Following the call for evidence last year, the U.K. government has now confirmed that it will bring the issuing or facilitating the use of stablecoins used as a means of payment into the U.K. regulatory perimeter. Consistent with the proposals under the Future Regulatory Framework Review, the government will set the regulatory perimeter, objectives and principles and the regulators – the Financial Conduct Authority, the Bank of England and the Payment Systems Regulator – will set out the detailed requirements in rulebooks. The government also confirms that it intends to consult later in 2022 on regulating a wider set of crypto activities, including trading of cryptocurrencies such as Bitcoin and Ether. This is a controversial area, with retail clients wanting more access to crypto-assets while the Financial Conduct Authority has banned the trading of cryptos by retail consumers. The FCA's ban is on the sale, marketing and distribution to retail clients of derivatives and exchange traded notes referencing certain types of unregulated, transferable crypto-assets by firms acting in, or from, the U.K. The ban is meant to provide investor protection, but many question whether that has been achieved.
The UK regulation of stablecoins used for payment will cover all stablecoins that reference fiat currencies, including a single currency stablecoin or stablecoin based on a basket of currencies, will be subject to financial regulation. Stablecoins that reference commodities will thus be excluded from the new rules, although activities concerning such stablecoins may well already be regulated (whether these structures fall within the regulatory perimeter is determined on a case-by-case basis). The extension of the regulatory perimeter to stablecoins that are predominantly used to facilitate trading and investment activities in unbacked crypto-assets will be further considered.
The FCA will have powers to regulate issuers of stablecoins for payments as well as other entities providing related services, including wallet providers and firms providing custody services. The requirements will ensure convertibility into fiat currency, at par and on demand. As with other entities providing payment services and e-money issuance, stablecoin-based payment service entities will need to be established in the U.K. to provide these services in the U.K. Notably, to ensure customer protection, consumers will have a legal claim to redeem the value of the token against either the stablecoin issuer or, where appropriate, the third party facing the consumer. Firms undertaking activities in relation to stablecoins used for payment 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.
Entities that are in scope and that are deemed systemically important would also be subject to supervision by the Bank of England. This will come about by extending the scope of Part 5 of the Banking Act 2009 to stablecoin activities posing potentially systemic risks. These entities will be authorized by the FCA and recognized by the Bank of England, and the Bank will be the lead prudential regulator. The requirement to be established in the U.K. will still apply. The government intends to consider the location issue in its consultation on the systemic perimeter for payments later in 2022. Relevant stablecoin payment systems will also become subject to competition regulation by the PSR.
The government has also announced its response to the call for evidence on the use of distributed ledger technology in the financial services sector. The government acknowledges that legislative changes will be required to accommodate DLT. However, where the changes are needed is not yet known. The government has stated that the FMI sandbox, announced in April 2021, will be available in 2023. Legislation will be brought forward when Parliamentary time allows to give HM Treasury powers to establish the FMI sandbox. HM Treasury will work with the regulators and industry to design the FMI sandbox, taking into account the legislation that will need to be disapplied or modified, the types of entities that will have access to the FMI sandbox, the standards that will need to be met to preserve the existing high standards met by current FMIs and the nature and scale of activities to be permissible in the FMI sandbox.