The UK Government has been considering and expanding its regulation of cryptoassets since March 2018 through its Cryptoassets Taskforce (consisting of HM Treasury, the Financial Conduct Authority and the Bank of England). One of the Taskforce’s main areas of focus has been on so-called stablecoins, a subset of cryptoassets that seek to stabilise their value in relation to another asset (such as a given fiat currency) or set of assets (such as a basket of fiat currencies). Stablecoins have gained traction as they attempt to offer the best of both worlds—the instant processing and security/privacy of payments of cryptocurrencies, and the stable valuations of fiat currencies.
In July 2019 the FCA published its Guidance on cryptoassets clarifying which cryptoassets fall within the existing regulatory perimeter. See our article from August 2019 for more details on the FCA’s Guidance. In summary, the FCA defined three broad categories of cryptoassets in relation to how they fit within existing FCA regulation:
- e-money tokens (electronically stored monetary value issued on receipt of funds for the purpose of making payment transactions) are regulated within the Electronic Money Regulations 2011
- security tokens (with specific characteristics that mean they provide rights and obligations akin to specified investments, like a share or a debt instrument) are regulated within the Financial Services and Markets Act 2000 (Regulated Activities) Order (RAO);
- unregulated tokens, including utility tokens (these grant holders access to a current or prospective product or service) and exchange tokens (these are designed to be used as a means of exchange, not issued or backed by any central authority).
Depending on design, stablecoins can currently fall into any of the three categories, however most are either e-money tokens, or unregulated exchange tokens which fall outside FCA’s remit.
In 2020, HMT consulted on bringing certain cryptoassets into the scope of financial promotions regulation to enhance consumer protection. Currently, security tokens that are “controlled investments” within RAO are captured by the Financial Promotion Order, and e-money tokens are regulated separately under the E-Money Regulations. Promotion of either is subject to the financial promotions regime. However, unregulated cryptoassets, including stablecoins are not subject to any such regulation. If the Government’s proposal in the consultation is taken forward, unregulated cryptoassets would be added to the list of controlled investments and the financial promotion restriction would apply.
Most recently, the HMT have been consulting more generally on whether the regulatory perimeter under RAO requires extension in relation to cryptoassets that have comparable features to specified investments but currently fall outside the perimeter. The consultation, closed on 21 March 2021, can be found here. The consultation details that the Government views many cryptoassets and unregulated exchange tokens as highly volatile and which cannot be reliably used as a means of payment or store of value. Not surprising, considering the fluctuating value of exchange tokens such as Bitcoins, as their unprecedented rise in 2021 has shown. The Government is therefore considering an approach in which the use of currently unregulated tokens and associated activities primarily used for speculative investment purposes, such as Bitcoin, could initially remain outside the perimeter for conduct and prudential purposes.
On the other hand, the Government notes that the use of stablecoins is rising; in June 2020, the value of transactions using stablecoins had outgrown Bitcoin. As stablecoins aim to hold their value, typically against a reference asset, they can be more reliably used as a means of exchange or store of value, though they may also be used to facilitate investment or trading activities. The Government believes that, if appropriate standards and regulation can be met, certain stablecoins would have the potential to play an important role in retail and cross-border payments (including settlement). It is also noted that the Covid-19 pandemic has accelerated the use of digital forms of payments, which could increase the uptake of stablecoins for transactions and remittances in the future. The Government therefore proposes to first introduce a regulatory regime for stablecoins used as a means of payment. This would cover firms issuing stable tokens and firms providing services in relation to them, either directly or indirectly to consumers.