Home England government UK Government Consults on Handling Systemic Failures of Stablecoin Firms | Shearman & Sterling LLP

UK Government Consults on Handling Systemic Failures of Stablecoin Firms | Shearman & Sterling LLP


HM Treasury has opened a consultation on dealing with the failure of systemic digital settlement asset companies, including stablecoin companies. In April 2022, the UK government confirmed that it would bring the issuance or facilitation of the use of stablecoins used as means of payment into the UK regulatory scope. Issuers of stablecoins for payments as well as other entities providing related services, including wallet providers and companies 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 consider expanding the definition of a payment system to include arrangements that facilitate or control the transfer of “digital settlement assets” (DSA ). Those companies deemed to be systemically important will also be subject to the supervision of the Bank of England, which means that they will be authorized by the FCA and recognized by the Bank of England, and the Bank will be the main prudential regulator.

The recent turmoil in the crypto market has prompted the UK Treasury to consider how to appropriately regulate certain types of stablecoins to mitigate risk to consumers, market integrity, and financial stability. In this new consultation, which closes on 2 August 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 the legislation to apply the existing Financial Market Infrastructure Special Administration (FMI SAR) scheme to systemic digital settlement asset businesses. This regime would take precedence over the special regime for the administration of payments and electronic money in cases where the IMF SAR and the PESAR apply to a company. However, the government is of the view that the existing IMF SAR will need to be amended, as it applies to systemic digital settlement asset businesses, to ensure that the regime addresses all financial stability risks posed by such businesses. . This would be done by adding an additional purpose for the return or transfer of funds and safekeeping of assets when the IMF SAR applies to systemic digital settlement asset businesses. In addition, the Bank of England would be granted the power to direct administrators and introduce new rules and regulations to support the additional objective. The application of the IMF SAR to companies already covered would not change.

The government confirms that it will consult in the coming months on the regulatory scope for all systemic payment companies.

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