Shearman & Sterling LLP | FinReg | UK Government Proposes Extending Regulatory Perimeter to Capture Stablecoins
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  • UK Government Proposes Extending Regulatory Perimeter to Capture Stablecoins

    HM Treasury has opened a consultation on the proposed U.K. approach to crypto-assets and stablecoins, in particular a proposal to bring stablecoins into the U.K. regulatory perimeter. Responses to the consultation may be submitted until March 21, 2021. The government will consider the responses to the consultation and publish a response with further details on how the approach would be implemented in law. If the policy approach is followed, the regulators would consult further on rules for firms.

    HM Treasury's proposed policy approach is to define the scope of the regulatory perimeter and the objectives and principles applicable within the new regime. The financial services regulators, namely the Financial Conduct Authority, the Bank of England and the Payment Systems Regulator, would be responsible for developing detailed requirements. HM Treasury is proposing to introduce a new category of regulated tokens (known as "stable tokens") to bring stablecoins within the regulatory perimeter. The approach would maintain the FCA's approach to classifying tokens, as set out in its 2019 Guidance on crypto-assets. Stable tokens would be tokens which stabilize their value by referencing one or more assets and that could be used as a means of exchange of value (i.e. as a means of payment). The proposed regulation of stable tokens would include:
    1. New rules for firms undertaking certain activities in relation to stable tokens, including: (i) issuing, creating or destroying asset-linked tokens or single fiat-linked tokens; (ii) value stabilization and reserve management, including providing custody or trust services for those assets; (iii) validation of transactions; (iv) facilitating access of participants to the network or underlying infrastructure; (v) transmission of funds and final settlement of transactions, thereby limiting counterparty and default risk; (vi) custody and administration of a stable token for a third party; (vii) executing transactions in stable tokens; and (viii) exchanging tokens for fiat money and vice versa.
    2. Firms undertaking these activities in relation to stable tokens would become subject to numerous regulatory requirements, including authorization, prudential requirements, rules for ensuring the quality and safekeeping of reserve assets, orderly failure and insolvency requirements for issuers and service providers, systems and controls, risk management and governance, conduct requirements, financial crime requirements, outsourcing, operational resilience and security requirements.
    3. The regulation of stable token arrangements by the Payments Systems Regulator, which would be akin to the regulation of payment systems. Where an arrangement reached systemic scale, the Bank of England would regulate as it does now for systemic payment systems.

    Feedback is also requested on the location requirements for firms engaged in the marketing of stable tokens in the U.K.

    In the long term, the government will consider whether the regime needs to be expanded to include a wider set of crypto-asset activities. It is not at this stage proposed that the conduct and prudential regulatory perimeter would be expanded to include the use of other currently unregulated tokens that are primarily used for speculative investing. However, these may be subject to enhanced regulation if they are brought within the financial promotions regime and would be subject to increased anti-money laundering requirements. The government consulted last year on proposals to extend the U.K.'s financial promotion rules to include unregulated crypto-assets, capturing a broader range of assets, including all stablecoins not currently classed as a regulated security or e-money token. The government is expected to publish its response to the consultation feedback in Q1 2021. The FCA began supervising crypto-asset business for AML purposes at the start of 2020.

    The consultation paper also includes a call for evidence on the use of crypto-assets for investment purposes and the use of distributed ledger technology in the financial services sector. Among other things, HM Treasury would like input on the advantages and disadvantages of adopting DLT across the financial markets.

    These proposals should be considered alongside the Future Regulatory Review for financial services, the Payments Landscape Review and the consultation on the U.K.'s framework for cross-border financial services, in which HM Treasury is considering policy approaches for ensuring the U.K. framework is fit for the future given the U.K.'s exit from the EU.

    View the consultation paper on the proposed U.K. approach to crypto-assets and stablecoins.

    View details of the proposals to extend the U.K. regulatory perimeter to capture promotion of unregulated crypto-assets.

    View details of the FCA's Guidance on Crypto-Assets.

    View details of the Payments Landscape Review.

    View details of the Future Regulatory Review.

    View details of the consultation on the U.K.'s framework for cross-border financial services.

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