Bringing stablecoins into the scope of regulation

Issue 376 | 27 August 2022

Bringing stablecoins into the scope of regulation

In this edition of Payments:Unpacked we take a look at the topic of stablecoins which features within the Financial Services and Markets Bill which is currently at its Second Reading in the House of Commons.

This email provides all you need to know about the Government’s work to bring stablecoins, a type of cryptoasset, into the scope of regulation when used as a form of payment, paving their way for use in the UK as a recognised form of payment.

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A précis for the layperson

At almost 330 pages the Financial Services and Markets Bill makes heavy and, to the layman, confusing reading but helpfully the accompanying Explanatory Notes (234 pages) unwraps the detail of the Bill in a more manageable form.

For some delving into the 550+ pages will be a necessity but, for the rest of us, here is a précis of the aspects of the Bill relating to stablecoins.

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Background: Financial Services and Markets Bill

The Financial Services and Markets Bill was introduced to Parliament on 20 July 2022.

The Chancellor’s speech at the Financial and Professional Services Dinner at Mansion House on 19 July 2022 set out the importance of the financial services sector to the UK economy, and the central role of the Financial Services and Markets Bill in delivering the government’s vision for an open, green, and technologically advanced financial services sector that is globally competitive.

The UK Government states that:

The Bill seizes the opportunities of EU Exit, tailoring financial services regulation to UK markets to bolster the competitiveness of the UK as a global financial centre and deliver better outcomes for consumers and businesses.

The Bill seeks to:

• Implement the outcomes of the Future Regulatory Framework (FRF) Review

• Maintain the UK’s position as an open and global financial hub

• Harness the opportunities of innovative technologies in financial services

• Bolster the competitiveness of UK markets and promote the effective use of capital

• Support the levelling up agenda, promote financial inclusion and consumer protection.

At almost 330 pages the Financial Services and Markets Bill makes heavy and confusing reading but helpfully the accompanying Explanatory Notes (234 pages) unwraps the detail of the Bill in a more manageable form.

The Government states that:

…the Bill introduces measures that support financial inclusion by ensuring people across the UK can continue to access cash with ease; enabling credit unions to offer more products; introducing a regulatory gateway designed to improve the quality of financial promotions; and enhancing protection for victims of authorised push payment scams.

This briefing focuses on how the Bill considers the topic of Stablecoins and is the third in our series of briefings on the Bill ahead of its 2nd Reading in the House of Commons on the 7 September 2022:

• Issue 363: Access to Cash and Wholesale Cash Distribution

• Issue 371: Updates to the UK’s regulatory framework for financial services.

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Bringing stablecoins into the scope of regulation when used as a form of payment

The explanatory notes explain the government’s position on bringing stablecoins, a type of cryptoasset, into the scope of regulation when used as a form of payment, paving their way for use in the UK as a recognised form of payment via the Financial Services and Markets Bill - here’s a quick summary:

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Cryptoassets: Definition

Cryptoassets are a digital representation of value or contractual rights that can be transferred, stored or traded electronically, which may (though do not necessarily) utilise cryptography or distributed ledger technology. No internationally agreed definition, taxonomy or classification currently exists.

Call for evidence

In January 2021, HM Treasury launched a consultation and call for evidence on the UK’s regulatory approach to cryptoassets. This sought views on how the government and regulators can ensure that the UK’s regulatory framework is equipped to harness the benefits of new technologies, supporting innovation and competition, whilst mitigating risks to consumers, market integrity and financial stability.

Staged and proportionate approach to regulation

This consultation proposed a staged and proportionate approach to regulation, which is sensitive to risks posed and responsive to new developments in the market. In particular, it highlighted that certain forms of cryptoassets, known as “stablecoins” had the potential to develop into a widespread means of payment, and potentially deliver improvements for payment transactions.

Bringing stablecoins into the regulatory perimeter

HM Treasury’s response to the consultation, published in April 2022, outlined the government’s intention to bring stablecoins, where used as a means of payment, into the regulatory perimeter.

A new category

A new category of “digital settlement asset”, which includes stablecoins and other cryptoassets which meet the definition, will be created to bring all such instruments within the regulatory reach of the existing payment and electronic money system landscape. Initially, digital settlement assets will be defined (in clause 22(2) of this Bill and new section 182(4A) of the Banking Act 2009, which will be inserted by Schedule 6 to this Bill) as a digital representation of value or rights, whether or not cryptographically secured, that:

• can be used for the settlement of payment obligations,

• can be transferred, stored or traded electronically, and

• uses technology supporting the recording or storage of data (which may include distributed ledger technology).

Stablecoins

Stablecoins are a form of cryptoasset which aim to maintain a stable value relative to other assets. Design features vary, including how the stablecoin is backed or stabilised (for example, with financial assets or using an algorithm to increase or decrease the supply as needed to maintain a stable price).

More akin to traditional payment instruments