The latest consultation from HMT reflects the advice from the UK’s joint Cryptoassets Taskforce, which was established in 2018. The consultation sets out a proposed policy approach to bringing ‘stable tokens’ into the UK regulated sector. This is only a first stage in the Government consultative process. Following feedback, if the proposals are adopted, the government will issue more detail on how the proposed approach may be implemented.
The consultation is honest in recognising that stablecoins can effectively fall into the regulated (e-money tokens) or unregulated (exchange tokens) categories depending on design and the purpose which the stablecoin is looking to serve. To provide continuity and clarity for market participants, the government proposes to maintain the FCA’s broad approach to classification as far as possible. The government is considering whether a new category of regulated tokens may be needed – stable tokens.
Stable tokens generally refer to tokens which stabilise their value by referencing one or more assets, such as fiat currency or a commodity (i.e. Stablecoins) and could for that reason more reliably be used as a means of exchange or store of value.
As part of its regulatory focus HMT will not seek to specify detailed firm requirements through legislation, but instead focusing on defining the scope of the regulatory perimeter and the objectives and principles applicable under the new regime. Detailed firm requirements as well as codes of practice would be designed, consulted on, and implemented by the independent FS regulators within the parameters set by HMT and Parliament.
The consultation also calls for evidence on investment and wholesale uses for security tokens and Distributed Ledger Technology-based financial market infrastructures (FMIs). The discussion concentrates on potential of DLT transforming financial markets infrastructure through more efficiency, improved liquidity and enhances transparency & security. However the government would also like to understand the number of challenges and hurdles that need to be overcome for realising the benefits of DLT FMIs.
Lastly, the consultation also discusses other unregulated tokens and new developments in the market including Decentralised Finance (DeFi). For unregulated tokens it notes that although these are offered for speculative investment purposes, public understanding of risks involved in cryptoassets trading is improving. Furthermore, the market remains comparatively less developed for any immediate legislation and regulatory rules to be introduced for these unregulated tokens. In any case the recent consultation from the government on bringing certain cryptoassets into the scope of financial promotions regulation if implemented in any capacity will further address the risks in relation to consumer awareness and market conduct issues.
The annex to the consultation provides a handy timeline covering the various workstreams and consultations currently in flight overseeing the regulation of crypto-assets in the UK.
Two years on, the landscape is changing rapidly. So-called stablecoins could pave the way for faster, cheaper payments, making it easier for people to pay for things or store their money. There is also increasing evidence that DLT could have significant benefits for capital markets, potentially fundamentally changing the way they operate.