At UK FinTech Week 2022 in April, the Treasury announced a number of new initiatives to support Push to become a road global hub for the crypto business, based on the UK’s FinTech Success Story. Initiatives range from incubators (such as the Financial Market Infrastructure Sandbox and FCA’s CryptoSprint event) to industry engagement partnerships through the Cryptoasset Engagement Group, tax treatment of cryptography and review of the legal status of decentralized autonomous organizations. Most important of the announcement is the Treasury’s confirmation that it will bring activities to the UK’s regulatory scope to issue or promote the use of stablecoin, which is used as a payment instrument.
This alert investigates the details of the upcoming Stablecoin regime and confirms further initiatives announced by the Treasury.
- New regulatory system for stablecoin
- Other future measures
As announced at FinTech Week, the Treasury has confirmed its intention to take the necessary legislative steps to bring activities to issue or promote the use of stablecoin, which is used as a payment method, into the UK’s regulatory scope. .. The policy approach adopted by the Treasury is in close agreement with the proposal presented in the January 2021 consultations. You can read the briefing on the Treasury talks here. This alert highlights the updates and changes announced by the Treasury and should be read along with the previous briefing for a complete picture of the upcoming regulatory system.
Tokens in scope
In response to the feedback received, the Treasury has further refined the scope of its regime. Unfortunately, the definition of stablecoin has not yet been confirmed. Future legislation will clarify the scope of activities to which the regime applies, and regulatory agencies will supplement the law with details of activities and tokens within the scope. However, the Treasury, for example, “issued and used as a means of making one or more fiat currencies and / or payment transactions.” This is a stable coin or currency basket based on a single currency. It is intended to capture all stable coins used as fiat currency-referenced payment methods, including coins. To facilitate general industry methodologies, the Treasury has decided to adopt the term “stablecoin”.
Waiting for a clearer boundary of tokens in scope, the Treasury has confirmed that certain stablecoins are excluded. In particular, following feedback to that consultation, the Treasury now believes that asset-referenced stablecoins are likely not currently meeting the minimum requirements expected from tokens used in retail payments (in some cases). May already be within the boundaries as a designated investment).
The Treasury has also confirmed that, as with e-commerce, it is a requirement for stablecoin holders to have legal claims. Under some arrangements, the Stablecoin issuer may not provide the holder with a legal claim against the issuer. That is, the customer’s right to redeem the value of the token (or to the reserve of the asset) may rest with a third party. It doesn’t exist at all. Given the intent of the regime to provide a certain level of consistency between traditional e-commerce and stablecoin used for payments, the Treasury’s view is that it is unacceptable to have no legal claims. is. However, because certain characteristics of Stablecoin mean that the relationship with the customer may be with a third-party intermediary (such as a wallet), the Treasury says that the customer is usually stable. We believe we should be able to charge either the issuer of the coin or, if appropriate. , Consumer entity. While legal requirements remain with the issuer, it is a high standard to require the issuer to meet the legal claim requirements directly, which may only be necessary in a systematic case. The Treasury will also apply the statutory redemption rights set out in the 2011 Electronic Commerce Regulations (EMR).
As proposed in the consultation, the Treasury is stablecoin within the scope of regulation, primarily by modifying and adapting the payment and e-commerce framework established by EMR and Payment Service Regulations 2017 (PSR). Brings. The comprehensive framework and key features of the EMR system will be applied to the issuance of stablecoin to ensure consistency with e-commerce regulations. The Treasury has also confirmed that the reform proposals presented in the discussions on future regulatory framework reviews will extend to payment and e-commerce schemes. With retained EU law.
Wallet providers and other entities that provide stablecoin activities for payments in the United Kingdom must be approved by the FCA and, if considered systematic, are also subject to the supervision of the Bank of England. (See below). When expanded, EMR and PSR location requirements apply. If Stablecoin is brought into an existing regulatory scope subject to FCA rules, FCA requirements apply. This includes provisions that require the entity to be based in the United Kingdom. There may also be additional location requirements that apply to full-body stablecoins under the supervision of the Bank of England. The Treasury recognizes that further adjustments to Stablecoin’s location requirements could interact with the regulatory treatment of other payment-related activities, and will consider further from the industry through future consultations. I will call you.
The Treasury will apply EMR-based protection requirements to customer funds received in exchange for the issuance of Stablecoin. That is, each £ 1 token issued must be protected at £ 1 and the funds cannot be used for any purpose (eg, lending).
The EMR exemptions, including limited network exclusions, also apply widely to Stablecoin.
