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    HM Treasury Sets Out Approach to Cryptoassets, Stablecoins, and DLT

    April 04, 2022

    The UK government announced a series of measures to make UK a global hub for cryptoasset technology and investment. These measures include bringing stablecoins within the payments regulatory perimeter, legislating for the financial market infrastructure sandbox to help firms innovate, the Financial Conduct Authority (FCA)-led CryptoSprint on key issues related to the development of a future cryptoasset regime, working with the Royal Mint on Non-Fungible Token, and establishment of Cryptoasset Engagement Group to work more closely with industry.

    HM Treasury published its response to the consultation and call for evidence on regulatory approach to cryptoassets, stablecoins, and distributed ledger technology (DLT) in financial markets. Through its consultation, the government had proposed a staged and proportionate approach to cryptoasset regulation, which is sensitive to risks posed and responsive to new developments in the market. This response document confirms the government’s intention to take the necessary legislative steps to bring activities that issue or facilitate the use of stablecoins used as a means of payment into the UK regulatory perimeter, primarily by amending existing electronic money and payments legislation. The rationale for doing this is that certain stablecoins have the capacity to potentially become a widespread means of payment including by retail customers, driving consumer choice and efficiencies. Later this year, the government intends to consult on regulating a wider set of cryptoasset activities, in view of their continued growth and uptake worldwide. The government will ensure sufficient flexibility is built into the regulatory framework of UK to allow regulators to adapt rules and requirements as international work concludes, benefiting too from the agility that will be afforded to UK financial services legislation by the Future Regulatory Framework. The basis of the government’s proposal to bring stablecoins where used as a means of payment within the UK regulatory perimeter is broadly as follows:

    • The framework in the UK for e-money through the Electronic Money Regulations 2011 and Payment Service Regulations 2017 provides a robust foundation for payment firms in the UK. Although it does not provide an explicit regime for regulating stablecoins, the government considers that an amended e-money framework can deliver a consistent framework to regulate stablecoin issuance and the provision of wallets and custody services.
    • The government plans to extend the applicability of Part 5 of the Banking Act 2009 to include stablecoin activities
    • The government is of the view that it is also necessary to extend the scope of the Financial Services (Banking Reform) Act 2013 to ensure relevant stablecoin-based payment systems are subject to appropriate competition regulation by the Payment Systems Regulator

    The document on response to consultation and call for evidence also outlines the feedback received to the call for evidence on the investment and wholesale uses of distributed ledger technology and sets out the government response, including further thinking on the development of the Financial Market Infrastructure Sandbox, which will be up and running in 2023. HM Treasury intends to legislate for powers that will enable it to set up the Sandbox. Further consultation with industry is expected in advance of HM Treasury introducing secondary legislation to set out the detailed legislative framework of the Sandbox. In the response document, the government also posed broad questions on the role of other forms of cryptoassets used primarily as retail investments and the growth of decentralized finance. The government’s planned consultation on cryptoasset regulation will set out proposals for these innovations, reflecting feedback received. 

    In addition, HM Treasury published the Statutory Instrument on European Market Infrastructure Regulation (United States of America Regulated Market Equivalence) Regulations 2022, which will come into force on April 20, 2022. The Statutory Instrument has revoked the Commission Implementing Decision 2016/1073 on the equivalence of designated contract markets in the United States of America. Decision 2016/1073 provided that the listed US markets, set out in its Annex, shall be equivalent to UK regulated markets. As a result, derivative contracts executed on the listed US markets did not fall within the definition of “OTC derivative” or “OTC derivative contract” given in Article 2(7) of European Market Infrastructure Regulation or EMIR. In a separate update, HM Treasury announced that the Steering Committee for the Center for Finance, Innovation, and Technology (CFIT) convened in March 2022 to develop proposals for a new body focused on driving UK financial innovation.

     

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    Keywords: Europe, UK, Americas, US, Banking, Securities, Cryptoassets, Stablecoins, Fintech, Regtech, Distributed Ledger Technology, Blockchain, Regulatory Regime, Financial Inclusion, Equivalence Decisions, OTC Derivatives, HM Treasury

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