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In a new consultation, the UK government has announced its intention to take the necessary legislative steps to bring services that issue or facilitate the use of stablecoins into the regulatory perimeter, primarily by amending existing electronic money and payments legislation.
Her Majesty’s Treasury (HMT), which is responsible for the UK’s financial services sector, has published a consultation paper that sets out a strategy to mitigate risks to financial stability arising from the failure of a systemic digital settlement asset, including stablecoins.
Stakeholders now have until August 2 to respond to the consultation, which has opted to term stablecoins and the like under the umbrella term of Digital Settlement Assets (DSAs).
“Since the initial commitment to regulate certain types of stablecoins, events in crypto-asset markets have further highlighted the need for appropriate regulation to help mitigate consumer, market integrity and financial stability risks,” HMT said in its proposal.
In particular, the government has placed an emphasis on situations in which large numbers of individuals may lose access to funds and assets they have chosen to hold as DSAs.
The consultation follows the collapse of the algorithmic stablecoin TerraUSD.
This lost its 1:1 peg with the US dollar during an exponential sell-off in crypto-markets earlier this month.
As part of the consultation, the UK government recommends amending existing legislation to give the Bank of England the power to appoint administrators to oversee insolvency arrangements with failed systemic DSAs, such as systemic stablecoin issuers.
As well as this, the Bank of England would be required to consult with the UK’s Financial Conduct Authority (FCA) prior to seeking an administration order or directing administrators where regulatory overlaps may occur.
The FCA is already responsible for the supervision of payments and electronic money institutions in the UK, meaning introducing stablecoins into this regulatory perimeter would see such firms also in the scope of the financial services watchdog.
The proposal considers the Financial Market Infrastructure Special Administration Regime (FMI SAR) to be best suited to apply to such firms, with relevant amendments due to be implemented to ensure risks to financial stability can be addressed, including the risks posed by the possible failure of systemic stablecoins.
The failure of a systemic DSA firm could have a wide range of financial stability as well as consumer protection impacts, HMT believes.
This could be both in terms of the continuity of services critical to the operation of the economy and individuals' access to their funds or assets.
The Treasury noted that further work will be required to consider whether it would be appropriate to put in place a bespoke legal framework for the failure of such firms and, if so, its design.
The FMI SAR will be amended with an additional objective covering the return or transfer of funds and custody assets, which may only be considered when the FMI SAR is applied in relation to systemic DSA firms.
This would allow administrators to take into account the return of customer funds and private keys as well as continuity of service.