Newly regulated storage activities
The Treasury will introduce new regulated storage activities, including token storage or storage arrangements. This new activity aims to capture wallets and other businesses such as exchanges that offer similar services, and will use Stablecoin as a payment method (or access to Stablecoin). Covers the actions of anyone other than the publisher who holds it. third party. Exclusions are expected to apply, but their details have not yet been published by the Treasury.
The introduction of new regulated storage activities is not unexpected (actually as proposed in the Treasury consultation), but it introduces additional complexity to the already complex regulatory approach to crypto assets and the industry You will be forced to navigate along different and conflicting scopes. Various configuration frameworks that apply to cryptography. Especially if the company provides cryptocurrency services, those custody services are the current AML / CTF registration scheme under the Money Laundering, Terrorist Financing and Fund Transfer (Information on Payers) Rule 2017 (MLR). It is within the range of. Future Stablecoin Regulatory System – But importantly, the Treasury has decided not to include custody in its list of managed activities, so it is included in the scope of future expansion of the Treasury Promotion System into cryptocurrencies. not.
In addition, the regulatory system defines crypto assets differently, which lacks clarity for industries seeking to navigate different requirements. MLR defines “cryptoasset” as a digital representation of cryptographically protected values or contractual rights that can be transferred, stored or traded electronically using the form of DLT for the purposes of the AML / CTF registration system. To do. The scope of this definition includes exchange tokens used for speculative purposes such as Bitcoin and Ether, as well as NFTs. In contrast, the Treasury’s Stablecoin and financial promotion regime deliberately omits mention of DLT in order to provide a means of guaranteeing the future. In addition, the Treasury’s stablecoin system applies only to fiat reference tokens used as a payment instrument, at least initially. The crypto business needs to carefully consider how different regulatory and marketing regimes apply to a particular activity.
See our previous alert here for more information on expanding our financial promotion regime to cryptocurrencies and the resulting complexity of the cryptocurrency business.
Systematic stablecoin payment system regulations
The Ministry of Finance has extended the regulation of the Bank of England’s systematic payment system under Part 5 of the Banking Act of 2009, applying when the risks posed may be systematic, including stable coin activity. – Approved by the FCA, the Bank of England is the main sound authority under the Banking Act. It expands the definition of payment systems and is designed to facilitate or control the transfer of stablecoin arrangements, such as “digital payment assets” (the term has not yet been settled). May be achieved by including.
Systematic stablecoin payment systems are also subject to competition regulation by payment system regulators.
In addition to the stablecoin regime, many other important new measures and initiatives were announced by the Treasury and FCA at FinTech Week.
The Treasury will discuss the regulation of broader crypto asset activities in late 2022. The consultation explicitly includes other forms of crypto assets, primarily used as retail investment and decentralized finance (DeFi), among other related topics. The Treasury may seek feedback in discussions with ESG on cryptographic convergence. The Treasury confirms that the talks reflect the UK’s Green Commitment and that the approach is in line with environmental goals, including the UK’s Net Zero goals. In particular, there may be a move from the Treasury to align British cryptocurrency innovations with sustainability goals: the Treasury, in this context, some stablecoins are “proof of stake”. It states that it may be based on a blockchain system and may not face energy consumption issues, which is usually related to the “mining” or proof of work process that underpins certain crypto assets. (In addition, we welcome the transition to the “Proof of Stake” process). In a keynote speech at FinTech Week, Treasury Secretary of State John Glenn confirmed that the UK government will “scrutinize energy usage associated with certain cryptographic technologies.”
In addition, as announced in 2021, the Treasury will use the Financial Markets Infrastructure (FMI) Sandbox (FMI) to support companies seeking innovation, such as providing FMI services using tokenization and DLT. (Scheduled to start operation in 2023) is under development.
Other measures and initiatives announced are:
- The UK Government will consider how to strengthen the UK tax system to promote further development of the UK crypto asset market. This includes seeing how DeFi loans and stakes are treated for tax purposes. The government will also discuss expanding the scope of tax exemptions for investment managers to include crypto assets.
- The UK Government will launch a research program to investigate the feasibility and potential benefits of using DLT for sovereign debt products.
- The Treasury will establish and chair the Cryptocurrency Engagement Group and convene FCA, Bank of England, and industry representatives to advise the government on the issues facing the Cryptocurrency sector.
- FCA will hold its first “CryptoSprint” event (held in May and June 2022) with industry participants to seek direct feedback from the industry on key issues related to the development of future cryptocurrency structures. .. In addition, in September, the FCA will hold a joint TechSprint with payment system regulators on approved push payment fraud.
- The Legal Commission is required to consider the legal status of Decentralized Autonomous Organizations based on its work on smart contracts.
- The Prime Minister has asked the Royal Mint to create an NFT this summer and will serve as a symbol of Britain’s ambition to become a global hub for cryptography.