UK to regulate stablecoins and pursue further cryptoasset reform

The Treasury announced that it will update UK law to bring such activities within the UK financial services “regulatory perimeter”, citing the potential of stablecoins to “become a widespread means of payment including by retail customers” as the reason for the move.

Stablecoins are digital assets created with minimal price volatility in mind. They aim to achieve this either by backing the stablecoin with collateral, such as an asset or basket of assets or by using gold or a fiat currency, or doing so algorithmically so that issue and redemption of the token matches demand. 

The Treasury said: “The framework in the UK for e-money through the Electronic Money Regulations 2011 and Payment Service Regulations 2017 provides a robust foundation for payment firms in the UK. Although it does not today provide an explicit regime for regulating stablecoins, the government considers that an amended e-money framework can deliver a consistent framework to regulate stablecoin issuance and the provision of wallets and custody services.”

“Establishing a regulatory environment for stablecoins used as payment simultaneously creates a basis to enable market entry to support innovation, while ensuring that appropriate regulatory standards apply for the benefit of customers, market integrity and stability,” it said.

Further changes to UK law in relation to stablecoins are also planned. The Treasury said it plans to “extend the applicability of Part 5 of the Banking Act 2009 to include stablecoin activities” – a move that would enable the Bank of England to bring stablecoin activities under its supervision “in cases where the risks posed have the potential to be systemic”. It also said that the scope of the Financial Services (Banking Reform) Act 2013 would be extended to “ensure relevant stablecoin-based payment systems are subject to appropriate competition regulation by the Payment Systems Regulator (PSR)”.

The legislative reforms will be introduced when parliamentary time allows, the Treasury said.

“Taken together, these changes will create the conditions for issuers and service providers of stablecoins used as a means of payment to operate and grow in the UK, in line with the government’s firm commitment to place the UK’s financial services sector at the forefront of cryptoasset technology and innovation,” the Treasury said. “For consumers, bringing stablecoins into the regulatory framework means they will be able to use stablecoin services with confidence.

The plans to stiffen regulation around stablecoins follow a 2021 consultation on the UK regulatory approach to cryptoassets and stablecoins and the government’s announcement earlier this year of a tightening of regulation around cryptoasset promotions and an earlier move to apply anti-money laundering requirements to cryptoasset exchange providers and custodian wallet providers.

In its newly published response to the 2021 consultation, the Treasury confirmed that it plans to adopt “an agile approach” to future regulation of cryptoassets. A second phase of legislation is already anticipated after the stablecoin-related reforms – the Treasury confirmed that it will consult later this year on proposals for “additional regulation of a broader set of cryptoasset activities, particularly as a means of investment”.

In a speech made to coincide with the consultation response paper’s publication, John Glen, economic secretary to the Treasury, said that the UK is in a position to “move very nimbly” and that one of the activities that could be brought within the scope of regulation in the second phase of reforms is “trading of tokens like bitcoin”.

Glen said: “Having robust and effective regulation won’t hinder innovation, it’ll actually boost it – by giving people and businesses the confidence they need to think and invest for the long-term.”

Hinesh Shah of Pinsent Masons said: “The government wants to show that the UK is at the cutting edge for new technologies and is keen to highlight its willingness to adapt quickly to developments in the market by rewriting and refining the law in relation to cryptoassets as appropriate.”

In his speech, Glen also confirmed that the government is exploring potential reforms to the tax treatment of decentralised finance loans and staking, and that it would amend the investment manager exemption “to remove disincentives to UK fund managers including disincentives to UK fund managers including cryptoassets in their portfolios”.

Further plans to implement a financial market infrastructure (FMI) ‘sandbox’ in 2023 were also outlined by the Treasury. The sandbox will “support firms wanting to use technologies such as [distributed ledger technology] to provide FMI services” and its work could spur further legislative reform, it said.

According to Glen, the government is also exploring whether it can issue a debt instrument using distributed ledger technology and that it has asked the Royal Mint to create a non-fungible token (NFT) to be issued by the summer.

Andrew Sackey, also of Pinsent Masons, said: “UK authorities have already moved to apply traditional enforcement powers in an innovative way to adapt to evolving NFT trends. Here we see the government signalling its intent not only to be at the vanguard of this developing future distributed ledger technology but also to ensure that that there will be a commensurate focus on regulation and appropriate enforcement.”

Glen said the government has also asked the Law Commission to “consider the legal status of Decentralised Autonomous Organisations” – an invitation the Law Commission said it is “delighted to accept”.