UK Government Consults on Managing Systemic Stablecoin Firm Failures | Shearman & Sterling LLP
HM Treasury has opened a consultation on managing the failure of systemic digital settlement asset firms, including stablecoin firms. In April 2022, the U.K. government confirmed that it will bring the issuing of or the facilitating of the use of stablecoins used as a means of payment into the U.K. regulatory perimeter. Issuers of stablecoins for payments as well as other entities providing related services, including wallet providers and firms providing custody services, will be subject to regulation by the Financial Conduct Authority. The government also noted that, to manage the failure of systemic stablecoin firms, it would be considering extending the definition of a payment system to include arrangements that facilitate or control the transfer of “digital settlement assets” (DSAs). Such firms that are deemed systemically important will also be subject to supervision by the Bank of England, meaning that they will be authorized by the FCA and recognized by the Bank of England, and the Bank will be the lead prudential regulator.
The recent crypto market turmoil has prompted HM Treasury to consider how to appropriately regulate certain types of stablecoin to mitigate consumer, market integrity and financial stability risks. In this new consultation, which closes on August 2, 2022, HM Treasury uses the term “digital settlement asset” to refer to stablecoins used as a means of payment as well as other digital assets used for payments or settlement.
HM Treasury is proposing to make changes to legislation to apply the existing Financial Market Infrastructure Special Administration Regime (FMI SAR) to systemic digital settlement assets firms. This regime would take precedence over the Payment and E-Money Special Administration Regime in cases where both the FMI SAR and the PESAR apply to a firm. However, the government’s view is that the existing FMI SAR will need to be amended, as it applies to systemic digital settlement assets firms, to ensure that the regime addresses all the financial stability risks posed by such firms. This would be done by adding an additional objective for the return or transfer of funds and custody of assets when the FMI SAR applies to systemic digital settlement assets firms. Furthermore, the Bank of England would be granted powers to direct administrators and to introduce further rules and regulations to support the additional objective. The application of the FMI SAR to firms already in scope would not change.
The government confirms that it will consult in the coming months on the regulatory perimeter for all systemic payments firms.