The UK has set out its proposals on the regulation of cryptoassets for public comment. The UK’s proposals are narrower than the EU proposals launched last year, reflecting an intention to take a “staged and proportionate approach”. In particular, the UK proposes to regulate only “stable tokens used as a means of payment” initially. It is, however, inviting input in relation to opportunities and risks in other areas, including cryptoassets used for investment purposes and DLT in financial services and financial market infrastructures in particular. The consultation closes on 21 March 2021.
HMT Consultation and Call for Evidence
The UK has finally launched a long-awaited consultation and call for evidence on cryptoassets and stablecoins.
The document reveals the government’s proposal to expand the regulatory perimeter to cover “stable tokens used as a means of payment”. The legislation would take the form of high-level principles, leaving it for financial regulators to specify detailed requirements through rules or codes of practice.
More broadly, the UK intends to take a “staged and proportionate approach” to cryptoasset regulation. As it deems the risks and opportunities in relation to stablecoins to be most urgent, the government has prioritised this area. It is not proposing to regulate further any other types of cryptoasset for now, except in relation to financial promotions (in relation to which it has already consulted and will report in due course). It is however seeking evidence in relation to cryptoassets used for investment purposes and the use of DLT in financial services and financial market infrastructures in particular, in order to inform its future proposals.
This approach stands in stark contrast to the European Commission’s legislative proposals which already include a comprehensive framework to regulate the entire crypto industry (MiCA) as well as a pilot regime for the creation and testing of digital security infrastructure. Underlying the UK approach is a desire to avoid applying “disproportionate or overly burdensome regulation to entities”, particularly where the financial stability risks are low.
Proposed regulatory framework for stable tokens
The proposal contemplates introducing two new categories of regulated token to supplement the FCA’s existing categories of “security tokens” and “e-money tokens”. These new categories, which broadly echo the taxonomy in MiCA, are (i) stable tokens whose value is linked to a single fiat currency; and (ii) stable tokens whose value is linked to assets other than a single currency (such as gold or multiple currencies).
The government anticipates that regulation would apply in relation to a long list of activities concerning such tokens. These include issuance, destruction, value stabilisation and reserve management, validation of transactions, facilitating access, settlement, custody and administration, executing transactions and fiat-token exchange. This list is intended to reflect the FSB’s recommendations in this area.
In determining its approach, the UK authorities will be considering how to align regulatory treatment with existing analogous frameworks. For instance, the government is contemplating whether stable tokens that are linked to a single fiat currency should be subject to the same requirements that apply to e-money tokens. However, it is mindful of the need to provide enhanced regulation for tokens with the potential to become systemically important, as well as a framework that is clear and appropriate to support innovation. The European Commission has had to grapple with similar issues in its drafting of MiCA.
As well as proposing new regulatory treatment for stable tokens, the consultation paper helpfully outlines how the government envisages stable token payment systems will be regulated. Notably, it suggests that stable token arrangements which play a similar function to existing payments systems should be regulated in a similar way, even if that entails legislative clarification. This would mean that systems with the potential to reach systemic scale would be regulated by the Bank of England whilst others may fall within the remit of the Payment Systems Regulator.
Given the decentralised and cross-border nature of stable tokens, UK authorities need to consider carefully how the proposed regulation will apply to firms located overseas. The proposal notes that the government is considering whether firms that actively market to UK consumers should be required to have a UK establishment and be authorised in the UK.
Call for Evidence
The final part of the document seeks views on a variety of questions in relation to cryptoassets used for investment purposes (including both unregulated tokens such as Bitcoin and regulated security tokens) as well as the use of DLT in financial services (including by regulated financial markets infrastructures and in Decentralised Finance). In particular, the government seems to be looking to develop its understanding around potential benefits and drawbacks to various types of innovation as well as potential regulatory barriers and unregulated risks.
The consultation closes on 21 March 2021. Input received will feed into the government’s response, which will include more detail on how the proposed approach may be implemented in law. We can also expect further consultations from the relevant regulatory authorities in relation to the specific rules.
Please feel free to get in touch should you wish to discuss.