UK Confirms Regulatory Measures to Create ‘Global Hub’ for Crypto | FintechLinks | Blogs | Insights

The UK government has taken further steps to regulate a wide range of crypto assets and other digital assets through the powers granted to it under FSMA 2023. Following recent consultations, the UK Treasury has now confirmed a number of key policy positions which will underpin future arrangements. These aim to address industry concerns, for example around giving UK consumers access to global liquidity pools and overseas-issued stablecoins. Secondary legislation has been promised for next year.

British Treasury papers

On October 30, 2023, the UK Treasury published the following documents regarding cryptoassets:

1. An update on plans to regulate fiat-backed stablecoins
2. A response to its consultation on addressing the failure of systemic digital settlement asset companies (including stablecoins).
3. A response to the consultation and call for evidence on the future financial services regulatory regime for cryptoassets

These papers modify, clarify and confirm a number of policy positions on which the Government has previously consulted and commented. The final positions appear to have been heavily influenced by industry feedback. Despite significant turmoil and malfeasance in the industry, the government claims to remain committed to its goal of making the UK a global hub for “crypto-asset technologies”. It sees these recent measures as an important step towards achieving this goal.

Update on fiat-backed stablecoins

Regulating fiat-backed stablecoins forms Phase 1 of the government’s regulatory strategy. In its update, the UK Treasury provides further details on the scope and plans for this phase.

In relation to ScopeBroadly, Treasury expects that Phase 1 will capture cryptoassets whose value is intended to be stabilized by reference to one or more fiat currencies, with fiat currencies held as backing. There are no plans to cover algorithmic stablecoins or tokens backed by assets other than fiat currency at this stage. (In contrast, these structures are likely to fall under the EU’s “e-money token” and/or “asset-referenced token” regulations under MiCAR and not under the general collection regime of MiCAR.) Tokenized deposits are not included either thought to be caught on the basis that they fall within the existing deposit-taking rules. The same applies to other instruments that fall within the scope of existing regulation.

The government will expand payment services legislation to apply to the Using these fiat-backed stablecoins in UK payment chains (i.e. when used in a payment transaction involving a UK consumer, where part of the transaction takes place in the UK or where a UK company facilitates the transaction). This means that companies involved in these payments would have to apply for authorization as a payment service provider in the UK and be subject to supervision by the Financial Conduct Authority.

The Issuance and custody of fiat-backed stablecoins (whether or not used in payments) are also included within the scope of the Regulation. UK issuers of fiat-backed stablecoins must be regulated by the FCA. For example, the FCA will set rules on how these stablecoins should be collateralized, what redemption rights holders have and how the collateral assets are held. The FCA will be given the power to require the security assets to be held in trust. The custodians of these stablecoins are also regulated by the FCA.

The Government recognizes the importance of considering fiat-backed stablecoins not issued in the UK, but is still considering the optimal regulatory approach to achieve this. For example, it has proposed imposing additional obligations on UK-regulated entities in the payment chain (e.g. acquirers or wallet providers).

Answer to address the failure of systemic digital settlement facility companies

In addition to regulating the issuance, custody and use of fiat-backed stablecoins, the government was also interested in addressing the potential systemic risks posed by novel means of payment. Among other things, she fears the consequences if a system or service provider becomes systemically relevant with regard to a new type of payment item and then fails.

The Financial Services and Markets Act 2023 gives the Bank of England and the Payments Systems Regulator the power to supervise certain digital settlement asset (DSA) firms that pose such risks, subject to the firm’s recognition or designation (if applicable) by the British Treasury. The term “digital settlement asset” is broader than the concept of fiat-backed stablecoins discussed above (for example, there is no similar requirement for asset backing). The Bank of England is expected to publish a discussion paper on its proposed regime in the coming months.

In addition, last year the government proposed applying a special administrative regime to DSA firms approved for Bank of England supervision and related service providers. The UK Treasury response document relates to this consultation. The Ministry of Finance now confirms the following:

• The Special administrative regime Financial market infrastructure rules will be extended to these entities (other than banks), subject to certain changes.
• A additional goal because this system will focus on the return of customer funds and custody assets, similar to the special management system for payment companies. In this context, the UK Treasury has recognized the complexity arising from the fact that the value of customer funds may be inextricably linked to the health of the DSA business.
• The Bank of England will receive new ones Rulemaking Powers so that it can respond to the failure of a systemic DSA company.

Answer on the future regulatory framework for cryptoassets

As mentioned above, the UK is prioritizing regulation of fiat-backed stablecoins in its first phase of cryptoasset regulation. Phase 2 includes the regulation of a broader range of cryptoassets and related activities.

Earlier this year, the Treasury Department sought views on its plans for a future financial services regulatory regime for cryptoassets. In a response to this consultation, the UK Treasury now summarizes the feedback it received from the consultation and confirms its intention to bring several cryptoasset activities within the scope of regulation for the first time.

Overall, the response suggests that the general direction remains unchanged from the UK Treasury’s original proposals. If the regulation comes into effect, it will represent a significant advance in what is expected from some crypto companies. Broadly speaking, they must meet similar standards to those applicable to traditional financial services.

However, there are some notable changes and clarifications. For example, the UK Treasury now expects to introduce a new, tailored system for the US Custody of security tokens (including cryptoassets that meet the definition of a specific investment or collective investment scheme). The importance of providing access to British consumers was also recognized global liquidity pools in relation to cryptoassets that may be based outside the UK. However, their comments suggest that this would depend on international regulatory cooperation, which may be difficult to achieve in practice.

The paper is an important step towards a comprehensive regulatory regime for cryptoassets in the UK. However, some aspects still remain open. For example:

• Timed coordination: The government promises to pass legislation in 2024. However, it does not specify when the regime will come into force. For comparison: MiCAR will come into general force by the end of 2024, subject to transitional measures.
• Exceptions: The government has tried to clarify where it wants to draw the line between regulated and unregulated cryptoasset activities. However, the picture will only become fully clear once the legislation is in place.
• homework: The government says it is continuing to develop policy in key areas, including rules around staking and DeFi (as well as other topics mentioned above).
• At sight: The government’s work is focused on creating the framework for the future regime. This is important to determine which activities will and will not be regulated in the future. However, what day-to-day life as a regulated crypto asset business will look like will largely be determined by the FCA, which must decide how to apply its rulebook to crypto asset businesses.

What happens next?

• The UK Treasury says it will pass “Phase 1” legislation – the regime for fiat-backed stablecoins – as soon as possible and by early 2024.
• The Bank of England plans to publish a discussion paper on the proposed regulatory regime for systemically important DSA companies.
• Legislation for “Phase 2” – the broader regulatory regime – is due to take place in 2024.

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