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HM Treasury consultation on cryptoassets and stablecoins

What is happening?

On 7 January 2021, HM Treasury published its consultation paper on the UK regulatory approach to cryptoassets and stablecoins. In summary, the consultation paper proposes to:

  • create a regulatory regime for stablecoins, and
  • request evidence for the future regulation of other types of cryptoassets.

HMT has set out three key objectives and principles for its proposed cryptoasset regulation;

  • maintaining the current division of UK regulator responsibilities as far as possible and applying the principle of ‘same risk, same regulatory outcome’,
  • ensuring the approach is proportionate, focused on where risks and opportunities are most urgent or acute, and
  • ensuring the approach is agile, able to reflect international discussions and aligned to the future government approach to financial services and payments regulation.

What do you need to do?

HMT proposes to introduce a regulatory regime for stablecoins which are used as a means of payments. It intends to ensure that tokens which could be reliably used for retail transactions or wholesale transactions are subject to minimum requirements and protections as part of a UK authorisation regime. This regime will cover the following types of tokens:

  • stablecoins linked to a single fiat currency, and
  • stablecoins not linked to a single fiat currency (e.g. gold or multi-currencies).

However, the regime will not cover the following:

  • algorithmically linked stablecoins (i.e. stablecoins which use algorithms to control a market maker which buys/sells the tokens),
  • unregulated exchange tokens,
  • unregulated utility tokens,
  • e-money tokens, and
  • security tokens.

HMT is also considering whether a lighter regime should be implemented for smaller stablecoins falling below a certain turnover.

HMT sets out that it will apply the proposed new regime to firms carrying out the following functions/ activities:

  • Issuing, creating or destroying asset-linked tokens – the activity of the token issuer in minting and burning tokens,
  • Issuing, creating or destroying single fiat-linked tokens – the activity of the token issuer in minting and burning tokens,
  • Providing custody and administration of a stable token for a third party – the activity of managing tokens on behalf of owners, including the storage of private keys,
  • Executing transactions in stable tokens – the activity of conducting transactions on behalf of another,
  • Exchanging tokens for fiat money and vice versa – the activity of purchasing/exchanging a stable token with fiat money,
  • Value stabilisation and reserve management – the activity of managing the reserve assets that are backing the value of a stable token and providing custody/trust services for those assets to ensure stabilisation of the stable token,
  • Validation of transactions – the activity of authorising or verifying the validity of transactions and records,
  • Access – the activity of providing services or support to facilitate access of participants to the network or underlying infrastructure, and
  • Transmission of funds – the activity of ensuring the correct and final settlement of transactions while limiting counterparty and default risk.

However, the last four activities above will not require authorisation by the FCA and they will only be regulated in certain circumstances, e.g. where the activity meets certain Payment Systems Regulator or Bank of England criteria.

HMT states that it expects financial crime requirements, including those in relation to anti-money laundering,  will apply to all wallet providers and issuers and that it will expect firms will be required to register under the anti-money laundering registration system for their activities relating to all cryptoassets (in addition to the stablecoin regime).

HMT has proposed the following high-level requirements for firms carrying out the activities which will result in them needing to become authorised by the FCA:

  • Authorisation requirements with associated threshold conditions prior to operating,
  • Prudential requirements, including capital and liquidity requirements and accounting and audit requirements,
  • Requirements for the maintenance and management of a reserve of assets underlying the token’s value and requirements to ensure the quality and safekeeping of those assets,
  • Orderly failure and insolvency requirements to ensure issuers and service providers are prepared for modified resolution or administration, or insolvency,
  • Safeguarding the token – requirements principally on wallets and exchanges to ensure those entities are appropriately protecting users’ tokens and the privacy and security of keys to those tokens,
  • Systems, controls, risk management and governance requirements relating to the effective overall management of an issuer or service provider,
  • Notification and reporting requirements relating to firms’ disclosures to regulators and customers,
  • Record-keeping requirements,
  • Conduct requirements relating to the rights that firms must provide for customers,
  • Financial crime requirements relating to proper implementation of anti-money laundering and counter-terrorist financing rules, among others,
  • Outsourcing requirements relating to safe outsourcing of key services to ensure continuous and adequate functioning,
  • Operational resilience, service reliability and continuity requirements to ensure business continuity in the event of physical, electronic, governance or other business failures, and
  • Security requirements (including cyber and cloud) relating to safeguards against cyber security risks related to the technology and infrastructure used.

In addition, HMT also sets out that it will be consulting on whether the marketing of cryptoassets should be considered as a financial promotion

How can we help you?

If you’d like to know more about how we can help you with your cryptocurrency or stablecoin arrangements, or with any other aspect of FCA compliance, our expert team is here to help.

Contact us today on 0207 436 0630 or email info@thistleinitiatives.co.uk.