On 7 January 2021, HM Treasury published a consultation paper on the United Kingdom’s (UK) proposed regulatory approach to cryptoassets and stablecoins (the proposal). This is part of a broader consultation on the regulatory approach to cryptoassets. The paper highlights the benefits of stablecoins and the ultimate objective of the regulation to ensure that the UK remains a leader in financial technology, while recognising and mitigating the risk of these products to consumers, competition, and financial stability. The consultation will run until 21 March 2021.
The proposal aims to broaden the regulatory perimeter around cryptoassets, including stablecoins. Rules and requirements under the proposal would take relevant aspects of the UK’s current approach to e-money and payments regulation, drawing on existing rules as far as possible. The main pieces of UK legislation governing payments regulation are the Electronic Money Regulations 2011 and Payments Services Regulations 2017, which provide powers to the Financial Conduct Authority (FCA) and Payment Systems Regulator to regulate and supervise firms engaged in relevant payment activities. Currently, in the UK, a large proportion of cryptoassets fall outside the scope of existing regulation, meaning they may not be subject to the same consumer protections or safeguards as other financial services and payments mediums, which could prevent realization of benefits and expose consumers to heightened risk. According to the paper, the proposed regulation will safeguard the users of stablecoins and provide them with protection, for example ensuring consumers benefit from the same level of protection they would when other regulated instruments are being used for the same purpose (e.g., payments). The UK government now acknowledges the important role stablecoins could play as a payment medium, with recognised benefits including the potential to drive efficiencies and enhance economic and financial stability. Guidehouse observes an international trend toward acceptance of stablecoin technology as a legitimate form of payment technology and is starting to build frameworks around its use. For example, in early January 2021, the United States (US) Office of the Comptroller of the Currency (OCC), in its Interpretive Letter 1174 authorised national banks and federal savings associations to use new technologies, including independent node verification networks (INVNs) and related stablecoins, to perform bank-permissible functions, such as payment activities and to validate, store, and record payments transactions by serving as a node on an INVN. The Interpretive Letter is an extension of the OCC’s July 2020 decision, which allowed all nationally chartered banks in the US to provide custody services for cryptocurrencies. In addition, the Interpretive Letter demonstrates the OCC’s support and recognition of the advancement of new technologies to facilitate payments.
Stablecoins backed by collateral in the form of an asset, or a basket of assets, such as gold or a fiat currency, will be protected under a UK authorisation regime (the requirement to be authorised by the FCA prior to operating). Stablecoins that maintain a stable value through algorithms are outside the scope of the proposal.
What Should Your Firm Do?
Firms that are part of the stablecoin ecosystem, such as issuers, system operators, cryptoassets exchanges, and custodial wallets, would be considered key participants or entities and would fall within the scope of the regulation. Firms undertaking any of the following activities or functions, either in terms of establishing the rules governing the activities or operating the infrastructure in relation to these activities, will also be a subject of the regulation:
Issuing, creating, or destroying asset-linked stablecoins or tokens
Issuing, creating, or destroying single fiat-linked stablecoins or tokens
Value stabilisation and reserve management
Validation of transactions
Providing access to the network or underlying infrastructure
Transmission of funds
Providing custody and administration of a stablecoin or token for a third party
Executing transactions in stable tokens
Exchanging tokens for fiat money, and vice versa
Entities in scope should design and implement systems and controls to objectively manage the risk of stablecoins as a payment medium, including the government’s high-level requirements considered necessary for compliance:
Authorisation requirements with associated threshold conditions
Prudential requirements, including capital and liquidity requirements, accounting and audit requirements
Requirements for the maintenance and management of a reserve of assets
Orderly failure and insolvency requirements
Safeguarding the token
Systems, controls, risk management, and governance
Notification and reporting
Financial crime requirements
Operational resilience, service reliability, and continuity requirements
How Guidehouse Can Help
Guidehouse has experience supporting a broad spectrum of clients, including financial institutions and cryptoassets firms, in the regulated and supervised sectors in the UK and across the globe. Through this experience, Guidehouse is uniquely positioned to help firms navigate regulatory changes and challenges through our highly experienced team of consultants, regulatory and technology experts, and industry leaders.
Please reach out to us if you would like to discuss further how we can assist you, to develop or review your regulatory or financial crimes compliance programme or selected Anti-Money Laundering/Terrorist Financing or sanctions controls.
Special thanks to contributing author: Galajo Bah.