Shearman & Sterling LLP | FinReg | HM Treasury Publishes Plan for Regulation of Fiat-backed Stablecoins
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  • HM Treasury Publishes Plan for Regulation of Fiat-backed Stablecoins

    HM Treasury has published a Policy Paper on Plans for the Regulation of Fiat-backed Stablecoins, setting out the next steps for the implementation of stablecoin regulation in the U.K. Fiat-backed stablecoins are (under HM Treasury's proposed definition) those which seek or purport to maintain a stable value by reference to a fiat currency, and hold that currency, in whole or in part, as backing.

    The Financial Services and Markets Act 2023 (discussed in our client note, A Boost for UK Financial Services) empowers HM Treasury to bring certain activities related to the use of "digital settlement assets" (which may include fiat-backed stablecoins), within the regulatory perimeter and to establish a regime for the supervision of stablecoin issuers. DSAs are defined broadly under the FSM Act 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. HM Treasury plans to bring certain activities related to fiat-backed stablecoins within the scope of regulation ahead of other types of cryptoasset, due to their potential to become a widespread means of retail payment.

    The Policy Paper sets out HM Treasury's proposals to:
    • Regulate the issuance, safeguarding, safeguarding and administering, and arranging of safeguarding or safeguarding and administering of U.K. issued fiat-backed stablecoins, bringing those activities within the regulatory perimeter via the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. Detailed rules will be determined by the U.K. Financial Conduct Authority.
    • Regulate the use of fiat-backed stablecoins in payment chains via amendments to the Payment Services Regulations 2017. This will include regulation of both "mixed" stablecoin payments (i.e., where the on-ramp to the payment chain is from a stablecoin which then converts to fiat for the off-ramp), or "pure" stablecoin payments (i.e., where both on- and off-ramp are in stablecoin). The amended PSRs will capture the use of fiat-backed stablecoins issued in or from the U.K. by a firm authorized to do so. The U.K. government intends to permit the use of overseas issued fiat-backed stablecoins in payment chains, but will consult alongside the FCA on how to do this safely and effectively. The amendments to the PSRs will ensure that payment transactions that involve U.K. consumers, where at least one end of the transaction is in the U.K., are captured, as well as payment transactions facilitated by U.K. firms, regardless of where the transaction takes place. Non-fiat backed stablecoins and unbacked cryptoassets will be permitted to be used in payment chains, but those transactions will not be regulated.

    HM Treasury expects to lay secondary legislation before Parliament by early 2024, subject to Parliamentary time. The proposed fiat-backed stablecoin regulatory framework constitutes "phase 1" of HM Treasury's broader digital asset regulatory agenda. Phase 2 concerns the regulation of a broader set of cryptoasset activities and is discussed in HM Treasury's separate consultation response on the future regulatory regime for cryptoassets.

    HM Treasury is empowered under the FSM Act to apply the existing special administration regime for financial market infrastructures to recognized DSA payment systems or service providers in the event they fail. HM Treasury has published a separate consultation response on its proposals for this regime.

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