HM Treasury consults on government's approach to cryptoasset regulation

Briefing

Introduction

On 7 January 2021, HM Treasury (HMT) opened a consultation on the regulation of cryptoassets and stablecoins.

It represents part of HMT's wider consultative process on the government's approach to cryptoasset regulation, and follows HMT's March 2020 Budget, which outlined two measures as part of the UK's overarching response to cryptoassets:

consulting on bringing certain cryptoassets into scope of the financial promotion regime to enhance consumer protection, and
consulting on the broader regulatory approach to cryptoassets, including new challenges from so-called ‘stablecoins’.

On the first measure, HMT's consultation on cryptoasset financial promotions concluded on 26 October 2020 and further detail will be set out in due course. For further information, please refer to our previous briefing, where we reviewed the changes proposed in that consultation and what this means for cryptoasset businesses.

This latest consultation looks to address the second commitment, by seeking views on how the UK can ensure that its regulations adequately harness the benefits of new technologies (including the rise of crypto and stablecoins), support innovation and competition, whilst still protecting consumers and wider market stability.

Currently, a large proportion of cryptoassets fall outside the regulatory perimeter, which does not offer the same level of protection for consumers as other financial payments. These new proposals could change that by seeking to address any significant regulatory gaps.

Phased approach

The consultation paper proposes "an incremental, phased approach to regulatory adjustments", to ensure that the regulatory approach focuses on risks and opportunities that are "most urgent or acute". This approach will be rooted in the principle of "same risk, same regulatory outcome", which is a theme running through the paper.

In the consultation, HMT seeks to define the general scope and objectives of the phased approach, rather than focusing on precise requirements. Instead, the detail will be left to the UK's independent regulators, which will be required to consult and use their agile powers to issue rules or codes of practice, within the regulatory perimeter, objectives and principles set by the government. This approach will allow the regime to keep up with developments and the rapid pace of change in this space.

In particular, HMT and the other Cryptoassets Taskforce authorities (the Financial Conduct Authority (FCA) and the Bank of England) have identified the following objectives:

Protecting financial stability and market integrity, including maintaining appropriate regulatory standards, ensuring operational resilience and mitigating any risks to financial stability.
Delivering robust consumer protections, including ensuring consumers benefit from the same of level of protection they would when using other regulated instruments.
Promoting competition, innovation and supporting UK competitiveness, including encouraging and supporting UK FinTechs to ensure access to a variety of high-quality services and products.

Spotlight on stablecoins

The consultation focuses heavily on stablecoins, which is where HMT judges that the risks and opportunities are most urgent. Following the emphasis on stablecoins last year, this should come as no surprise.

For example, in September 2020, Bank of England Governor Andrew Bailey recognised that stablecoins can offer some useful benefits, for example by reducing frictions in payments, however, he warned that "if stablecoins are to be widely used as a means of payment, they must have equivalent standards to those that are in place today for other forms of payment types". More widely, regulators and intergovernmental organisations, such as the Financial Action Task Force (FATF), have been working to understand the risks and potential of stablecoins.

To recap, stablecoins aim to hold their value, relative to a specified asset or a pool or assets to other assets, meaning that they can be more reliably used as a means of exchange or store of value. This is supported by research carried out by the FCA showing that stablecoins are most likely to be used as a means of payment. COVID-19 has also had a role to play in accelerating the use of digital forms of payments, which will undoubtedly increase the uptake of stablecoins being used for payments in the future.

HMT therefore proposes to introduce a regulatory regime for "stable tokens" (commonly known as stablecoins) used as a means of payment, including stable tokens backed by single-fiat and those backed by other linked assets. The new regime would cover both firms issuing stable tokens and firms providing services facilitating the use of stable tokens, based upon a specified list of activities that the government considers should be regulated (including issuing, creating or destroying asset-linked and fiat-linked tokens, transmission of funds, and providing custody and administration of a stable token for a third party). Key participants likely to be caught include issuers, system operators, cryptoasset exchanges and wallet providers.

For entities that will be in-scope, the paper sets out a list of high-level requirements that HMT expects would be necessary, including authorisation, prudential requirements, safeguarding, financial crime, conduct and security requirements.

The proposals suggest that the government will draw on existing payments and e-money regulations as the basis of the requirements for a new stable token regime and apply enhanced requirements where appropriate. But it has asked stakeholders to comment on what other existing legislation and requirements should be considered.

What about Bitcoin?

HMT's priority is to ensure that tokens which can reliably be used for transactions (for example, stablecoins) are subject to appropriate regulation. Tokens which are not suitable for these types of transactions (such as unregulated exchange tokens and unregulated utility tokens) are outside the scope of the proposals for now, but HMT invites views on this position and these may be subject to regulation in the future. This means that Bitcoin, which celebrated its 12th birthday on 3 January, could initially remain outside the perimeter.

Nonetheless, these unregulated tokens could [are likely to] be subject to more stringent regulation in relation to consumer disclosures via the proposed amendments to the financial promotions regime (touched on earlier). Businesses carrying on cryptoasset activity in the UK or EU will also be subject to anti-money laundering (AML) and counter-terrorist financing (CTF) regulation.

Call for evidence

In addition to the questions throughout the consultation paper, HMT has also issued a call for evidence on investment and wholesale uses of cryptoassets, and the broader use of distributed ledger technology (DLT) in financial markets.

Next steps

The consultation sets out a proposed policy approach to bringing stablecoins into the UK's regulatory perimeter. It is open until 21 March and HMT has encouraged industry stakeholders, particularly firms engaged in cryptoasset or DLT activities, to get involved and share their views on the proposed approach. Responses should be submitted to cryptoasset.consultation@hmtreasury.gov.uk.

HMT will then carefully consider the responses and use these to inform a response, setting out in more detail how the proposals may be implemented into law, ensuring that the UK's framework remains fit for the future.