What happened?

And so 4 April 2022 may come to be seen as a pivotal turning point for the future of cryptoassets in the UK.  The UK HM Treasury announced that the government plans to make the UK a global cryptoasset technology hub, with a particular emphasis on stablecoins used as a means of payment.  The UK Financial Conduct Authority, for its part, published a speech given by Jessica Rusu, its Chief Data, Information and Intelligence Officer, at the Innovate Finance Global Summit 2022 on how the FCA is “riding the innovation wave”, as well as details of a two-day CryptoSprint in May to inform regulatory policy changes based on evolving technologies.

A welcome shift…

These are most welcome developments that should facilitate positive technological innovation, open up competition providing benefits for consumers in terms of product and service quality and choice, and encourage economic growth.  But one may be forgiven for being somewhat surprised by the announcements, given the position adopted so far in the UK in relation to cryptoassets.  How does this fit into the story so far, what distinctions are to be drawn, and what is changing?

The story so far

Cryptoassets are not a homogenous asset class, which is key to understanding the differentiation in regulatory approach to different sub-categories of cryptoasset.  There is no single definition of a cryptoasset, be it across domestic legislation or global regulators.  In the UK, the definition may typically include “a cryptographically secured digital representation of value or contractual rights”, it may include reference to the distributed ledger technology by which it may be transferred, and it may include reference to characteristics that it can be transferred, stored or traded electronically.  This type of definition is wide enough to encapsulate a very broad population of cryptoassets where in some instances their only similarly is the technology used to create them. 

In the UK from a regulatory perspective the FCA, as per its 2019 guidance, splits cryptoassets into three categories: security tokens, e-money tokens and unregulated tokens.  We have to date in the UK seen a very hostile environment towards cryptoassets – this is because the focus to date has been on unregulated tokens and the risks that these present to consumers.  This has manifested itself in a number of ways – FCA warnings to consumers and the ban on sale of crypto-derivatives to retail consumers, the very low number of firms that have successfully registered with the FCA as cryptoasset exchange providers and custodian wallet providers, and the strong criticism and restrictions on cryptoasset advertising – presently by the UK Advertising Standards Authority which recently issued guidance on crypto ads following a number of rulings, and in future the FCA as it is planned that the financial promotions regime will be expanded to cover a wide range of unregulated cryptoassets and that such adverts will need to comply with onerous regulatory requirements.  The cryptoassets typically being considered in this context are cryptocurrencies – of which the most well-known example is bitcoin, and to a greater or lesser extent non-fungible tokens (NFTs).  Cryptocurrencies are not asset-backed – unlike stablecoins, which seek to achieve stability via assets held in a reserve - and typically display a high degree of volatility that gives rise to consumer protection concerns.

Stablecoins as a means of payment: private v public money

The announcement that the government intends to bring in a regulatory regime for stablecoins used as a means of payment, which would significantly expand the range of private money available to consumers, is particularly interesting in light of the global and domestic narrative to date on this issue.  Consideration of the merits of stablecoins as private money is often taken together with its public counterpart – the proposal for a central bank digital currency (CBDC).

Back in October 2019, the G7 Working Group on global stablecoins triggered by Facebook-backed Libra (subsequently renamed Diem, and later sold to Silvergate Capital Corporation in January 2022) concluded that global stablecoins carry systemic risks.

In March 2020, the Bank of England noted that one of the ways in which a CBDC could help it achieve its objectives of monetary and financial stability was to “avoid the risks of new forms of private money creation” aka stablecoins.  CBDCs do of course present many other opportunities, and the Bank of England is still exploring a CBDC.  In June 2021 the Bank of England published an interesting discussion paper on new forms of digital money, covering both stablecoins and a CBDC.

Also in June 2021, the G7 Finance Ministers and Central Bank Governors issued a communiqué, which reiterated that “no global stablecoin project should begin operation until it adequately addresses relevant legal, regulatory, and oversight requirements through appropriate design and by adhering to applicable standards”. 

In the UK, HM Treasury consulted on the regulatory approach to cryptoassets and stablecoins in January 2021, and the response was published on 4 April 2022.  The intention is to amend the e-money framework to regulate stablecoin issuance and the provision of wallets and custody services.  To the extent that stablecoins raise systemic risks, these will be supervised by the Bank of England (via extension of the scope of the Banking Act 2009).  Relevant stablecoin-based payment systems will also be subject to competition regulation by the Payment Systems Regulator (by extension of the scope of the Financial Services (Banking Reform) Act 2013).

In announcing these changes, HM Treasury noted that "By recognising the potential of this technology and regulating it now, the government can ensure financial stability and high regulatory standards so that these new technologies can ultimately be used both reliably and safely."

Other government proposals

The UK will proactively explore the potentially transformative benefits of Distributed Ledger Technology (DLT) in UK financial markets, which enables data to be synchronized and shared in a decentralised way to potentially achieve greater efficiency, transparency and resilience.  To support this a financial market infrastructure (FMI) sandbox will be created – to be up and running in 2023 - that will enable firms to experiment and innovate in providing the infrastructure services that underpin markets, in particular by enabling Distributed Ledger Technology to be tested.

Lastly to note, there will be a further consultation later in 2022 on extending the FCA regulatory perimeter to capture services facilitating investment and trading of unregulated tokens.