administrators' objective, specifically for systemic DSA firms, focusing on the return or transfer of customer funds and custody assets, to account for the value storage service that DSA firms provide. This would sit alongside the existing administrators' objective to ensure continuity of service, which applies to all firms subject to the FMI SAR;
• new powers for the Bank of England to direct administrators to prioritize a particular objective;
• new regulations to ensure the additional objective can be effectively implemented;
• a new requirement upon the BoE to consult with the U.K. Financial Conduct Authority when seeking an administration order or directing administrators in relation to dual-regulated DSA firms.

HM Treasury plans to implement the regime in two stages—first, it will lay regulations implementing the amended FMI SAR as described above, to enable the BoE to use the regime if a systemic DSA firm fails. It will then make detailed insolvency rules providing clarity on how the regime will operate for systemic DSA firms.

The FMI SAR regime will not apply to non-systemic DSA firms, which will instead fall within the standard insolvency procedures under the Insolvency Act 1986. However, the FCA will consider whether new, bespoke special administration regimes should be developed for these firms, as well as systemic DSA firms, in the future.

The proposed changes form part of the U.K. Government's wider strategy on supervising the digital assets industry. HM Treasury has separately published a response to its consultation on the regulation of fiat-backed stablecoins and a response to its consultation on the future regulatory regime for cryptoassets.

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